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

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Form 20-F

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|o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) 
  OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------------------------
|  |                                                                                                  
|  | OR                                                                                               
|  |                                                                                                  
|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF 
  THE SECURITIES EXCHANGE ACT OF 1934          
|  | For
  the fiscal year ended December 31, 2002                                                    
|  |                                                                                                  
|  | OR                                                                                               
|  |                                                                                                  
|o | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
  THE SECURITIES EXCHANGE ACT OF 1934       
|  | For
  the transition period from _________ to _________                                          

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Commission File Number 001-14552

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Top Image
Systems Ltd.(Exact name of Registrant as specified in its charter)

|Top Image Systems Ltd.                          |  | Israel                                         
|----------------------------------------------- |  | -----------------------------------------------
|(Translation of Registrants name into English) |  | (Jurisdiction of incorporation or organization)

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2
Habarzel Street, Ramat Hahayel, Tel Aviv 69710, Israel(Address of principal executive offices)

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Securities registered or to be
registered pursuant to Section 12(b) of the Act:

|Title of each class |  | Name of each exchange on which
  registered
|------------------- |  | -------------------------------------------
|None                |  | None                                       

Securities registered or to be registered pursuant to Section
12(g) of the Act:Ordinary Shares, nominal value NIS 0.04 per share

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

Indicate
the number of outstanding shares of each of the issuers classes of capital or
common stock as of the close of the period covered by the annual report:

6,098,890 Ordinary
Shares

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

Yes X
No __

Indicate by check mark
which financial statement item the registrant has elected to follow:

Item 17 __
Item 18 X

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TABLE OF CONTENTS

|         | Page    
|-------- | --------
|         |         
|         |         
|PART I   | 1       
|         |         
|         | ITEM 1. 
|         | ITEM 2. 
|         | ITEM 3. 
|         | ITEM 4. 
|         | ITEM 5. 
|         | ITEM 6. 
|         | ITEM 7. 
|         | ITEM 8. 
|         | ITEM 9. 
|         | ITEM 10.
|         | ITEM 11.
|         | ITEM 12.
|         |         
|PART II  | 55      
|         |         
|         | ITEM 13.
|         | ITEM 14.
|         | ITEM 15.
|         | ITEM 16.
|         |         
|PART III | 56      
|         |         
|         | ITEM 17.
|         | ITEM 18.
|         | ITEM 19.

i

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PART I

Forward
Looking Statements

Certain
information contained herein, which does not relate to historical financial
information, may be deemed to constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.  The words or phrases will likely
result,  are expected to, will continue,
is anticipated, estimate, project, believe, plan or similar expressions
identify some, but not all of the forward looking statements contained in
this report.   Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical results and those presently anticipated or
projected.  We wish to caution readers
not to place undue reliance on any such forward looking statements, which speak
only as of the date made.  We undertake
no obligation to release publicly any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. 
Among the factors that could cause our actual results in the future to
differ materially from any opinions or statements expressed with respect to
future periods are competitive industry conditions and various other factors
set forth in Item 3, Key Information  Risk Factors and elsewhere in this
annual report.

ITEM
1.     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISORS

Not applicable

ITEM
2.     OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable

ITEM
3.     KEY INFORMATION

Selected
Financial Data

The
following selected financial data as of December 31, 1998, 1999, 2000, 2001 and
2002 have been derived from, and should be read in conjunction with, the
Companys consolidated financial statements, related notes and other financial
information included elsewhere in this annual report. The selected financial
data as of December 31, 1998 and 1999 have been derived from the Companys
audited consolidated financial statements not appearing in this annual
report.  The Companys consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles in Israel, or Israeli GAAP.  Israeli GAAP vary in certain significant respects from generally
accepted accounting principles in the United States, or U.S. GAAP.  Application of U.S. GAAP would have affected
our results of operations and shareholders equity for each of the years in the
three-year period ended December 31, 2002 to the extent summarized in Note 18
to the consolidated financial statements included elsewhere in this annual
report.

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|                                                                |  |           |   |          |           |          |  |            |   |         
|--------------------------------------------------------------- |  | --------- | - | -------- | --------- | -------- |  | ---------- | - | --------
|                                                                |  | 1998
  $  |   | 1999
  $ |           | 2000
  $ |  | 2001
  $   |   | 2002
  $
|                                                                |  |           |   |          |           |          |  |            |   |         
|Revenues                                                        |  | 6,844,294 |   |          | 8,299,774 |          |  | 10,626,342 |   |         
|Cost of revenues                                                |  | 1,874,879 |   |          | 1,978,945 |          |  | 3,923,932  |   |         
|Gross profit                                                    |  | 4,969,415 |   |          | 6,320,829 |          |  | 6,702,410  |   |         
|Research and
  development, net                                 |  |          |   |          | 677,624   |          |  | 2,121,901  |   |         
|Selling, general and
  administrative, and other
  expense      |  | 3,942,252 |   |          | 5,901,405 |          |  | 11,386,054 |   |         
|Financial expense
  (income)                                    |  | (143,968  | ) |          | 47,212    |          |  | (439,972   | ) |         
|Other (income) expense                                          |  | (23,261   | ) |          | 25,294    |          |  | 460        |   |         
|Taxes on Income                                                 |  |          |   |          |          |          |  |           |   |         
|Minority share in loss of
  a subsidiary                        |  |          |   |          |          |          |  | 2,410      |   |         
|Net income (loss)                                               |  | 1,194,392 |   |          | (236,282  | )        |  | (6,363,623 | ) |         
|Israeli GAAP net basic
  and dilutive income
  (loss) per share |  | 0.313     |   |          | (0.053    | )        |  | (1.088     | ) |         
|Israeli GAAP weighted
  average number of shares
  outstanding  |  | 3,820,517 |   |          | 4,267,760 |          |  | 5,848,890  |   |         
|U.S. GAAP net basic
  income (loss) per share                   |  | 0.313     |   |          | (0.061    | )        |  | (1.095     | ) |         
|U.S. GAAP weighted
  average number of shares
  outstanding     |  | 3,820,517 |   |          | 3,885,188 |          |  | 5,810,376  |   |         
|U.S. GAAP net dilutive
  income (loss) per share                |  | 0.312     |   |          | (0.061    | )        |  | (1.095     | ) |         
|U.S. GAAP weighted
  average number of shares
  outstanding     |  | 3,826,424 |   |          | 3,933,495 |          |  | 5,810,376  |   |         

|Balance Sheet Data:      |  |           |  |          |           |          |  |            |  |         
|------------------------ |  | --------- |  | -------- | --------- | -------- |  | ---------- |  | --------
|                         |  |           |  |          |           |          |  |            |  |         
|                         |  | 1998
  $  |  | 1999
  $ |           | 2000
  $ |  | 2001
  $   |  | 2002
  $
|                         |  |           |  |          |           |          |  |            |  |         
|Cash and cashequivalents |  | 2,020,659 |  |          | 2,039,519 |          |  | 12,107,098 |  |         
|Working capital          |  | 6,103,705 |  |          | 6,537,447 |          |  | 14,075,684 |  |         
|Total Assets             |  | 7,571,442 |  |          | 8,062,005 |          |  | 18,069,247 |  |         
|Long Term debt           |  | 19,950    |  |          | 9,350     |          |  |           |  |         
|Total liabilities        |  | 1,114,806 |  |          | 1,207,582 |          |  | 3,389,362  |  |         
|Shareholders equity      |  | 6,456,636 |  |          | 6,854,423 |          |  | 14,679,885 |  |         

2

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Risk Factors

The market for data capture systems and
automatic form processing systems is highly competitive.

The
market for data capture systems in general, and for automatic form processing
systems in particular, is characterized by intense competition, significant
price erosion over the life of the product, and rapidly changing business
conditions, customer requirements, and technology.  Our products compete with those developed and marketed by
numerous well-established companies, as well as with manual data entry systems.  Many of our competitors have longer operating
histories and greater financial resources than we do.  Furthermore, certain of these competitors are industry leaders
with the financial resources necessary to enable them to withstand substantial
price competition or downturns in the market for computer software.  This risk is particularly acute during
difficult economic times such as the present.

A slow-down in our customer ́s industry or a
decline in economic conditions could adversely impact the sale of our products
and  our prospects of achieving profitability.

A
slowdown in the industries into which we sell our products would likely result
in significantly reduced product demand, erosion of selling prices and
overcapacity.  Such a downturn could
materially reduce demand for the products and technology that we offer.  In addition, our ability to reduce expenses
in response to any downturn or slowdown in such industries may be limited
because of:

| |  | our continuing need to invest in research and
  development;
| | - | ------------------------------------------------------------
| |   |                                                             
| |  | our capital equipment requirements; and                     
| |   |                                                             
| |  | marketing requirements.                                     

Since
2000 there has been a global recession and a resulting decline in economic
conditions.  If general economic and industry conditions fail to improve,
demand for our products could be adversely affected, as could the financial health
of our suppliers and resellers.  In addition, the September 11, 2001 terrorist attacks on
the United States and the subsequent military response, as well as the recent war in Iraq, have had, and may
continue to have, a negative effect on the global economy and our business and that of and our customers. 
Any similar acts of violence or war may further negatively affect our business environment,
revenues and profitability and could also result in a
disruption of our business or that of our customers.

Our success depends on our strategic marketing relationships
and the marketing and distribution efforts of our distributors and other
strategic partners.

Our
prospects depend upon our ability to maintain our existing, and to develop
additional, strategic marketing relationships and upon the marketing and
distribution efforts of our distributors and other strategic partners.  The loss or diminishment of our relationship
of any one of our significant strategic partners could have a material and
adverse effect on our existing operations and growth prospects.  We intend to seek to recruit additional
distributors with established distribution channels and reputations for
marketing and installing document imaging, data capture and workflow systems to
market our products.  We cannot assure
you that we will be able to develop such relationships.

Our lengthy sales cycle increases our exposure to customer
cancellations or delays in orders, which may result in volatile quarterly
revenues.

In
general our sales cycle takes between 9 and 12 months to complete.  During this time, we may expend substantial
funds and management effort.  Lengthy sales
cycles subject us to a number of significant risks, including fluctuations in
operating results, over which we have little or no control.

3

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If we do not respond to rapid technological change, new product
introductions and enhancements and evolving industry standards, our products
and services could become obsolete.

Our
ability to compete will depend upon our ability to offer products at
competitive prices in a timely and cost-effective manner.  Our product decisions must anticipate the
changing demand for products.  If we are
unable to develop, modify and enhance our existing technology to respond to
such changing demands, standards and customer demands, our business could be
adversely affected.  In addition, the
development of new technologies, new product introductions or enhancements by
our competitors could adversely affect our sales.

We have had a history of losses and may incur future losses.

Since
our inception in March 1991, we have incurred net losses in every year other
than in 1995, 1997 and 1998, and our losses may continue.  For the year ended December 31, 2002, we had
a net loss of $3,827,788, and accumulated deficit of $14,209,783.  We plan to maintain the level of our
aggregate product development, sales and marketing and administrative expenses
over the near future.  Accordingly, to
maintain our current level of financial performance, we will need to increase
or maintain our revenues.  We cannot
assure you that our revenues will grow or that we will achieve positive profitability in the future.

We have a history of quarterly fluctuations
in our results of operations and expect these fluctuations to continue.  This may cause our stock price to decline.

We
have experienced and expect to experience in the future significant
fluctuations in our quarterly results of operations.  Factors that may contribute to fluctuations in our quarterly
results of operations include:

| |  | the size, timing and shipment of orders;                                                                                                        
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                 
| |  | customer deferral of orders in anticipation of new
  products, product upgrades or price enhancements;                                          
| |   |                                                                                                                                                 
| |  | the high level of competition that we encounter;                                                                                                
| |   |                                                                                                                                                 
| |  | the timing of our product introductions, upgrades or
  enhancements or those of our competitors or of providers of complementary
  products; and
| |   |                                                                                                                                                 
| |  | the purchasing patterns and budget cycles of our
  customers.                                                                                   

We derive
significant revenue from distributors or resellers of our products and default
in payment by them could adversely affect us.

A
default in payment by one or more of our significant distributors or resellers
could adversely affect our business, results of operations, and financial
condition.  Although we believe that we
have made adequate reserves against our receivables, we cannot assure you that
uncollected receivables will not exceed those reserves.  If they do exceed our reserves in a
significant manner, we could suffer a material adverse effect on our business,
results of operations, and financial condition.

Our success and financial results are subject to all of the
risks inherent in the development of new products.

Our
success and financial results are subject to all of the risks inherent in the
development of new products, including unanticipated delays, expenses, and technical
problems or difficulties, as well as the possible insufficiency of funds to
implement our efforts, which could result in abandonment or substantial change
in product development.

The loss of our key employees would hurt our ability to
implement our strategy and could adversely affect our business, results of
operations and financial condition.

Our
success depends upon the contributions of our executive officers and other key
personnel.  All of our key management
and technical personnel have expertise which is in high demand among our
competitors, and the loss of any of these individuals could cause our business
to suffer.  We do not as a general
matter maintain key man life insurance policies on our officers, directors and
key employees.

4

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Our success depends on our proprietary
software technology.

Our
success depends upon our proprietary software technology.  Although we believe that our technology has
been developed independently and does not infringe on the proprietary rights of
others, we cannot assure you that the technology does not and will not so
infringe or that third parties will not assert infringement claims against us
in the future.  In the case of
infringement, we would, under certain circumstances, be required to modify our
products or obtain a license.  We cannot
assure you that we would be able to do either in a timely manner, upon
acceptable terms and conditions or at all, or that we will have the financial
or other resources necessary to defend successfully a patent infringement or
other proprietary rights infringement action. 
Further, even if we were not infringing, intellectual property
litigation is expensive and time consuming for management. Failure to do any of
the foregoing could have a material adverse effect on us.  Furthermore, if our products or technologies
are deemed to infringe upon the rights of others, we could become liable for
damages, which could have a material adverse effect on us.

We
have been named by Millennium L.P. in a suit claiming that our operations
infringe on patents it holds.  We are
currently evaluating the merits of the suit and how to react. We believe that we are not infringing
Millenniums patents and further the that Millenniums patents are invalid. We also believe
that the potential liability, if any, with respect to this action will not
materially adversely affect our financial position, results of operations or
cash flows but we cannot assure you of the outcome of the suit or its impact on
our operations or financial condition.

Our inability to protect our
intellectual property could adversely affect our competitive position and,
consequently, our business and operations.

Our
success depends on our ability to protect our intellectual property.  We have not yet obtained any patents and we
cannot assure you that we will obtain any patents.  In addition, we cannot assure you that:

| |  | any patents which we may
  obtain will be broad enough to protect our technology, will provide us with
  competitive advantages or will escape challenge or invalidation by third
  parties;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                             
| |  | the patents of others
  will not have an adverse effect on our ability to do business; or                                                                                                   
| |   |                                                                                                                                                                                             
| |  | others will not
  independently develop similar products, duplicate our products or, if patents
  are issued to us, design around these patents.                                            

Further,
the laws of foreign jurisdictions where we sell and seek to sell our products
may afford little or no protection of our intellectual property rights.  We cannot assure you that the protection
provided to our intellectual property rights by the laws and courts of foreign
nations will be substantially similar to the remedies available under United
States law.  We cannot assure you that
third parties will not assert infringement claims against us based on foreign
intellectual property rights and laws that are different from those established
in the United States.

We
also rely upon trade secret protection, employee and third-party nondisclosure
agreements and other intellectual property protection methods to protect our
confidential and proprietary information. 
Despite these efforts, we cannot be certain that others will not
otherwise gain access to our trade secrets or copy and use information that we
regard as proprietary without our authorization.

Our
products may contain defects, requiring us to allocate significant time and
financial resources to correct, and which may result in damage to our
reputation and liability claims.

Despite
our testing efforts, our products may contain undetected errors or
defects.  Such errors or defects could
require us to divert significant financial and other resources to correct the
problems and could result in liability claims made against us by our customers
for damages related to product defects. 
Moreover, the occurrence of such defects could result in adverse
publicity, significant customer relations problems and injury to our
reputation, and may impair or delay the market acceptance of our products.  A successful product liability claim against
us could have a material adverse effect.

5

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We engage in international sales, which expose us to a
number of foreign political and economic risks.

We
engage in international sales, which are subject to a number of risks that
could seriously impede our financial condition and growth.  For instance, trade restrictions, changes in
tariffs and export duties and license requirements could adversely affect our
ability to sell our products in the countries adopting or changing those
restrictions, tariffs or requirements. Further, we cannot assure you that the laws of foreign jurisdictions
where we sell and seek to sell our products afford similar or any protection of
our intellectual property rights as may be available under United States
laws.  We are directly impacted by the
political, economic, military and other conditions in the countries where we
sell or seek to sell our products, including the recent Severe Acute Respiratory
Syndrome, or SARS outbreak.

Our capital requirements have, historically, been
significant and we may not in the future be able to meet our requirements with
our working capital.

Historically,
our capital requirements have been significant.  We may in the future require additional financing to fund our
operations and capital requirements beyond our working capital.  In such event, we cannot assure you that
additional financing will be available to us when needed, on commercially
reasonable terms, or at all.  We have no
current arrangements with respect to, or potential sources of, additional
equity financing, and we do not anticipate that existing shareholders will
provide any portion of our future financing requirements.  Any inability to obtain additional financing
when needed would have a material adverse effect on us, requiring us to curtail
our expansion efforts.  In addition, to
the extent that we incur indebtedness, we will be subject to risks associated
with incurring substantial indebtedness, including the risk that interest rates
may fluctuate, and cash may be insufficient to repay interest and principal on
any such indebtedness.  Any additional
equity financing may involve substantial dilution of the interests of our
then-existing shareholders.

Political, economic and military conditions in Israel may
adversely affect our ability to develop, manufacture and market our products.

Since
our principal offices and manufacturing facilities and many of our suppliers
are located in Israel, political, economic and military conditions in Israel
directly affect our operations.  Since
the establishment of the State of Israel in 1948, a number of armed conflicts
have taken place between Israel and its Arab neighbors.  A state of hostility, varying in degree and
intensity, has led to security and economic problems for Israel.  There has been a marked increase in such
hostility and a significant deterioration of Israels relationship with the
Palestinian community since October 2000. 
Continuing or escalating hostilities in the region or curtailment of
trade between Israel and its present trading partners may have an
adverse affect on our business conditions, including our ability to develop,
manufacture and market our products.

Our operations may be disrupted by the obligation of key
personnel to perform military service.

Some
of our executive officers and employees in Israel are obligated to perform up
to 36 days
of military reserve duty annually. 
Moreover, in light of escalating hostilities and threats of armed
conflict in the Middle East since October 2001, our executive officers and
employees may be called for active military duty for an unlimited period of
time.  Our operations could be disrupted
by the absence for a significant period of our executive officers or key
employees as a result of military service. 
Any disruption in our operations could adversely affect our ability to
develop and market products.

Since most of our revenues will most likely be generated in
U.S. dollars and other non-Israeli currencies but a significant portion of our
expenses are and will continue to be incurred in New Israeli Shekels, we may be
adversely impacted by inflation and fluctuations in currency exchanges.

We
anticipate that most of our revenues will be generated in U.S. dollars and
currencies other than New Israeli Shekels NIS, but most of our expenses
will be incurred in NIS.  As a result,
we are exposed to risk to the extent that the rate of inflation in Israel
exceeds the rate of devaluation of the NIS in relation to the U.S. dollar or
such other currencies, or if the timing of this devaluation lags behind
inflation in Israel.  In that event, the
cost of our operations in Israel measured in NIS will increase and our results
of operations could be adversely affected. 
In addition, our operations also could be adversely affected as a result
of fluctuations in currency exchange rates. 
We have not engaged in currency hedging transactions, nor can we assure
you that engaging in such transactions will materially reduce the effect of
fluctuations in foreign currency exchange rates on our results of operations.

6

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We may not be able
to expand our personnel or marketing efforts quickly enough to support our
growth.

Because
of our small size and our business strategy to increase our sales, we
anticipate an increased demand on all of our resources.  If we do not accurately estimate our need
for personnel or marketing and customer support, we may not be able to support
our future growth.  For example, if we
are successful in our efforts to obtain significant orders for our products, we
may be required to install and service, on a timely basis, large numbers of
installations at our customers locations. 
We cannot assure you that we will be able to provide such services on
adequate terms and conditions or at all.

Recently legislated tax reform in Israel could have adverse
consequences on us.

In
July 2002, the Israeli Parliament approved a law enacting extensive changes to
Israels tax law  generally effective
January 1, 2003. Among the key provisions of the legislation are
(i) changes which may result in the imposition of taxes on dividends
received by an Israeli company from its foreign subsidiaries; and (ii) the
introduction of the controlled foreign corporation concept according to which
an Israeli company may become subject to Israeli taxes on certain income of a
non-Israeli subsidiary if the subsidiarys primary source of income is passive
income (such as interest, dividends, royalties, rental income or capital
gains).

Government grants we received for research and development
expenditures may be reduced or eliminated in the future due to Israels
government budget cuts, and such grants limit our ability to develop products and
transfer technologies outside of Israel, and require us to satisfy specified
conditions.

In
the past, we have received grants from the government of Israel through the
Office of the Chief Scientist of the Ministry of Industry and Trade, or the
OCS, for the financing of our research and development expenditures in Israel.
The Israeli government has reduced the benefits available under this program in
recent years and may not continue it in the future at its current level, if at
all. The terms of the OCS grants limit our ability to develop products and
transfer technologies outside of Israel without the prior approval of the OCS,
if such products or technologies were developed using OCS grants. Such
approval, if granted, will generally be subject to additional financial
obligations. In addition, if we fail to comply with any of the conditions
imposed by the OCS, including the payment of royalties with respect to grants
received, we may be required to refund any payments previously received, together
with interest and penalties.

If we fail to satisfy the condition specified by our
Approved Enterprise program, we may be denied benefits to which we are
currently entitled to in the future.

The
Investment Center of the Ministry of Industry and Trade has granted us
Approved Enterprise status to certain development programs. The benefits
available to an Approved Enterprise program are dependent upon the fulfillment
of conditions stipulated under applicable law and in the certificate of
approval. If we fail to comply with these conditions, in whole or in part,
benefits from tax exemptions or reduced tax rates would likely be denied to our
shareholders or us in the future.

7

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ITEM
4.    INFORMATION ON THE COMPANY

History
and Development

The
Companys legal and commercial name is Top Image Systems Ltd. ( TiS, the
Company or we).  The Company changed
its name from T.i.S.-Top Image Systems (1991) Ltd. to its present name in July
1996.  The Company was incorporated on
March 26, 1991.  The life of the Company
is not limited.

The
Company is domiciled in Israel and exists as a company with a limited share
capital.  The Company was incorporated,
and operates, under the laws of Israel. Its registered and principal executive
offices are located in Israel at 2 Habarzel Street, Ramat Hahayal, Tel Aviv
69710, and its telephone number is 011-972-3-767-9100.  Its website is http://www.topimagesystems.com
(the information contained in the Companys website is not a part of this
annual report and no portion of such information is incorporated herein).

In
May 2000, the Company closed a private placement of its shares in which Charter
TiS L.L.C. (Charter), an affiliate of Charterhouse Group International Inc.
(Charterhouse), purchased 2,000,000 Ordinary Shares for $15,000,000.  For additional information, see the sections
entitled Major Shareholders and Related Party Transactions in Item 7 of
this annual report.

In
November 2001, the Company acquired the minority interest in its subsidiary
e-Mobilis Ltd., and its operations were integrated into those of the
Company.  For additional information,
see the section entitled Related Party Transactions in Item 7 of this annual
report.

Business
Overview

General

We
are engaged in the development and marketing of an automated data capture solution for managing and validating
content that is gathered from customers, trading partners and employees.  Whether originating from electronic, paper,
mobile or other sources, our solutions deliver digital content to applications
that drive an enterprise, by using advanced technologies including wireless
communications, servers, form processing and information recognition
systems.  Our software improves business
processes by integrating data from multiple sources and of different
types.  Such integration is performed
regardless of the source and format of the data, which could be structured, as
in the case of application forms or surveys, or semi-structured, such as
invoices, purchase orders, checks, freight and shipping bills and others.  Our solutions seamlessly deliver the
extracted data to applications such as document and content management,
Enterprise Resource Planning, or Customer Relationship Management.  Our solutions minimize the need for manual
data entry by automatically reading, understanding, identifying and processing
information, increasing data capture accuracy and the rate of information
processing.  The platform solution we
offer does away with traditional means of extracting information from
paper-based documents and integrates multiple information sources into a single
enterprise-level solution that increases speed and efficiency.

Products

eFLOWUnified Content PlatformTM

Our
flagship product is the eFLOW Unified Content PlatformTM.  eFLOWTMprovides the common
architectural infrastructure for our solutions.  Our current plans are that future developments will also be based
on the Unified Content Platform.  Based
on a single, integrated environment, the eFLOWTMplatform provides a
visual application designed to enable systems integrators and Value Added
Resellers, or VARs, to build complete form processing and data capture
applications quickly and easily. Providing a modular platform with an open,
scalable and flexible architecture, eFLOWTMfacilitates the
development of applications ranging from desktop, stand-alone applications to
high-volume, network-based systems.

8

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We
believe that our eFLOWTMplatform and the total range of TiS
solutions based on it can be used with the Internet and personal mobile devices
as well as with paper forms and archived image files.   eFLOWTM allows a customer to integrate multiple
sources of information including the Internet, paper, fax, microfilm,
microfiche and wireless mobile devices to provide a single connection of all
sources of data to the enterprise application system.  The
eFLOWTM
platform allows maximum flexibility, using one set of rules for all
applications, and dramatically reducing the implementation time while
broadening the use of the solution across the company.

eFLOWTM
includes the capability to receive and process data from electronic forms that
are filled in via the Internet as well as transactions created on and
transmitted from personal mobile devices.

eFLOW
TMis designed to address the needs of companies, institutions,
government agencies, and other organizations with a broad range of form
processing requirements (5,000 or more forms per day).

In
addition, eFLOWTM
may integrate with a customers financial systems, ERP and other relevant
applications to provide an end-to-end solution for managing invoices and
payments.  As such, eFLOWTM eliminates
a significant portion of the traditional manual data entry, decreases the need
for data entry resources and processing time, and significantly improves the
quality, accuracy and value of the data.

eFLOWTMhas been designed with a new underlying
infrastructure that utilizes advanced technology, such as Microsoft Visual
Basic for Applications and COM/DCOM, to provide an accelerated data capture
solution for paper, electronic forms, fax, ftp files and input from mobile devices.  The use of these technologies  will allow customers, developers and
partners to modify user interfaces, extend functionality and connect TiS eFLOWTM
with other mission-critical applications to create fully integrated business
solutions.  eFLOW TMincludes
support for the XML standard which enables the interchange of documents between
systems and applications in a standard format.

Targeting
banking and finance, logistics, insurance, postal systems, healthcare, tax,
statistics and many other potential markets, eFLOWTM
technologies enable enterprises to implement digital information recognition,
improving processing and speeding up the data entry cycle, by providing a
single data collection entry point.

Integrafor Structured Content

Integra,
our eFLOWTM plug-in
for structured content, provides a solution for data capture,
validation and delivery from structured predefined forms.

Freedom
for Semi-Structured Content

Freedom,the eFLOWTM plug-in for semi-structured
content, enables customers to identify and capture critical data from
semi-structured documents such as invoices, purchase orders, shipping notes and
checks, among others.  Based on
artificial intelligence, Freedomis designed to understand the
format of the document without the need to predefine its structure.  Freedom is able to locate, identify,
capture and validate critical data contained in the document.  This product targets companies that receive
thousands of semi-structured documents such as invoices every month from hundreds
of suppliers, and allows them to automatically identify and process any type of
such documents.

The
Learning module is an innovative module that automatically learns new types of
forms, in order to both introduce new forms previously unseen into the system,
and to improve recognition of existing forms already captured into the system.
Unrecognized forms reach the Learning module, where an operator trains the
system as to where certain important fields are located. The new information
would be available for the system to recognize a similar, although not
necessarily identical, form in the future.

9

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AFPSProTM

AFPSProTM
had been TiS flagship product until the introduction of the eFLOW
Unified Content PlatformTM.  We have begun the process of upgrading AFPSProTM
customers to eFLOWTM and plan to continue doing so until
eventually AFPSProTM
will phase out altogether.

Principal
Markets

We
operate branch offices in the United States, the United Kingdom and Germany through
subsidiaries (TiS BV and TiS America, Inc.). 
The U.S. branch is responsible for sales, marketing and support
activities in the United States, Canada, and in Latin America.  These four territories, together with Japan,
define the Companys principal markets. 
In addition, we believe that there exist significant potential
opportunities in South Africa, the Czech Republic, Spain, Australia, France,
the Benelux countries, and in offering solutions for large government projects
as part of the forthcoming round of Census projects beginning in 2005.

The
following is a table giving a breakdown of total revenues by category of
activity and geographic market for each of the last three fiscal years:

|                             |       | Year
  Ended December 31,
|---------------------------- | ----- | -------------------------
|                             |       |                          
|                             |       | 2000                     
|                             |       |                          
|                             |       | $                        
|Product Revenues by
  Region |       |                          
|                             |       |                          
|Israel                       |       | 62,336                   
|Far East (excluding
  Japan) |       | 269,670                  
|Europe                       |       | 3,408,898                
|North America                |       | 1,837,539                
|South America                |       | 936,854                  
|Africa                       |       | 805,146                  
|Middle East                  |       | 771,805                  
|Japan                        |       | 1,981,569                
|Other                        |       |                         
|                             | Total |                          
|                             |       |                          
|                             |       |                          
|Service Revenues by
  Region |       |                          
|                             |       |                          
|Israel                       |       | 72,978                   
|Far East (excluding
  Japan) |       | 13,874                   
|Europe                       |       | 223,397                  
|South America                |       | 135,082                  
|Middle East                  |       | 46,792                   
|North America                |       | 28,578                   
|Africa                       |       | 30,928                   
|Japan                        |       | 896                      
|Other                        |       |                         
|                             | Total |                          
|                             |       |                          
|                             |       |                          

Seasonality

Our
business significantly depends upon the requirements of large corporations and
governmental agencies.  Because many of
these entities operate according to annual budgets, their tendency is to
approve budgets in the beginning of the fiscal year and release the
budgets toward the end of the fiscal year. 
This mode of operation affects our results of operations throughout the
year.

10

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Marketing

Over
the past few years, we have shifted our marketing emphasis from a time and
labor intensive project orientation, which required us to provide technical
support and customization for our customers, to eFLOWTM, which is
marketed as an enterprise solution. 
This shift in our marketing strategy has freed us from having to expend resources
in providing support and services to the end-user.  This function is now increasingly performed by the VARs,
distributors and systems integrators with whom we work.

In
the past, we marketed our technology directly to customers with form processing
needs or through strategic alliances. 
We now market eFLOWTM to VARs, distributors
and systems integrators to assist them in building form processing systems more
quickly, easily, and economically at their customers locations.

As
we have shifted our marketing strategy from a project-oriented strategy to a
solution-oriented strategy, we have looked more and more to strategic
alliances with VARs, distributors and systems integrators.  This has also enabled us to expand our
market share in new geographic markets by partnering with the top-tier VARs,
distributors and systems integrators located in or selling products in each
country.  This enables us, together with
each partner, to initiate common marketing and sales strategies and thereby, to
generate sales.  This strategy is based
on our belief that VARs, distributors, systems integrators and Original
Equipment Manufacturers, or OEMs,generally have better access to end-users
in their respective markets than we do. 
By engaging VARs, distributors, systems integrators and potentially,
OEMs, to include our products as part of their products and service offerings,
we can sell products to end-users without the costs of directly marketing to
end-users.

Currently,
we sell through a network of VARs, distributors and systems integrators in
approximately 30 countries worldwide. 
The system integrators are managed via our sales and marketing force
located in our headquarters in Israel and in our branch offices.  We have implemented a program to align TiS
with major complementary strategic level partners who can help us reach new
target customers and market segments. 
These agreements call for TiS and the strategic partner to plan and
coordinate marketing and sales activities in their respective territories.

In
November 2002, we held a successful annual partner event in Prague.  The event drew more than 80 different
participants from diverse countries including the United States, France,
Germany, South Africa, India, the United Kingdom, Singapore, Australia, Brazil,
Spain, Portugal and others.  The
partners gathered to learn about our new version of our eFLOWTM that was
formally introduced there, as well as to exchange experiences and case studies.  In
December 2002, we announced a sales and marketing agreement with Formic Ltd., a
leading UK supplier of electronic document and data capture systems.  The joint activity of the companies will
cover the UK market, focusing on the semi-structured forms.

In
May 2002, we signed a territory agreement with IBM, and became a formal IBM
Business Partner and an advanced level member of IBMs PartnerWorld® for
Developers.  Our solution utilizes IBM
WebSphere® Application Server and DB2® Universal DatabaseTM.

In
April 2002, we announced a teaming agreement with Scan - Optics, a leader in
applying technology to high-speed imaging, recognition, data capture and
archive and retrieval solutions.  The
agreement provides for joint activity focusing on marketing and sales of the
integrated solutions worldwide.

In
March 2002, we named Vegstore Systems as the primary distributor of eFLOWTM
in the Italian market. Based on the sale of the eFLOWTM platform
for data capture in the Italian Census project, Vegstore Systems has become
TiS distributor, system integrator and partner in the Italian market, using
its extensive network of value added resellers to sell and support integrated
enterprise solutions for automated data capture, digital processing and
document management.

Licensed
Technology

We
license various recognition software technologies from third parties in order
to utilize them in our products.  We
currently use technologies developed by several different companies.  Depending upon the requirements of each
customer, we incorporate one or several of such technologies into a specific
product.  We are not dependent upon any
single source of recognition software technology and the various technologies
that we use are, in large part, interchangeable.

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Intellectual
Property Rights

Our
success depends upon our proprietary software technology.  Although we believe that our technology has
been developed independently and does not infringe on the proprietary rights of
others, we cannot assure you that the technology does not and will not so
infringe or that third parties will not assert infringement claims against us
in the future.  In the case of
infringement, we would, under certain circumstances, be required to modify our
products or obtain a license.  We cannot
assure you that we would be able to do either in a timely manner, upon
acceptable terms and conditions or at all, or that we will have the financial
or other resources necessary to successfully defend a patent infringement or
other proprietary rights infringement action. 
Failure to do any of the foregoing could have a material adverse effect
on us.  Furthermore, if our products or
technologies are deemed to infringe upon the rights of others, we could become
liable for damages, which could have a material adverse effect on us.

We
have been named in a suit by Millennium L.P. in a suit claiming that our
operations infringe on their patents. 
We are currently evaluating the merits of the suit and how to react. We believe that we are not infringing
Millenniums patents and further that Millenniums patents are invalid. We also believe
that the potential liability, if any, with respect to this action will not
materially adversely affect our financial position, results of operations or
cash flows but we cannot assure you of the outcome of the suit or its impact on
our operations or financial condition.

Our
success also depends on our ability to protect our intellectual property.  We have not yet obtained any patents and we
cannot assure you that we will obtain any patents.  In addition, we cannot assure you that:

| |  | any patents which we may
  obtain will be broad enough to protect our technology, will provide us with
  competitive advantages or will escape challenge or invalidation by third
  parties;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                             
| |  | the patents of others
  will not have an adverse effect on our ability to do business; or                                                                                                   
| |   |                                                                                                                                                                                             
| |  | others will not
  independently develop similar products, duplicate our products or, if patents
  are issued to us, design around these patents.                                            

Further,
the laws of foreign jurisdictions may afford little or no protection of our
intellectual property rights. We cannot assure you that the protection provided
to our intellectual property rights by the laws and courts of foreign nations
will be substantially similar to the remedies available under United States
law.  We cannot assure you that third
parties will not assert infringement claims against us based on foreign
intellectual property rights and laws that are different from those established
in the United States.

We
also rely on trade secret protection, employee and third-party nondisclosure
agreements and other intellectual property protection methods to protect our
confidential and proprietary information. 
Despite our efforts, we cannot be certain that others will not gain
access to our trade secrets or copy and use information that we regard as proprietary
or confidential without our authorization.

Dr.
Yeshurun, the Companys former Chief Scientist, was, at the time of his
employment by the Company, a Professor of the Tel Aviv University Computer
Science Department where he conducted research in the areas of computer vision,
neural computation and robotics.  While
the university consented to Dr. Yeshuruns employment by the Company and has
not asserted any claim that intellectual property developed by Dr. Yeshurun on
behalf of the Company belongs to the university, the university has not
acknowledged the Companys rights to any intellectual property developed by
Dr. Yeshurun on behalf of the Company. 
We cannot assure you that the university will not assert a claim for
such intellectual property rights in the future or that the university does not
have any rights to such intellectual property.

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We
believe that product recognition is an important competitive factor in the form
processing industry.  Accordingly, we
promote our new platform name, eFLOWTM,in connection with our
marketing activities.  We either hold or
intend to apply for trademark registration of our significant solution and
module names, although we cannot assure you that such applications will be successful.  Although we have not sought to market our
products using our tradename TiS as a trademark, we believe that certain
other companies use trademarks that contain the letters TIS for products,
which we believe, do not compete with our products.  We cannot assure you that this will not limit our ability to use
our tradename TiS to market our products.

Competition

The
market for data capture systems in general, and for automatic form processing
systems in particular, is characterized by intense competition, significant price
erosion over the life of the product, and rapidly changing business conditions,
customer requirements, and technology.

Our
solutions compete with those developed and marketed by numerous
well-established companies, as well as with manual data entry systems.  Many of these competitors have substantially
greater financial, technical, personnel and other resources than we do, and
have established reputations for success in the development, licensing and sale
of their products and technology. 
Certain of these competitors are industry leaders with the financial
resources necessary to enable them to withstand substantial price competition
or downturns in the market for computer software.

Among
our major competitors in providing form processing systems and software
are:  Captiva Software Corporation,
Cardiff, Mitek, Banctec, Microsystems Technology, Inc., Datacap, Inc., SER and
ReadSoft.  During 2002, Captiva Software
Corporation merged with ActionPoint, a provider of enterprise information
capture software. The merger created the largest provider of input management
software solutions, under the name Captiva Software Corporation.

In
addition, we are often in competitive situations with major systems suppliers
such as IBM, Siemens and Unisys.  In
these cases, the major systems suppliers are offering one of our competitors
solution as part of a large integrated solution.  There are also numerous other companies that have developed or
may be expected to develop technologies or products that may be functionally
similar to some or all of those being offered by us.  We cannot assure you that other companies with greater financial
resources and expertise do not have or are not currently developing
functionally equivalent or superior products or that functionally equivalent or
superior products will not become available in the near future.

The
market for our technology and solutions is also characterized by rapid changes
and evolving industry standards, often resulting in product obsolescence or
shortened product lifespans. 
Accordingly, our ability to compete will be dependent upon our ability
to continually enhance and improve our existing products and technologies, complete
the development of, and introduce new solutions into the marketplace in a
timely manner.  We cannot assure you
that we will be able to compete successfully, that our present or future
competitors will not develop technologies or products that will render our
products and technology obsolete or less marketable, or that we will be able to
enhance successfully our existing products and technology or adapt them
satisfactorily or develop new products.

In
certain markets, such as the United States, the United Kingdom and Germany, TiS
competes with more than one company supplying similar solutions.  In Japan, where these competitors are less
active, TiS holds a prominent position in the market due to our Japanese
distributor, the EDMS Division of Toyo Ink.

Customers

Our
customers consist of governments, corporations and VARs.  We have strengthened our position in the
automated data collection for national population census projects.   During 2002, our solutions were used
successfully in connection with the population census projects of the Republic
of Cyprus, Italy and Ireland. All projects were completed on time, beating
extremely tight deadlines. In addition, TiS had successfully completed the
first phase and moved to the second phase of the largest census project in the
world, the Indian census project, processing around 6 million forms per week.
Additional governmental agencies applications include the implementation of the
eFLOWTM
platform as the software solution to process the Slovak Republics tax forms,
leveraging the completion of the Republics census project.

13

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Other
market solutions provided by us include integrated systems for complicated
semi-structured applications, such as automating the capture and process of
data from hundreds of different formats of forms of Schneider Logistics, a
leading provider of supply-chain and transportation logistics solutions to
Fortune 1000 customers.

We
have also strengthened our competitive position in several markets with the
acquisition, renewal or successful completion of several significant customers
/ projects, during 2002, including:

| |  | SEB, a major banking concern in Germany;                                 
| | - | -------------------------------------------------------------------------
| |   |                                                                          
| |  | Febreban, the Federation of Banks of Brazil;                             
| |   |                                                                          
| |  | The census in India;                                                     
| |   |                                                                          
| |  | The census in Cyprus;                                                    
| |   |                                                                          
| |  | The census in Italy;                                                     
| |   |                                                                          
| |  | Schneider Logistics in the United States;                                
| |   |                                                                          
| |  | The Slovak Republics tax services;                                      
| |   |                                                                          
| |  | FedEX Express Corp. in the United States;                                
| |   |                                                                          
| |  | The Irish Census in the Republic of Ireland;                             
| |   |                                                                          
| |  | The Deutsche Bank AG in the Far East; and                                
| |   |                                                                          
| |  | Extension of the agreement with the EDMS Division of
  Toyo Ink in Japan.

Warranty
and Service

We
generally negotiate our warranty obligations with respect to our products on a
case by case basis.  Performance
warranties typically extend for 90 days.

We
may be exposed to potential product liability claims by our customers and users
of our products.  Currently, we hold a
world-wide product liability insurance policy that provides coverage limited to
$2,000,000 in aggregate for the policy period ending on September 30,
2003.  This policy also provides
unlimited coverage for legal expenses within the coverage period.  Despite this coverage, a successful claim
against us for product liability could have a material adverse effect on our
financial condition.  While we have not
experienced material warranty liability in the past, we cannot assure you that
future warranty expense will not have an adverse effect on us.

We
have entered into maintenance and service agreements with certain of our
customers.  These agreements typically
provide for regular payment to us of an amount equal to 15% per annum of the
applicable license fees for maintenance.  Our technical team also provides support to
VARs, distributors and systems integrators to assist in integration of our
products.

If
we are successful in our efforts to obtain significant orders for our products,
we may be required to install and service, on a timely basis, large numbers of
installations at our customers locations. 
We cannot assure you that we will be able to provide such services on
adequate terms and conditions, or at all.

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Government
Regulation

The
government of Israel encourages research and development projects oriented
towards products for export through its Chief Scientist Office, or OCS,
pursuant to the Law for the Encouragement of Industrial Research and
Development, 1984, commonly referred to as the Research Law.  In exchange for assistance provided by the
Israeli government in connection with research and development cost, we are
committed to pay to the Israeli government royalties at the rate of 2% to 3.5%
of revenues from sale of our FormOut!TM and eFLOWTM
software, up to a maximum of 150% of the amount of participation received,
linked to the U.S. dollar plus interest at the Libor rate.  Total grants received or accrued less
royalties paid amounted to $45,496 as of December 31, 2002.

The
terms of grants under the Research Law also require that the manufacture of
products developed with government grants be performed in Israel, unless a
special approval has been granted. Ordinarily, any such approval will be
conditioned upon acceleration of the rate of royalties and increasing the total
amount to be repaid to up to 300% of the grants.  Israeli government consent is required to transfer to third
parties technologies developed through projects in which the government
participates.  Such restrictions do not
apply to exports from Israel of products developed with such technologies.  The consent of the OCS is required for the
transfer of manufacturing rights out of Israel.  Royalty-bearing grants received from the State of Israel for
research and development are offset against the Companys research and
development costs.

In
November 2002, the Research Law was amended, most of which became effective on
April 1, 2003.  Many of the provisions
of the amendment address procedural issues, such as the structure of the
entities that govern grants under the Research Law, appeals and granting the
various entities powers to determine additional benefit tracks.

The
amendment also provides for greater flexibility with regard to the place of manufacturing
of products, whose development was funded with grants and gives the authorities
larger discretion than in the past based on the value added to the
products.  A plan will now be approved if the applicant is an Israeli corporation
and, as a result of the plan, the applicant will develop in Israel, by Israeli
residents, a new product or a significant improvement to an existing product,
unless the plan is performed as part of an international cooperation agreement
to which Israel is a party, or the OCS is convinced that it is essential for
the execution of the plan that part of it will be performed out of Israel or by
non-Israeli residents. The amendment also determined a variety of fixed
levels of grants which the research committee (appointed according to the law)
will be entitled to grant based on the expected contribution of the planned
research and development to the Israeli economy.

The
amendment requires the grant recipient and its controlling shareholders and
interested parties to notify the OCS of any change in control of the recipient
or a change in the holdings of the means of control of the recipient that
results in a non-Israeli becoming an interested party directly in the
recipient. Such Interested Party will also be required to sign an undertaking
in favor of the OCS in form published by the OCS. For this purpose, control
is defined as the ability to direct the activities of a company other than any
ability arising solely from serving as an officer or director of the company.  A person is presumed to have control if such
person holds 50% or more of the means of control of a company.  Means of control refers to voting rights
and the right to appoint directors or the chief executive officer.  An interested party of a company includes
its chief executive officer and directors, someone who has the right to appoint
its chief executive officer or at least one director, and a holder of 5% or
more of the companys outstanding equity or voting rights.

We
also benefit from being designated as an Approved Enterprise under Israels
Law for the Encouragement of Capital Investments, 1959.  For additional information, see the section
entitled Law for the Encouragement of Capital Investments, 1959 in Item 10
of this annual report.

Additionally,
we may be subject to varied regulation in the markets where we sell our
products.  The burden of complying with
such regulatory schemes (which may be contradictory) could have a material
adverse effect on our ability to diversify or grow our sales.

15

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Organizational
Structure

We
have three subsidiaries.  In August
1991, we established TiS America, Inc. to provide sales, marketing and
technical support to our customers.  TiS
America is incorporated under the laws of Delaware and is a wholly owned
subsidiary of the Company.  In January
2000, we, together with others, established e-Mobilis.  e-Mobilis was incorporated in Israel, and we
initially held 80.2% of its issued shares. 
During 2001, we acquired the remaining 19.8% interest in e-Mobilis, and
e-Mobilis operations were integrated into ours.  For additional information, see the section entitled Related
Party Transactions in Item 7 of this annual report.  In July 2000, we established TiS B.V., a wholly-owned subsidiary
incorporated under the laws of the Netherlands, with operating branches in he
United Kingdom and Germany.

Property,
Plant and Equipment

We
lease approximately 707 square meters in Ramat Hahayal, Tel Aviv, Israel, for
which we pay a monthly rent of approximately $17,400.  The lease expires in November 2007.  In addition, our North American subsidiary leases approximately
60 square feet of office space in Miami, Florida for an aggregate monthly rent
of $850.  Our branch in Germany leases
approximately 241 square meters of office space in Cologne, Germany for a
monthly sum of $3,300 and our English branch leases approximately 35 square
meters of office space in Uxbridge for the amount of $4,000 per month.  All lease agreements out of Israel will
either expire or be renewed during 2003.

16

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ITEM
5.     OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Managements
discussion and analysis of financial conditions and results of operations.

The
following discussion and analysis have been derived from, and should be read in
conjunction with, our consolidated financial statements, related notes and
other financial information included elsewhere in this annual report.

General

We
derive revenue from the sale of products and solutions and also from service
and maintenance agreements.

Our
sales to resellers, VARs, distributors and system integrators are made on
credit terms and we do not hold collateral to secure payment.  The terms of the agreements with these
resellers, VARs, distributors and system integrators do not provide the
resellers, VARs, distributors and system integrators with the right to return
the purchased products or solutions. 
Payment with respect to such sales is generally due within 30 to 180
days following receipt of an invoice.  A
default in payment by one or more of our resellers, VARs, distributors and
system integrators could adversely affect our business, results of operations,
and financial condition.  We cannot
assure you that uncollectible receivables will not exceed our reserves.  Any significant increase in uncollected
accounts receivable beyond reserves could have a material adverse effect on our
business, results of operation, and financial condition.

As
a result of our strategy of pursuing strategic alliances with VARs,
distributors and system integrators, most of our revenues are derived from such
alliances.  During the years ended
December 31, 2000, 2001 and 2002, revenues deriving from VARs, distributors and
system integrators accounted for approximately 84%, 76%, and 72%, respectively,
of our revenues.

Historically,
we have recognized a substantial portion of our revenues from product sales.  During the years ended December 31, 2000,
2001 and 2002, product revenues accounted for approximately 95%, 83%, and 82%
respectively, of revenues, while service revenues accounted for approximately
5%, 17%, and 18% respectively, of revenues. 
In 2000, sales of AFPSProTMaccounted for 78% of
our product sales and for approximately 74% of our revenue; sales of eFLOWTM,
which was introduced in March 2000, accounted for 6% of our product sales and
for approximately 5% of our revenue.  In
2001, sales of AFPSProTMaccounted for 42% of our product sales
and for approximately 35% of our revenue; sales of eFLOWTM accounted
for 54% of our product sales and for approximately 45% of our revenue.  In 2002, sales of AFPSProTMaccounted
for 25% of our product sales and for approximately 21% of our revenue; sales of
eFLOWTM
accounted for 69% of our product sales and for approximately 57% of our
revenue.

Quarterly
Results; Seasonality

Our
sales cycle for AFPSProTM as well as eFLOWTMranges from
9 to 12 months.  These sales cycles vary
by customer and could extend for longer periods depending on the time required
by the customer to evaluate the utility of the applicable product to its
operations.  Our operating results could
vary between periods as a result of this fluctuation in the length of our sales
cycles, the purchasing patterns of potential customers, the timing of
introduction of new products and product enhancements introduced by us and our
competitors, technological factors, variations in sales by distribution
channels, competitive pricing and generally non-recurring product sales.  Consequently, our product revenues may vary
significantly by quarter.    During
2000, 28% of our revenues in the third quarter were from a significant project
for the U.S. Social Security Administration, while that project accounted for
only approximately 8% of our revenues on an annualized basis.  During 2001, 25% of our revenues in the
second quarter were from Politec, a system integrator in Brazil, and 28% of our
revenues in the third quarter were from Unisys, another system integrator in
Brazil, while each of the above accounted for only 8% of our revenues on an
annualized basis.  During 2002, 30% of
our revenues in the first quarter were from Schneider Logistics, a customer in
the United States, while it only accounted for 10% of our annual revenues.

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Geographical
Considerations

Revenues
from the sale of products, solutions and services outside of Israel accounted
for approximately 99%, 98%, and 99% of our revenues during the years ended
December 31, 2000, 2001 and 2002 respectively. 
More specifically, the percentage of our product sales occurring in
various geographic regions has fluctuated significantly in the past and is
likely to continue to do so in the future. 
During the years ended December 31, 2000, 2001 and 2002 the percentage
of our product sales in the Far East (including Japan) was 22%, 35%, and 34%
respectively.  During those same years,
our product sales in North America were 18%, 11%, and 15% respectively of total
sales.  During those same years, product
sales revenues from Europe represented 34%, 18%, and 41% respectively of total
sales.  As a result of the fluctuation
in product sales in various geographic regions, we are subject to the risks
associated with international sales, including economic and political
instability, shipping delays, customs duties, export quotas and other trade
restrictions, any of which could have a significant impact on our ability to
deliver products on a competitive and timely basis and exacerbate the risks
inherent in our business.  While we have
not encountered significant difficulties in connection with the sales of our
products in international markets, the future imposition of, or significant
increases in, the level of custom duties, export quotas or other trade
restrictions could have an adverse effect on us.

Critical
Accounting Policies and Estimates

We
believe that several accounting policies applied in the preparation of our
consolidated financial statements may be considered critical because they are
most important to the portrayal of our financial condition and results, and
they require managements most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters
that are inherently uncertain.  We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under present circumstances.  Actual results may differ from these estimates under different
assumptions or conditions.  We believe
the following critical accounting policies require our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.

Revenue
Recognition

We
derive revenue from primarily two sources: sales of software licenses and
provision of services. Service revenues include contracts for software
maintenance and technical support, consulting and training.

We
apply the provisions of Statement of Position (SOP) 97-2, Software Revenue
Recognition (as amended by SOP 98-4 and SOP 98-9) and related
interpretations to all transactions to recognize revenue.

We
allocate revenue from software arrangements involving multiple elements to each
element based on the relative fair values of the elements. The determination of
fair value of each element in multiple element arrangements is based on the
price charged when a similar element is sold separately.

A
typical solution includes software licenses, maintenance, and technical
support. Some customer arrangements include training and consulting.
Maintenance includes unspecified updates on an if-and-when available basis, and
support includes telephone support, and bug fixes or patches. Training consists
of courses taught by our instructors at our facility or at the customers site.
Consulting consists primarily of product installation, and tailoring the product
to the customers needs.

We
have analyzed all of the elements included in our multiple-element arrangements
and determined that we have vendor specific objective evidence of fair value to
allocate revenue to the different services. Accordingly, assuming all other
revenue recognition criteria are met, revenues from licenses are recognized
upon delivery of the software license in accordance with SOP 98-9.
Revenues from maintenance and support are recognized ratably over the term of
the agreement. Revenue for consulting and training is recognized as the
services are performed.

Our
criteria for revenue recognition are as follows:

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Persuasive
Evidence of an Arrangement Exists. It is our customary practice to
have a written contract, which is signed by both the customer and us, or a
purchase order from our customers, prior to recognizing revenue from an
arrangement.

Delivery
Has Occurred. Our software is physically or electronically
delivered to the customer. If undelivered products or services exist that are
essential to the functionality of the delivered product in an arrangement,
delivery is not considered to have occurred.

The
Vendors Fee is Fixed or Determinable. The fee our customers
are to pay for the products or services is negotiated prior to the inception of
the arrangement. Therefore, the fees are considered to be fixed or determinable
at the inception of the arrangement. Arrangements with payment terms subject to
any condition are not considered to be fixed or determinable until such
condition is fulfilled.

Collection
is Probable. Probability of collection for our customers
debts, is assessed by management on a customer-by-customer basis. This
assessment is based, among other factors, on actual payment by the customer,
general reputation of the customer in the market, and the history of relations
between us and the customer.

License
revenues from reseller arrangements are recognized upon delivery when payment
is not dependent on third party collection by the reseller.

The
estimated sales value of performance on long-term contracts is recognized using
the percentage of completion method, which is in accordance with Standard 4 of
the Israeli Standards Board, which is substantially identical to SOP 81-1.  The percentage of completion is determined
in accordance with milestones agreed between the parties.  In the event that management anticipates a
loss on a particular contract, such anticipated loss is provided for in
full.

Trade
Receivables

Trade
receivables are recorded at cost, less the related allowance for doubtful trade
receivables. Management considers current information and events regarding the
customers ability to repay its obligations and evaluates accounts receivable
to be impaired when it is probable that we will be unable to collect all
amounts.

The
balance sheet allowance for doubtful debts for all the periods through December
31, 2002 is determined as a specific amount for those accounts the collection
of which is uncertain.

In
2002, an allowance for doubtful accounts in the amount of $468,525 was made for
specific trade receivables as compared to $887,163 in 2001.  The decrease in the allowance for doubtful
accounts derives mainly from two amounts stemming from Argentina and Germany,
against which we were fully reserved by the end of 2001, and which were written
off during 2002.

Government
Grants

With
respect to the participation of the Israeli government in software research and
development cost, we are committed to pay the Israeli government royalties as a
percentage of revenues from the sale of the supported software.

Recently Enacted Accounting Pronouncements

In
June 2001, the Financial Accounting Standards Board, or FASB, issued 143,
Accounting for Asset Retirement Obligations. 
SFAS 143 requires us to record the fair value of an asset retirement
obligation as a liability in the period in which we incur a legal obligation
associated with the retirement of tangible long-lived assets that result from
the acquisition, construction, development and/or normal use of the
assets.  We also record a corresponding
asset, which is depreciated over the life of the asset.  Subsequent to the initial measurement of the
asset retirement obligation, the obligation will be adjusted at the end of each
period to reflect the passage of time and changes in the estimated future cash
flows underlying the obligation.  We are
required to adopt SFAS 143 on January 1, 2003. 
We do not believe the adoption of SFAS 143 will have a significant
impact on our consolidated financial statements.

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In
April 2001, the FASB issued SFAS 145, Rescission of FASB Statement 4, 44
and 64, Amendment of FASB No. 13 and Technical Corrections.  SFAS 145 rescinds FASB Statement No. 4,
Reporting Gains and Losses from Extinguishments of Debt, and an amendment of
that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements.  FASB 145
also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor
Carriers and amends FASB Statement No. 13, Accounting for Leases, to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions.  SFAS 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions.

The
provisions of SFAS 145 related to the rescission of Statement 4 are applicable
in fiscal years beginning after May 15, 2002. 
Early adoption is encouraged.  A
calendar-year entity may adopt the Statement 4 rescission in the fourth quarter
of 2002.  The provisions of SFAS 145
related to Statement 13 are effective for transactions occurring after May 15,
2002, with early application encouraged. 
All other provisions of SFAS 145 are effective for financial statements
issued on or after May 15, 2002, with early application encouraged.  We have adopted SFAS 145 beginning January
1, 2003, except for the provisions relating to the amendment of SFAS No. 13,
which was adopted for transactions subsequent to May 15, 2002.  The adoption of SFAS 145 did
not have significant impact on our consolidated financial statements.

In
July 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit
or Disposal Activities.  According to
SFAS 146, commitment to a plan to exit an activity or dispose of long-lived
assets will no longer be enough to record a one-time charge for most
anticipated costs.  Instead, companies
will record exit or disposal costs when they are incurred and can be measured
at fair value, and they will subsequently adjust the recorded liability for changes
in estimated cash flows.  SFAS 146
revises accounting for specified employee and contract terminations that are
part of restructuring activities.  SFAS
146 is effective for exit or disposal activities initiated after December 31,
2002, however earlier adoption is encouraged. 
The adoption of SFAS 146 will not have a significant impact on
our consolidated financial statements.

In
November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others.  The initial
recognition and initial measurement provisions of Interpretation No. 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, regardless of the guarantors fiscal year-end.  The guarantor may not revise or restate its
previous accounting for guarantees issued before the date of the
Interpretations initial application to reflect the effect of the recognition
and measurement provisions of the Interpretation.  The disclosure requirements in this Interpretation are effective
for financial statements of interim or annual periods ending after December 15,
2002.  The guidance on indirect
guarantees of the indebtedness of others, which previously was included in FASB
Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of
Others, continues to apply to financial statements for fiscal years ended after
June 15, 1981.  We do not believe the
adoption of interpretation No. 45 will have a significant impact on our
consolidated financial statements.

The
disclosure requirements are included in Note 10A to the consolidated financial
statements included elsewhere in this annual report.

In
November 2002, the Emerging Issues Task-Force, or EITF, issued its consensus on
EITF 00-21, Revenue Arrangements with Multiple Deliverables on an approach to
determine whether an entity should divide an arrangement with multiple
deliverables into separate units of accounting. According to the EITF in
an arrangement with multiple deliverables, the delivered item(s) should be
considered a separate unit of accounting if all of the following criteria are
met:  (1) the delivered item(s) has
value to the customer on a standalone basis, (2) there is objective and
reliable evidence of the fair value of the undelivered item(s), and (3) if the
arrangement includes a general right of return, delivery or performance of the
undelivered item(s) is considered probable and substantially in the control of
the vendor.  If all the conditions above
are met and there is objective and reliable evidence of fair value for all
units of accounting in an arrangement, the arrangement consideration should be
allocated to the separate units of accounting based on their relative fair
values.  However, there may be cases in
which there is objective and reliable evidence of the fair value(s) of the
undelivered item(s) in an arrangement but no such evidence for one or more of
the delivered items.  In those cases,
the residual method should be used to allocate the arrangement
consideration.  The guidance in EITF
00-21 is effective for revenue arrangements entered into in fiscal years
beginning after June 15, 2003. 
Alternatively, entities may elect to report the change in accounting as
a cumulative-effect adjustment in accordance with Opinion 20.  If so elected, disclosure should be made in
periods subsequent to the date of initial application of this consensus of the
amount of recognized revenue that was previously included in the cumulative
effect adjustment.  We believe that the
adoption of EITF 00-21 will not have a significant impact on our consolidated
financial statements.

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In
December 2002, the FASB issued SFAS 148, Accounting for Stock Based
Compensation - Transition and Disclosure - an amendment of FASB statement No.
123.  SFAS 148 permits two additional
transition methods for entities that adopt the fair value based method of
accounting for stock-based employee compensation.  SFAS 148 also requires new disclosures about the ramp-up effect
of stock-based employee compensation on reported results. SFAS 148 also
requires that those effects be disclosed more prominently by specifying the form,
content, and location of those disclosures. 
The transition guidance and annual disclosure provisions of SFAS 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances.  The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002.  At December 31,
2002, we made the required disclosures and continued to apply APB Opinion No.
25

In
January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities. According to Interpretation No. 46, a Variable Interest
Entity will be consolidated by an enterprise that is subject to a majority of
the risk of loss from the Variable Interest Entitys activities or entitled to
receive a majoritys of the entitys residual returns or both.  The enterprise that consolidates a Variable
Interest Entity is called the primary beneficiary of that entity.  Interpretation requires certain disclosures
to be made by the primary beneficiary and by an enterprise that holds a
significant variable interest in a Variable Interest Entity but is not the
primary beneficiary.  The consolidation
requirements of Interpretation No. 46 apply immediately to Variable Interest
Entities created after January 31, 2003. 
The consolidation requirements apply to older entities in the first
fiscal year or interim period beginning after June 15, 2003.  Certain of the disclosure requirements apply
in all financial statements issued after January 31, 2003, regardless of when
the variable interest entity was established. 
We do not expect the adoption of FIN 46 to have any significant impact
on our consolidated financial statements.

On
April 30, 2003, the FASB issued Statement No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities, which amends FASB Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities, to
address (1) decisions reached by the Derivatives Implementation Group, (2) developments
in other Board projects that address financial instruments, and (3)
implementation issues related to the definition of a derivative. 
Statement No. 149 has multiple effective date provisions depending on the
nature of the amendment to Statement No. 133. 
We are currently evaluating the impact of adopting Statement No. 149 on
our financial statements.

On
May 15, 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.  This Statement establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer classify
a financial instrument that is within its scope as a liability (or an asset in
some circumstances). Many of those instruments were previously classified as
equity. This Statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. It is to be implemented by
reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption. Restatement is not
permitted. We are currently evaluating the impact of adopting Statement 150 on
our financial statements.

Accounting
Standard No. 12 on Discontinuance of Adjustment of Financial Statements.
Pursuant to this standard, commencing January 1, 2004, the adjustment of
financial statements will be discontinued. Until December 31, 2003, the Company
will continue to prepare adjusted financial statements in accordance with
Opinion No. 36 of the ICPAI. The adjusted amounts included in the financial
statements as at December 31, 2003, will constitute the starting point for the
nominal financial report as of January 1, 2004.  The extent of the effect of this change depends on the rate of
inflation and the financing sources of the Company.  The Company believes that the adoption of this standard will not
have a significant impact on its financial position or results of operations.

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Accounting
Standard No. 13 on Effect of Changes in Exchange Rate of Foreign Currency.
The standard discusses the translation of transactions in foreign currency and
the translation of financial statements of foreign operations for the purpose
of including them in the financial statements of the reporting entity and
replaces the instructions in Clarifications 8 and 9 to Opinion No. 36 which
will be annulled upon Accounting Standard No. 12 coming into effect. This
standard will apply to financial statements for periods beginning after
December 31, 2003. The adoption of Accounting Standard No. 13 will have no
effect on the Companys consolidated financial statements.

In
August 2002, the Israel Accounting Standards Board published Standard No. 14,
Interim Financial Reporting. The standard prescribes the minimum content of
an interim financial report, including the disclosure required in the notes,
and also prescribes the accounting recognition and measurement principles that
should be applied in an interim financial report. Standard No. 14 will become
effective for financial statements covering periods beginning on or after
January 1, 2003. The adoption of Accounting Standard No. 14 will have no effect
on the Companys consolidated financial statements.

In
February 2003, the Israel Accounting Standards Board published Accounting
Standard No. 15  Decline in Value of Assets.  The Standard provides procedures which a company must apply in
order to ensure that its assets in the consolidated balance sheet, are not
presented at an amount which is in excess of their recoverable value, which is
the higher of the net selling price or the present value of the estimated
future cash flows expected to be derived from use and disposal of the asset.  In addition, the Standard provides rules for
presentation and disclosure with respect to assets whose value has declined.
The Standard applies to financial statements for periods beginning January 1,
2003.  The Standard provides that in
most cases, the transition will be effected by means of the from here on
method, however, a loss from decline in value of an asset, in the amount of the
difference between the book value on the commencement date of the Standard and
the recoverable amount as at that date, shall be charged to the statement of
operations in the category cumulative effect as at beginning of the year of
change in accounting method if and only if, the said loss was not recognized
in the past solely due to the fact that the net non-discounted future cash
flows were greater than the book value. 
The adoption of Accounting Standard No. 15 will have no effect on the
Companys consolidated financial statements.

Results of Operations

The
following discussion and analysis should be read in conjunction with the
section entitled Selected Financial Data in Item 3 of this annual report and
the consolidated financial statements, related notes and other financial
information included elsewhere in this annual report.

Year
Ended December 31, 2002 Compared to Year Ended December 31, 2001

Revenues.  Product sales decreased by $3,490,503, or
35%, from $9,913,851 in 2001 to $6,423,348 in 2002 primarily as a result of the
effects of the worldwide economic slowdown in information technology (IT)
markets.  Total revenues for the year
ended December 31, 2002 amounted to $7,799,093 compared to $11,959,249 for the
year ended December 31, 2001.

Cost
of Revenues.  Cost of
revenues decreased 2% from $3,072,333 in 2001 to $3,005,463 in 2002 primarily
as a result of lower sales. As a percentage of our revenues, cost of revenues
increased from 26% in 2001 to 38% in 2002. 
This decrease in our margins is primarily a result of the inflexible nature
of certain expenses such as salaries and third parties license expenses that do
not decrease materially as revenues decrease.

Research
and Development. 
During 2001, the Company continued the development of eFLOWTM,
which began in 1999, as well as the development of its modules for
semi-structured forms and mobile capabilities. During 2002, our efforts were
concentrated mainly on the semi-structured module capabilities, while during
October 2002 the efforts towards the mobile capabilities were halted. Gross
research and development expenses aggregated $1,340,408 for 2002 compared to
$2,198,628 for 2001. The decrease is mainly due to expenses attributed to
e-Mobilis, for which operation and headcount decreased materially, and was
integrated into our other operations. By the end of 2002, all research and
development efforts previously concentrated in e-Mobilis were stopped.

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Selling,
General and Administrative Expenses.Selling,
general and administrative expenses decreased from  $9,800,622 in 2001 to $7,464,572 in 2002.  This decrease was primarily due to a
material decrease of marketing expenses, the provision for bad and doubtful
debts, and commissions for third parties. During the fourth quarter of 2002,
the Company implemented several cost cutting measures targeted at reducing
staff and other expenses during coming years, which had a partial effect during
2002, and will have a greater impact during future years.

Restructuring
costs and other special charges.During October 2002, we
adopted and began the execution of a restructuring plan.  Pursuant to such plan, our
personnel was reduced in size. 
Furthermore, certain positions were eliminated, while the job
descriptions of other positions were altered. 
In accordance with the plan, we implemented lay-offs mainly in our
headquarters located in Israel that included, among others, four employees in
management positions. Costs related to the restructuring plan consist mainly of
employee salaries and vehicle expenses during the advance notice period.  Management estimates these expenses will
amount to approximately $314,000 in 2002 and 2003 in the aggregate, which
include approximately $53,000 related to benefits to which an officer of the
Company is entitled following the termination of his employment. Such benefits
are detailed in the section entitled Compensation in Item 6 of this annual
report.

Financing
Income.  Financing
income for the year ended December 31, 2002 was $187,318, compared with
$287,197 in the year ended December 31, 2001. 
This decrease is primarily attributable to the combination of the
decrease of interest rates in the United States and the decrease in our cash
balances.

Net
Loss.  As a result of
the foregoing, our loss was $3,827,788 in the year ended December 31, 2002,
compared to a loss of $2,791,249 for the year ended December 31, 2001.

Year
Ended December 31, 2001 Compared to Year Ended December 31, 2000

Revenues.  Product sales decreased from $10,073,817 in
2000 to $9,913,851 in 2001 primarily as a result of the Companys shift towards
marketing eFLOWTMas its leading product instead ofAFPSProTM, and more
specifically the gradual penetration of the new solution.   Total revenues for 2001 amounted to
$11,959,249 compared to $10,626,342 for 2000. 
This is primarily a result of an increase in service revenues, deriving
mainly from other software services for several projects and software
maintenance contracts.

Cost
of Revenues.  Cost of
revenues decreased 22% from $3,923,932 in 2000 to $3,072,333 in 2001, primarily
due to the decrease in sales.  As a
percentage of the Companys revenues, cost of revenues decreased from 37% in
2000 to 26% in  2001.  This decrease is primarily a result of the
restructuring plan that took effect at the end of 2000.  This plan reduced labor costs and eliminated
certain non-profitable activities such as training customers through the
Internet.

Research
and Development. 
During 2001, the Company continued the development of eFLOWTM,
which began in 1999, as well as the development of its modules for
semi-structured forms and mobile capabilities. 
Gross research and development expenses aggregated $2,198,628 for 2001
compared to $2,207,967 for 2000. 
Royalty-bearing grants received from the Government of Israel for
research and development are offset against the Companys gross research and
development expenditures.  A grant from
the OCS of $86,067 was offset against the Companys gross research and
development expenses in 2000, thus resulting in net research and development
expenses of $2,121,901 for the year.  No
grants were received during 2001. 
Research and development expenses during 2001 include a $90,000
write-off of in-progress research and development resulting from the
acquisition of the minority interest in e-Mobilis Ltd., a subsidiary of the
Company.

Selling,
General and Administrative Expenses.Selling,
general and administration expenses decreased from $11,386,054 in 2000 to $9,800,622 in 2001.  This decrease was primarily due to decreased
spending on marketing AFPSProTM (which has been replaced by eFLOWTM),
the introduction of eFLOWTM (which was introduced to
the market primarily in 2000), offset in part by an expansion of offices in the
United States, the United Kingdom and Germany (as part of the Company's
strategy of transferring its critical mass to business activities abroad), and
labor costs (as a result of the restructuring plan that took effect at the end
of 2000).

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Non-Recurring
Severance Expense.In
accordance with an agreement with an officer of the Company, upon termination
of employment, the officer will be entitled to receive certain benefits which
amount to approximately $706,000 which will be paid over an 18-month period
which commenced in November 2002.  Such
benefits are detailed in the section entitled Compensation in Item 6 of this
annual report.

Financing
Income.  Financing
income for 2001 was $287,197, compared with $439,972 in 2000.  This decrease is primarily attributable to
the decrease of interest rates in the United States as well as erosion of the
British Pound and the Deutsche Mark against the US dollar, and the decrease in
the Companys cash balances.

Net
Loss.  As a result of
the foregoing, the Companys loss was $2,791,249 in the year ended December 31,
2001, compared to a loss of $6,363,623 for the year ended December 31, 2000.

Impact
of Currency Fluctuation and Inflation

Most
of our product and service revenues from transactions outside of Israel are
denominated in U.S. dollars, and revenues from transactions in Israel are
denominated in NIS but are linked to the U.S. dollar exchange rate.  In the early to mid 1980s, Israels economy
was subject to a period of very high inflation.  However, inflation was significantly reduced by the late 1980s
due primarily to government intervention. 
The annual rate of inflation in Israel was 0%, 1.41%, and 6.5% in 2000,
2001 and 2002, respectively.  The dollar
cost of our operations in Israel is influenced by the extent to which any
increase in the rate of inflation in Israel is not offset (or is offset on a
lagging basis) by devaluation of the NIS in relation to the dollar.  For example, in 1994 the inflation rate was
14.5%, but the corresponding devaluation of the NIS against the dollar was only
1.1%. On the other hand, during the years 2001 and 2002, the devaluation of the
NIS against the dollar, which amounted to 9.28% and 7.27% accordingly, exceeded
the inflation rate for the same periods. 
The increase in the dollar cost of our operations in Israel relates
primarily to the costs of salaries in Israel, which constitute a substantial
portion of our expenses and are paid in NIS. 
In addition, inflation in Israel will have a negative effect on the
profitability to our contracts under which the Company is to receive payment in
dollars or other non-Israeli currencies while incurring expenses in NIS (some
of which are linked to the Israeli consumer price index), unless such inflation
is offset by a devaluation of the NIS. 
Inflation in Israel and currency fluctuations will also have a negative
effect on the profitability to our fixed price contracts under which the
Company is to receive payment in NIS.  A
devaluation of the NIS in relation to the dollar will have the effect of
decreasing the dollar value of any assets of the Company, which consist of
receivables payable in NIS (unless such receivables are linked to the
dollar).  Such a devaluation would also
have the effect of reducing the dollar amount of liabilities of the Company
which are payable in NIS (unless such payables are linked to the dollar).
Conversely, any increase in the value of the NIS in relation to the dollar will
have the effect of increasing the dollar value of any unlinked NIS assets of
the Company and the dollar amounts of any unlinked NIS liabilities of the
Company.

Because
exchange rates between the NIS and the other currencies, in which the Company conducts
business, including the dollar, fluctuate continuously (albeit with a
historically declining trend in the value of the NIS), exchange rate
fluctuations and especially larger periodic devaluations have an impact on our
profitability and period-to-period comparisons of our results.  Such impact is recorded in our financial
statements as financial income/expense. 
Favorable exchange rates will tend to increase reported financial
income, and unfavorable exchange rates will tend to reduce reported income.  To date, the Company has not engaged in
currency-hedging transactions intended to reduce the effect of fluctuations in
foreign currency exchange rates on our results of operations.  In the future, the Company may enter into
currency hedging transactions to decrease the risk of financial exposure from
fluctuations in the exchange rate of the dollar against the NIS; however, we
cannot assure you that such measures will adequately protect the Company from
material adverse effects due to the impact of inflation in Israel.  In addition, if for any reason exchange or
price controls or other restrictions on the conversion of foreign currencies
into NIS were imposed, the Companys business could be adversely affected.

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Political
and Economic Conditions in Israel Affecting our Business

Since
our principal offices and manufacturing facilities and many of our suppliers
are located in Israel, political, economic and military conditions in Israel
directly affect our operations.  Since
the establishment of the State of Israel in 1948, a number of armed conflicts
have taken place between Israel and its Arab neighbors.  A state of hostility, varying in degree and
intensity, has led to security and economic problems for Israel.  There has been a marked increase in such
hostility and a significant deterioration of Israels relationship with the
Palestinian community since October 2001. 
Continuing or escalating hostilities in the region may have an adverse
affect on our business, including our ability to develop, manufacture and
market our products.

Some
of our executive officers and employees in Israel are obligated to perform up
to 36 days
of military reserve duty annually. 
Moreover, in light of escalating hostilities and threats of armed
conflict in the Middle East since October 2001, our executive officers and
employees may be called for active military duty for an unlimited period of
time.  Our operations could be disrupted
by the absence for a significant period of our executive officers or key
employees as a result of military service. 
Any disruption in our operations could adversely affect our ability to
develop and market products.

Economic
Conditions

Israels
economy has experienced numerous destabilizing factors, including a period of
rampant inflation in the early to mid 1980s, low foreign exchange reserves,
fluctuations in world commodity prices, military conflicts and civil
unrest.  The Israeli government has, for
these and other reasons, intervened in the economy by utilizing fiscal and
monetary policies, import duties, foreign currency restrictions and control of
wages, prices and exchange rates.  The
Israeli government has periodically changed its policies in all these areas.

The
Israeli governments monetary policy contributed to relative price and exchange
rate stability in recent years, despite fluctuating rates of economic growth
and a high rate of unemployment.  We
cannot assure you that the Israeli government will be successful in its
attempts to keep prices and exchange rates stable.  Price and exchange rate instability may have a material adverse
effect on the Companys business.

Trade Relations

Israel
is a member of the United Nations, the International Monetary Fund, the
International Bank for Reconstruction and Development and the International
Finance Corporation.  Israel is also a
member of the World Trade Organization and is a signatory of the Global
Agreement on Trade in Services and the Agreement on Basic Telecommunications
Services.  In addition, Israel has been
granted preferences under the Generalized System of Preferences from the United
States, Australia, Canada and Japan. 
These preferences allow Israel to export the products covered by such
programs either duty-free or at reduced tariffs.

Israel
and the European Economic Community, now known as the European Union, concluded
a Free Trade Agreement in 1975.  This agreement
confers advantages on Israeli exports to most European countries and obligates
Israel to lower its tariffs on imports from these countries over a number of
years.  In 1985, Israel and the United
States entered into an agreement to establish a free trade area.  The free trade area has eliminated all
tariff and some non-tariff barriers on most trade between the two
countries.  On January 1, 1993, an
agreement between Israel and the EFTA, which includes Austria, Norway, Finland,
Sweden, Switzerland, Iceland and Liechtenstein, established a free trade zone
between Israel and the EFTA nations.  In
recent years, Israel has established commercial and trade relations with a
number of other nations, including Russia, China, Turkey and other nations in
Eastern Europe and Asia.  We cannot
assure you that the recent increase of armed conflict and hostility and the
significant deterioration of Israels relationship with the Palestinian
community will not have an adverse affect on the Companys ability to conduct
trade in the international market.

25

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Liquidity
and Capital Resources

In
May 2000, we closed a private placement of our Ordinary Shares in which
Charter, an affiliate of Charterhouse, purchased 2,000,000 Ordinary Shares for
the consideration of $15,000,000.  The private placement contributed greatly to our liquidity.

As
of December 31, 2002, we had current assets of $11,377,161, cash and
cash equivalents of $7,400,889, accounts receivable of $3,148,781, other receivables
of $299,164 and aggregate current liabilities of $3,637,652.  We had working capital of
$7,739,509 at December 31, 2002 compared to working capital of $11,292,455 at
December 31, 2001.  In our opinion, our working capital is sufficient for our present operating
requirements and capital expenditures at least over the next 12 months,
although we cannot assure you that this will remain true in the future.

Cash
used in operating activities in 2002 was $1,983,285, compared to cash used in
operating activities in  2001 of
$3,123,794.  During 2002, we increased our trade payables by $18,331, increased our
accrued liabilities and other payables by $177,037, decreased our accounts receivable by $1,310,122 and
decreased our other receivables by $103,741. 
Cash used in investing activities in 2002 was $199,028, compared to cash
provided by investing activities in 2001 of $211,985.  Cash provided by financing activities in 2002 was $164,037,
compared to cash provided by financing activities in 2001 of $223,876.

We
currently have a short-term line of credit with First International Bank
of Israel.  The total amount available
under this line of credit is the lesser of $1,500,000 and 75% of certain eligible
trade receivables. As of December 31, 2002, we had approximately
$400,000 available under this line of credit. 
The revolving line of credit in NIS bears interest at a rate of prime +
0.25% to 1% (As of December 31, 2002 prime rate is 10.4%).  The line of credit in US dollars bears
interest at a rate of Libor + 2% (As of December 31, 2002 - Libor rate is
1.375%).  Any indebtedness under this credit line is payable on demand and secured by a floating
charge on our assets.  We are required to maintain certain financial ratios and our ability to
issue securities is restricted.  In the
event that we default under the line of credit, the bank could
declare our indebtedness to become immediately due and payable and,
if we are is unable to make the required payments, foreclose on our assets.  Moreover, to the
extent that our assets continue to secure such indebtedness, such
assets will not be available to secure additional indebtedness unless approved
by the Bank.

Contractual
Obligations and Commitments

The
following is a table giving details regarding our contractual obligations:

|Contractual Obligation                                                                 |  |  | Total     |  |  | Less
  Than
  1 Year |  |  | 1-3
  Years |  |  | 3-5
  Years |  |  | More
  than
  5 Years | 
|-------------------------------------------------------------------------------------- |  |  | --------- |  |  | -------------------- |  |  | ----------- |  |  | ----------- |  |  | --------------------- | 
|                                                                                       |  |  |           |  |  |                      |  |  |             |  |  |             |  |  |                       | 
|Long-Term Debt Obligation                                                              |  |  |           |  |  |                      |  |  |             |  |  |             |  |  |                       | 
|Capital Lease Obligation                                                               |  |  |           |  |  |                      |  |  |             |  |  |             |  |  |                       | 
|Operating Lease Obligation                                                             |  |  | 1,199,389 |  |  | 375,738              |  |  | 432,445     |  |  | 391,206     |  |  |                       | 
|Purchase Obligation                                                                    |  |  | 375,000   |  |  | 375,000              |  |  |             |  |  |             |  |  |                       | 
|Other Long-Term Liabilities
  Reflected on the Registrants
  Balance Sheet Under GAAP |  |  |           |  |  |                      |  |  |             |  |  |             |  |  |                       | 
|                                                                                       |  |  |           |  |  |                      |  |  |             |  |  |             |  |  |                       | 
|Total                                                                                  |  |  | 1,574,389 |  |  | 750,738              |  |  | 432,445     |  |  | 391,206     |  |  |                       | 
|                                                                                       |  |  |           |  |  |                      |  |  |             |  |  |             |  |  |                       | 

We
also have a long-term liability on our balance sheet as of December 31, 2002 in
the amount of $161,149 related to employee severance obligations mandated by
Israeli law.  As we cannot determine the period, if any, during which we
will be required to make any payments in respect of that liability, it is not
reflected in the table above.

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Our
contractual obligations and commitments at December 31, 2002 principally
include obligations associated with our outstanding indebtedness, future
minimum operating lease obligations and contractual and legal obligations to
employees and officers severance expense. Such obligations are detailed in
Notes 9, 10, and 12 to the consolidated financial statements included elsewhere
in this annual report, as well as the section entitled Compensation in Item
6 of this annual report.  We expect to
finance these contractual commitments from cash on hand and cash generated from
operations.

Research and Development, Patents and Licenses, etc.

During
2000 and 2001 we substantially increased our investment in research and
development in comparison to previous years, in order to develop new solutions
and products.  Gross research and
development expenses for 2001, and 2000 were $2,198,628, and $2,207,967
respectively.     Research and
development expenses during 2001 include a $90,000 write-off of in-progress
research and development resulting from the acquisition of the minority
interest in eMobilis Ltd.  During 2002,
subsequent to the integration of e-Mobilis activity, efforts of developing a
mobile solution decreased materially, until finally totally halted during the
fourth quarter of 2002. Due to the above and the decision to focus on the
structured and semi-structured forms solution, headcount decreased
significantly. As a result, gross research and development expenses for 2002
were $1,340,408.  We intend to continue
various research and development efforts to satisfy the needs of our customers
and potential customers. These efforts include refinements of and enhancements
to our products, such as improvements in image enhancement, automatic forms
recognition, automatic forms removal, machine print and handwritten character
recognition, as well as special purpose algorithms.

Our
research and development efforts have led to the development of our current solutions
technology, eFLOW
Unified Content PlatformTM.  Our latest research and development efforts have concentrated on
the semi-structured forms processing, resulting in the development of the Freedom.   These developments will enhance our ability
to compete in complicated projects as a solution provider for all kind of forms
and all types of information.  The
introduction of the Freedomfits well with our plans to keep
pace with the trend towards the ultimate integration of all forms and formats
of information entering the organization.

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ITEM
6.     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Directors and Senior Management

The
directors and senior management of the Company and any employees such as
scientists or designers upon whose work the Companys is dependent are as
follows:

| | Name                |  |    | Age |                                              | Position with Company | 
| | ------------------- |  | -- | --- | -------------------------------------------- | --------------------- | 
| |                     |  |    |     |                                              |                       | 
| | Thomas
  C. Lavey   |  | 59 |     | Chairman
  of the Board of Directors        
| |                     |  |    |     |                                             
| | Ido
  Schechter     |  | 41 |     | Chief Executive Officer                     
| |                     |  |    |     |                                             
| | Tal Marom           |  | 35 |     | Vice
  President of Sales                   
| |                     |  |    |     |                                             
| | Arie Rand           |  | 43 |     | Chief Financial Officer                     
| |                     |  |    |     |                                             
| | Oded
  Leiba        |  | 32 |     | Vice
  President of Engineering             
| |                     |  |    |     |                                             
| | Ofir Shalev         |  | 31 |     | Vice President of Research and
  Development
| |                     |  |    |     |                                             
| | Ami Katz            |  | 53 |     | Vice President of Business
  Development    
| |                     |  |    |     |                                             
| | Rami Lazar          |  | 50 |     | External Director                           
| |                     |  |    |     |                                             
| | Ofir
  Zemer        |  | 37 |     | External Director                           
| |                     |  |    |     |                                             
| | Izhak
  Nakar       |  | 51 |     | Director                                    
| |                     |  |    |     |                                             
| | A.
  Lawrence Fagan |  | 73 |     | Director                                    
| |                     |  |    |     |                                             
| | Elie
  Housman      |  | 66 |     | Director                                    
| |                     |  |    |     |                                             
| | Phyllis
  Haberman  |  | 54 |     | Director                                    

Thomas
C. Lavey became a Director of the Company in August 2002 and
the Board elected him as non-Executive Chairman at the same meeting. Since
February 2002 Mr. Lavey has served as Executive Vice President, Worldwide Field
Operations of MS2, Inc, which provides product life cycle automation software.
Prior to joining MS2, Mr. Lavey was senior vice president of worldwide
operations at Extricity, which became part of Peregrine Systems and provided
B2B relationship management software. Mr. Lavey also served as senior vice president
at i2 Technologies and, from 1994 through 1999, he served as vice president of
application sales at Oracle Corporation. Mr. Lavey has a bachelors degree in
mathematics from Penn State University and an M.B.A. from the University of
Southern California.

Ido
Schechterhas been the CEO of the Company since January
2002.  From January 2001 until he became
CEO, Dr. Schechter was Vice President of TiS ASP2 , an initiative
of TiS to be engaged in offering data collection services via the Internet,
using the eFLOW platform solution.  Prior to
that Dr. Schechter had been the Companys Vice President of Sales since August
1996.  From January 1995 until August
1996, Dr. Schechter served as General Manager of Super Image, a former
affiliate of the Company, which operates a form processing service bureau.  From August 1993 to December 1994, Dr.
Schechter oversaw the start-up of automatic form processing services at Israel
Credit Cards, Ltd.  From 1991 to 1993,
Dr. Schechter was a research scientist at the Horticultural Research Institute
of Ontario, Canada.  Dr. Schechter is
the recipient of eight Honors and Scholarships, has published or presented more
than twenty-five articles and is a Captain in the Israeli Air Force.  Dr. Schechter received his Ph.D. and M.Sc.
in Plant Physiology from the University of Guelph in Ontario, Canada and his
B.Sc. from the Hebrew University in Israel.

Tal
Marom is the Vice President of Sales for the markets not
covered by TiSs branch offices, a position he has held since January
2001.  Prior to his promotion to Vice
President Sales, Mr. Marom was Director of Government Projects at TiS, where he
successfully established TiS position as a provider of software solutions to
many national census projects.  From
January through June of 1998 he served as an investment analyst at Koor
Technologies where he analyzed and evaluated hi-tech startups.  Mr. Marom practiced law for several years
and holds degrees in law and accounting from the University of Tel Aviv.

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Arie
Rand joined TiS in April 2001 from Tescom, a high tech
company with 600 employees and several subsidiaries worldwide, where he served
as Chief Financial Officer.  Prior to
Tescom, from September 1991 to June 1996 Mr. Rand served as a senior manager in
the finance department of Delta Galil Industries, a major industrial
company.  Mr. Rand also has several
years of experience at Almagor & Co., one of Israels leading accounting
firms.  He holds an MBA in Finance from
Bar Ilan University.

Oded
Leiba is Vice President of Engineering, and has held that
position since May 2001.  From May 1999
to May 2001 Mr. Leiba was the Companys representative in Japan and worked with
its exclusive distributor, EDMS for a period of three years. Before joining
TiS, Mr. Leiba was employed as a senior level programmer at VISA where he was
involved in the installation of the first of the Companys forms-processing
system (AFPS) from the client side.  Oded
Leiba holds a Bachelor of Arts in Computer Science and Business Management from
Tel Aviv University.

Ofir
Shalevhas served as Vice President of Research and
Development since October 2002. Prior to his promotion to Vice President of
Research and Development,  Ofir Shalev
served as the companys Director of Recognition for three years. During this
period, Mr. Shalev was responsible for the development of TiS semi-structured
data module that plugs into the eFLOW Unified Content PlatformTM.
In this position, Mr. Shalev was responsible for maintaining TiS technological
advantages over its competitors in the recognition arena. Before joining TiS,
Mr. Shalev served as a senior development leader at the Israeli Defense Force.
Mr. Shalev holds a Bachelor of Science degree from the Technion, the Israeli
Institute of Technology, and is a candidate for a Master of Science degree in
Computer Science from the Open University in Israel.

Ami
Katz joined TiS in 2002 as Vice President of Business
Development and brings to the company more than 20 years experience in various
business positions in the IT industry. 
Prior to joining TiS, Mr. Katz spent 5 years at Nice Systems as the
Director of Strategic Alliances, where he was a major contributor to the
companys business through the formation and management of successful regional
and global distribution channels and strategic alliances. Prior to Nice
Systems, Mr. Katz served 14 years at IBM Israel, in several sales management
positions, successfully achieving his targets of complex projects sales to
large customers in various market segments. Mr. Katz holds a B.Sc. degree in
Industrial Engineering and Management from the Technion, the Israeli Institute
of Technology.

Rami
Lazarhas been a director of the Company since October
2000.  He is a co-founder of NICE
Systems Ltd. (NICE), a leading global provider of integrated digital
recording and quality management solutions that was established in 1986.  Mr. Lazar has been a Director of NICE since
1991, and has served as its Senior Vice President of Business Development since
1998.  Previously, he served in a
variety of management roles in NICE, the most recent ones being Senior Vice
President of Sales and Marketing for the CTI (Computer Telephony Integration)
division and Senior Vice President of Marketing for the Systems Division.  Between 1975 and 1986, Mr. Lazar served as
an engineer in the Israel Defense Forces, where he held various positions in an
intelligence unit and retired with the rank of major.  Mr. Lazar has a Bachelors degree (cum laude) in electrical
engineering from the Technion, Israels Institute of Technology, and a Masters
degree (cum laude) in business administration from the Recanati School of
Management in the Tel Aviv University.

Ofir
Zemer has been a director of the Company since May 2000.
Since 2001, Mr. Zemer has served as an Assistant Vice President of Comverse
(Nasdaq: CMVT), where he has held a 
variety of management positions. 
Between 1998 and 2001 he worked as an investment manager at Steps
Ventures, a venture capital subsidiary of Arison Investments Ltd.  In 1996 Mr. Zemer served as general manager
in CIS Corp., a Manhattan based start-up. 
Prior to his position in CIS, Mr. Zemer was a marketing manager in Elbit
Systems (Nasdaq: ESLTF).  From 1985 to
1992 Mr. Zemer served in the Israeli Air Force (IAF) as fighter pilot and
project manager for an IAF avionics project. 
He holds a BA in Economics with distinction from Tel-Aviv University and
an MBA with distinction from INSEAD in Fontainebleau, France.

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Izhak
Nakar founded the Company and served as its Chief Executive
Officer from inception until December 2001. 
He has been a director of the Company since 1991.  In 1997 he initiated an entrepreneurial
venture, TopGuard that was later sold to Elron.  Mr. Nakar served in the Israel Air Force from 1970 to 1987, where
he led various large-scale highly technical development projects, including
leading a development team that worked in cooperation with the U.S. Air
Force.  He received his B.Sc. in
Computer Science from Bar Ilan University in 1982, and an MBA from Tel-Aviv
University in 1984.  Mr. Nakar is a
recipient of the Israel Defense Award, bestowed annually by the President of
Israel, for the development of high-tech systems in the field of intelligence
for the Israeli Defense Force.  He also
received the Man of the Year Award in Business and Management (95-96) in
recognition of his business accomplishments and contributions to the growth and
development of Israeli high-tech companies.

A.
Lawrence Fagan has been a director of the Company since May
2000.  He has been Vice Chairman of
Charterhouse since June 2001.  He was
President of Charterhouse from January 1997 until June 2001 and Executive Vice
President of Charterhouse from 1984 to December 1996.

Elie
Housman has been a director of the Company since May
2000.  Mr. Housman joined InkSure in
February 2002 as Chairman and also serves as a director of InkSure. Mr. Housman
was a Principal at Charterhouse from 1989 until June 2001. At Charterhouse, Mr.
Housman was involved in the acquisition of a number of companies with total
sales of several hundred million dollars. Prior to Charterhouse, he was
co-owner of AP Parts, a $250 million automotive parts manufacturer. Mr. Housman
was also the Chairman of Novo Plc. in London, a leading company in the
broadcast storage and services industry. At present, Mr. Housman is a director
of three public companies, deltathree, Inc., ICTS International, N.V., a
prominent aviation security company and EVCI Career Colleges Incorporated.  In addition, Mr. Housman serves a director
for Jazz Photo, Inc., and Bartech Systems International, Inc., which are both
privately held companies in the United States.

Phyllis
Haberman has been a director of the Company since May
2000.  She has been a Senior Vice
President of Charterhouse since January 1997. 
From 1988 through December 1996, Ms. Haberman was a Vice President of
Charterhouse.

There
are no familial relationships between any of the persons named above.  A. Lawrence Fagan, Elie Housman and Phyllis
Haberman have been designated to the Board 
seats by Charter pursuant to the terms of the investment by Charter in
the Company and a voting agreement with Mr. Nakar.  For further details, see the sections entitled Major
Shareholders and Related Party Transactions in Item 7 of this annual
report.  Mr. Housman left the employ of
Charterhouse in 2001.  Mr. Fagan and Ms.
Haberman each disclaim beneficial ownership of the Ordinary Shares beneficially
owned by Charter.

Compensation

For
the year ended December 31, 2002, the compensation paid, and benefits in kind
granted, to Izhak Nakar, our former Chief Executive Officer, was $237,089.  The compensation paid, and benefits in kind
granted, to Ido Schechter, our current Chief Executive Officer, for the year
ended December 31, 2002 was $242,224. The compensation paid to all other persons,
as a group, who were, at December 31, 2002, directors or members of our
administrative, supervisory or management bodies during that time was
$1,132,158.  In addition, in 2002
members of that group were granted an aggregate of options to purchase 67,500
Ordinary Shares.  Of those options, options
to purchase 17,500 Ordinary Shares with exercise prices of between $0.52 and
$2.73 per share were granted under our ESOP 1996, options to purchase 30,000
Ordinary Shares, with an exercise price of $2.61 per share, were granted under
our ESOP 2000, and options to purchase 20,000 Ordinary Shares, with an exercise
price of $0.46 per share were granted outside of any employee stock option
plan.  For further details, see Item 6
of this annual report.  The compensation
paid does not include (i) reimbursement of directors expenses,
(ii) $982,036, which has been accrued to provide pension, retirement,
severance, vacation or similar benefits, and (iii) amounts expended by us for
automobiles made available to its officers ($110,678) and other expenses (including
business travel, and professional and business association dues and expenses)
reimbursed to officers.

30

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As
a function of the private placement of our shares and the investment by
Charter, Izhak Nakars employment agreement was amended during 2000.  The amendment executed with respect to the
conditions of Mr. Nakars employment was completed in two stages.  First, an amendment passed at the
extraordinary annual meeting held on March 10, 2000 provided that Mr. Nakars
annual base salary (not including managers insurance, retirement and other
benefits added to the base salary) was $216,000, that he would be eligible for
an annual bonus of up to 50% of his annual base salary, that the term of his
employment agreement would be for 18 months after the closing date of Charters
investment May 8, 2000), and an automatic renewal thereafter for successive 12
months periods, and that he would be entitled to certain rights including the
right to receive a lump sum payment equaling his annual salary upon termination
for any reason.  In the annual meeting
held on October 5, 2000, the employment agreement of Mr. Nakar was amended once
again to provide that:

| | 1. | Upon resignation by Mr. Nakar in connection with a
  merger, acquisition, sale of all or substantially all of assets or other
  change of control of us or, Change of Control, (i) Mr. Nakar would be
  entitled to receive a lump sum payment in cash equal to three times the
  highest annual salary plus bonus received (or scheduled to be received) by Mr.
  Nakar during any annual period covered by the employment agreement, (ii) we
  would be required to continue the benefits granted to Mr. Nakar and his
  family (at the same level in effect for one year prior to the date of
  termination or resignation) for a period of three years, (iii) the
  restrictions on competition contained in Section 8 of Mr. Nakars current
  employment agreement would be void and of no effect; and                                                        
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 2. | Upon termination of Mr. Nakars employment with us
  for any reason (other than a resignation by Mr. Nakar in connection with a
  Change of Control or a termination of Mr. Nakars employment for Cause),
  subject to the immediately following paragraph, (i) Mr. Nakar would be
  entitled to receive payments in cash, payable in eighteen equal monthly installments
  commencing immediately after termination of Mr. Nakars employment, equaling
  in the aggregate 1.5 times the highest annual salary plus bonus received (or
  scheduled to be received) by Mr. Nakar during any annual period covered by
  the Agreement (ii) we would be required to continue all of the benefits
  granted to Mr. Nakar and his family (at the same level in effect for one year
  prior to the date of termination or resignation) for a period of eighteen
  months).

For
so long as we have not defaulted on our obligations set forth in paragraph 2
above, Mr. Nakar will remain subject to the restrictions on competition
contained in Mr. Nakars employment agreement. 
Those restrictions lapse in May 2004.

In
accordance with the foregoing and as a result of Mr. Nakars resignation of his
employment, we recorded a non-recurring severance provision, the expenses in
our financial statements for which were in the amount of approximately
$759,000.

Board Practices

Board
of Directors

All directors currently
hold office until the next annual meeting of shareholders and until their
successors are duly elected and qualified. 
External directors currently hold office for three years from their
appointment (in 2000) and until their successors are duly elected and qualified
at the next annual meeting. The External Directors may be elected for one
additional three-year period.  The
company, in its shareholders meeting held on November 25, 2002, approved a
monthly payment to Mr. Thomas C. Lavey in the amount of $2,000 as compensation
for his service as a director and Chairman of the Board, and that Mr. Izhak
Nakar and Mr. Elie Houseman receive an annual payment of 20,043 NIS each and an
amount of 1,003 NIS per meeting attended. 
The above amounts may be updated from time to time in accordance with
the updates to the Fixed Amount as defined and in the first, second and third
schedules to the Israeli Companies Regulations (rules regarding compensation
and expenses for external directors), 2000. Each External Director receives an
annual fee of 20,043 NIS, and 1,003 NIS per meeting attended which
are the Fixed Amounts permitted to External Directors according to the
Companies Law and regulations without necessitating approval, which figures are
updated periodically in accordance with the Israeli law. Ms. Phyllis Haberman
and Mr. A. Lawrence Fagan waived their right for compensation for their service
as directors.  We reimburse all of the
directors for reasonable travel expenses incurred in connection with their
activities on our behalf.

31

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Other
than Mr. Nakar no director or other member of our administrative, supervisory
or management bodies has a service contract with us or any of our subsidiaries
providing for benefits upon termination of employment.  For additional information on Mr. Nakars
arrangement, see the section entitled Compensation in Item 6 of this annual
report.

Audit
Committee; Remuneration Committee

The
new Israeli Companies Law (5759-1999), which became effective February 1, 2000
requires that public companies appoint an audit committee.  The responsibilities of the audit committee
include identifying irregularities in the management of the companys business
and approving related party transactions as required by law.  An audit committee must consist of at least
three directors, including all of the external directors of the Company.  The chairman of the board of directors, any
director employed by or otherwise providing services to the Company, and a
controlling shareholder or any relative of a controlling shareholder, may not
be members of the audit committee.

We are also required by
the NASDAQ National Market to establish an audit committee, all of whose
members are independent of management, and to adopt an audit committee
charter.  Our two external directors,
Rami Lazar and Ofir Zemer, serve on the audit committee of the board of
directors, along with Elie Housman.

We
do not have a remuneration or compensation committee.

Employees

As
of May 31, 2003, we employed 37 full-time employees in our headquarters.  Three are employed in administration and
three in finance, eight in marketing and sales, and 23 in product development
and production.  In addition, our North
American subsidiary employs four full-time persons.  Our German branch employs three full-time persons, and our
English branch employs four full-time persons. 
Management believes that its relations with its employees are good.

Certain
provisions of the collective bargaining agreements between the Histadrut
(General Federation of Labor in Israel) and the Coordination Bureau of Economic
Organizations (including the Industrialists Associations) are applicable to
our employees in Israel by order of the Israeli Ministry of Labor.  These provisions concern principally the
length of the workday, minimum daily wages for professional workers, insurance
for work-related accidents, procedures for dismissing employees, determination
of severance pay, and other conditions of employment.  We generally provide our employees with benefits and working
conditions beyond the required minimums.

Pursuant
to Israeli law, we are legally required, subject to certain exceptions, to pay
severance benefits upon the retirement or death of an employee or the
termination of employment of an employee without due cause. We satisfy the
majority of this obligation by contributing funds to a fund known as Managers
Insurance.  This fund provides a
combination of savings plans, insurance, and severance pay benefits to the
employee, giving the employee a lump sum payment upon retirement and a
severance payment, if legally entitled, upon termination of employment.  The remaining portion of this obligation is
represented our balance sheet as Provision for severance pay.  The Israeli law has recently been amended to
address some of the issues that were, in the past addressed only by the collective
bargaining agreements mentioned above, such as procedures for dismissing
employees, minimum wages and other issues  In the event of contradiction
between a provision of the law and that of a collective bargaining agreement,
the principal for interpretation is that the provision which is in favor of the
employee will prevail.

Share Ownership

Board
of Directors, Senior Management and Certain Employees

Mr.
Izhak Nakar currently holds in his name 119,174 Ordinary Shares.  These shares represent 1.95% (1.82% on a fully
diluted basis) of our outstanding share capital.  In addition, Mr. Nakar and members of his immediate family own
Nir 4 You Technologies Ltd., an Israeli company that holds 280,000 Ordinary
Shares amounting to 4.59% (4.28% on a fully diluted basis) of our outstanding
share capital.  Mr. Nakar also holds
options to purchase 50,000 Ordinary Shares (0.76% of our outstanding share
capital on a fully diluted basis) at an exercise price of  $2 per share.  These options expire three years from the date they were
granted.  None of the Ordinary Shares
discussed in this section have different voting rights than those of other
outstanding Ordinary Shares.

32

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A.
Lawrence Fagan and Phyllis Haberman disclaim beneficial ownership of the
Ordinary Shares owned by Charter.

Stock
Options

We
have reserved 115,000 Ordinary Shares for issuance upon exercise of outstanding
non-plan share options granted to certain executive officers and key employees
all of which have exercise prices of between $2.77 and $5.00 per share.  Pursuant to the terms of the option grant
letters, of the options granted to two employees, options to purchase 25% of
the shares became exercisable upon our 
initial public offering, and options to purchase 25% of the shares are
to become exercisable upon each of the first three anniversary dates of the
issuance of the options provided that the employees continue to be employed by
us on such dates.  Of the options
granted to these employees, options to purchase 50,000 shares expired when the
employees employment with us ended. 
Pursuant to the terms of the option grant letters, the options granted
to three other employees were to become exercisable in four equal parts upon
each of the first four anniversary dates of the issuance of the options
provided that the employees continue to be employed by us on such dates.  Of the options granted to two of the said
employees, options to purchase 12,250 shares expired when their employment with
us ended.

In
order to attract, retain and motivate employees (including officers) who
perform services for or on behalf of us, we have two Employee Share Option
Plans.  The first was established in
1996, the second during the year 2000.

Employee
Share Option Plan (1996)

In
September 1996, the Board of Directors adopted, and our shareholders approved,
the Employee Share Option Plan (1996). 
ESOP 1996 authorizes the granting of options to purchase up to 250,000
Ordinary Shares, consisting of options intended to qualify as incentive stock
options within the meaning of Section 422 of the United States Internal
Revenue Code of 1986, as amended, and options not intended to satisfy the
requirements for incentive stock options. 
At May 31, 2003, options to purchase 156,500 Ordinary Shares were
outstanding under the plan at exercise prices between $0.52 and $5.00 per share
and options to purchase 142,742 were available for future grant (including the
non-plan options described above that expired due to termination of employment
and were returned to the Company).  All
of the outstanding options under the plan become exercisable in four equal
parts upon each of the first four anniversaries of the option grant dates.  No exercises of options took place during
2002 or the five months ended May 31, 2003.

Options
granted under ESOP 1996 have terms of up to ten-years, provided, however, that
options that are intended to qualify as incentive stock options and that are granted
to an employee who on the date of grant is a 10% shareholder of us or any
subsidiary corporation or parent corporation shall be for no more than a
five-year term.  Ordinary Shares
issuable upon the exercise of the options granted under ESOP 1996 will be held
in trust for the benefit of the optionee for a period of at least two years
after the grant of the options.  The
exercise price of options granted under ESOP 1996 may not be less than 100% of
the fair market value of the Ordinary Shares on the date of the grant and the
exercise price of options granted under future employee share options shall not
be less than 85% of the fair market value of the Ordinary Shares on the date of
grant, in each case, as determined by the Board (or the Share Option Committee,
if the Board elects to appoint one).  In
the case of options that are intended to be incentive stock options granted to
an employee who, at the date of such grant, is a 10% shareholder of us or any
subsidiary corporation or parent corporation, the exercise price for such
options may not be less than 110% of the fair market value of the Ordinary
Shares on the date of such grant.  The
number of shares covered by an option granted under ESOP 1996 is subject to
adjustment for stock splits, mergers, consolidations, reorganizations and
recapitalizations.  Options are
non-assignable except by will or by the laws of descent and distribution, and
may be exercised only so long as the optionee continues to be employed by us.  If the optionee dies, becomes disabled or
retires, the right to exercise the option will be determined by the Board (or
the Share Option Committee) in its sole discretion.  The optionee is responsible for all personal tax consequences of
the grant and the exercise thereof.  For
so long as we are not a U.S. taxpayer, we believe that, other than a 1% stamp
tax, no tax consequences will result to us in connection with the grant or
exercise of options pursuant to ESOP 1996.

33

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Upon
termination of employment, other than for death or disability, grantees may
exercise vested options for three months following termination. ESOP 1996
contains similar provisions in relation to a grantee who becomes disabled or
dies, only in these cases, the vested options may be exercised for a period of
one year.

On
February 28, 2000, we filed a Form S-8 regarding ESOP 1996.

Employee
Share Option Plan (2000)

The
Employee Share Option Plan (2000) is designed to benefit from, and is made
pursuant to, the provisions of Section 102 of the Israeli Income Tax Ordinance
(New Version) 1961 and the rules promulgated thereunder (Section 102), as
applied prior to the implication of the tax reform in Israel, described
elsewhere in this annual report.

ESOP
2000 is administered by a committee appointed by the Board of Directors or
alternatively the Board itself.  The
Committee has discretion as to when and to whom and upon what terms to grant
options under ESOP 2000.  Options under
the plan may be granted to any officer or employee of us or of any of our
subsidiaries.  The Committee will
examine various factors when determining to whom to grant options and upon what
terms; however, these factors shall always include the grantees salary and
duration of employment with us or our subsidiary.

The
options and/or shares issued upon exercise thereof shall be held in trust.  The trustee shall act in accordance with our
instructions.

A
total of 240,000 of authorized but unissued shares have been reserved for the
purposes of ESOP 2000 and, as of May 31, 2003, an aggregate of 170,000 had been
granted to employees.  All of the
granted options vest over a three-year period and have exercise prices between
$0.99 and $4.125 per share.  At that
time, options to purchase 70,000 Ordinary Shares were available for future
grant.  In the event that the rights of
a grantee expire for any reason before he has exercised his rights to acquire
shares, the unacquired shares shall again become available for future
grant.  The number of shares covered by
an option granted under ESOP 2000 is subject to adjustment for stock splits,
mergers, consolidations, reorganizations and recapitalizations.

Upon
termination of employment, other than for death or disability, grantees may
exercise vested options within three months of termination.  Unvested options may only be exercised with
the consent of the Committee.  If
employment is terminated by us due to the improper actions of the grantee, all
options, whether vested or not, are immediately forfeited.  ESOP 2000 contains similar provisions in
relation to a grantee who becomes disabled or dies.

On
December 19, 2002, we filed a Form S-8 regarding ESOP 2000.

Any
tax consequences that arise from the grant or exercise of any option are borne
solely by the grantee.

A
new stock option plan has been approved by the board of directors on May 13,
2003 and will become effective upon shareholder approval.  All the shares reserved for grant under ESOP
2000 and ESOP 1996 that were not granted or that are the subject of options under
those plans that expire prior to their exercise according to the conditions
detailed therein, will be transferred into the new plan.  We intend to file a registration statement
on Form S-8 to register these shares. We have filed the necessary documents
with the Israeli tax authorities for the approval of the new option plan on
June 4th, 2003. Such approval shall provide the grantees the
eligibility for certain benefits under Section 102 as revised by the Israeli
tax reform.

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Issuance of Options to Certain
Persons

In
November 2001, the Company issued to Izhak Nakar, our then CEO and Yehezkel
Yeshurun, our former Chief Scientist and a former director, options to purchase
50,000 each, Ordinary Shares in exchange for the minority interest held by them
in our subsidiary, e-Mobilis.  For
additional information, see the section entitled Related Party Transactions
in Item 7 of this annual report.

In November 2002, we
issued to Thomas C. Lavey, our Chairman of the Board of directors, options to
acquire 20,000 Ordinary Shares at an exercise price of $0.46 per share.

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ITEM 7.     MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

As
of May 31, 2003 Charter held 2,000,000 Ordinary Shares, or 32.79% (30.56% on a
fully diluted basis) of our outstanding share capital.  At the time of the Charter investment, Izhak
Nakar held in his name 119,174 Ordinary Shares, or 1.95% (1.82% on a fully
diluted basis) of the outstanding share capital, and Nir 4 You Technologies
Ltd., a company owned by Mr. Nakar and his immediate family, held 280,000
Ordinary Shares, or 4.59% (4.28% on a fully diluted basis) of our outstanding
share capital.  Except as provided in
the Share Purchase Agreement described below, none of these shares have special
voting rights attached to them.

Charter
acquired its Ordinary Shares in May 2000 in exchange for a $15,000,000
investment.  Under the terms of the
Share Purchase Agreement, the Board of Directors appointed by the shareholders
meeting to serve immediately following the closing was comprised of seven
members out of which Charter designated four, Charter obtained the right to
demand registration of its shares on three separate occasions, Charter was
granted pre-emptive rights with respect to future issuances of securities by
us, and certain informational rights. 
Charters right to appoint four of our seven directors was a one-time
right only.  This right is not attached
to the shares purchased by Charter and the entire Board faces re-election at
each annual general meeting.  Currently
three persons nominated by Charter serve on the Board. These are A. Lawrence
Fagan, Elie Housman and Phyllis Haberman.

In
connection with the investment by Charter, certain rights were granted to Mr.
Nakar, our then Chief Executive Officer. 
These included the modification of Mr. Nakars compensation, as
described in the section entitled Compensation in Item 6 of this annual
report, as well as the granting to Mr. Nakar of the right to demand
registration of any or all of the shares held by him in the event that his
employment was terminated under certain specific conditions.  These rights to demand registration have
come into effect following the termination of Mr. Nakars employment.  The grant of these rights was approved by
our Board of Directors, Audit Committee and shareholders.

In
accordance with the foregoing and as a result of Mr. Nakars resignation from
employment, we recorded a non-recurring severance expense in our financial
statements in the amount of approximately $759,000.  For additional information, see the section entitled Compensation
in Item 6 of this annual report, and Note 12 to the consolidated financial
statements included elsewhere in this annual report.

In
connection with the Charter investment, Mr. Nakar and Charter have entered into
an agreement which provides, among other things, that each party will vote to
maintain the size of the Board at seven directors, and that each party will
vote all of the shares of TiS held by it in favor of the appointment of the
individuals designated by the other party as nominees to the Board of
Directors.  The voting arrangement
expired in 2002.   Mr. Nakar is still
bound to vote his Ordinary Shares for up to four designees of Charter to the
Board of Directors.  Charters
obligation to vote for Mr. Nakars designees to the Board of Directors
terminated with Mr. Nakars employment.

In
January 2000, TiS, together with Izhak Nakar, our then CEO, and Yehezkel
Yeshurun, our former Chief Scientist and a former director, established
e-Mobilis Ltd. as a subsidiary of TiS. 
The shareholdings in e-Mobilis at that time were as follows:  TiS held 80.2%, Mr. Nakar held 9.9% and Mr.
Yeshurun held 9.9%.  In November 2001,
we acquired from Mr. Nakar, and Mr. Yeshurun, their interests in e-Mobilis.  The acquisition was in consideration of the
issuance to each of them of immediately vested options to purchase 50,000
Ordinary Shares at an exercise price of $2.00 per share.  These share options expire three years from
the date they were granted and were valued at $90,000 using the Black Scholes
valuation model.

Eighteen
record holders of Ordinary Shares have declared postal addresses in the United
States.  These eighteen record holders
hold, between them, 90% of our outstanding share capital.

There
are no arrangements known to us  that
may at a subsequent date result in a change in control of us.

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ITEM 8.     FINANCIAL
INFORMATION

Consolidated
statements and other financial information

Consolidated
Financial Statements

See
Item 18.

Other
Financial Information

The
amount of export revenues constitutes a significant portion of our total
revenues. The following is a  table
giving details of our export revenues, as well as the breakdown of revenues
between products and services.

|Export
  Revenues            |  |  |            |   |      |            |      |  |           |  
|---------------------------- |  |  | ---------- | - | ---- | ---------- | ---- |  | --------- | -
|                             |  |  | 2000       |   | 2001 |            | 2002
|                             |  |  |            |   |      |            |     
|Export Revenues              |  |  | 10,491,028 |   |      | 11,773,707 |      |  | 7,753,019 |  
|                             |  |  |            |   |      |            |      |  |           |  
|Total Revenues               |  |  | 10,626,342 |   |      | 11,959,249 |      |  | 7,799,093 |  
|                             |  |  |            |   |      |            |      |  |           |  
|Percentage of Total Revenues |  |  | 99         | % |      | 98         | %    |  | 99        | %
|                             |  |  |            |   |      |            |      |  |           |  
|Breakdown
  of Revenues      |  |  |            |   |      |            |      |  |           |  
|Product Revenues             |  |  | 95         | % |      | 83         | %    |  | 82        | %
|                             |  |  |            |   |      |            |      |  |           |  
|Service Revenues             |  |  | 5          | % |      | 17         | %    |  | 18        | %

Legal
Proceedings

In December 2002 we were sued in the United
States District Court for the Southern District of New York by Millennium L.P.
for allegedly infringing five U.S. patents purportedly owned by Millenium,
L.P.  Our subsidiary, TiS America, Inc.
was also named as a defendant in the suit. 
We believe that we are not infringing Millenniums patents and that Millenniums
patents are invalid.  We will defend
this suit vigorously while simultaneously exploring an amicable resolution of
the matter.  We believe that the
potential liability, if any, with respect to this action will not materially
adversely affect our financial position, results of operations or cash flows
but we cannot assure you of the outcome of the suit or its impact on our
operations or financial condition.

Dividend
Policy

To
date, we have not paid any dividend on our Ordinary Shares.  The payment of dividends in the future, if
any, is within the discretion of the Board of Directors and will depend upon
our earnings, its capital requirements and financial condition and other relevant
factors.  We do not anticipate declaring
or paying any dividend in the foreseeable future.

Significant Changes

We
are not aware of any significant change to our business, results of operations,
and financial condition since December 31, 2002.

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ITEM 9.     THE
OFFER AND LISTING

Stock
price history

The
annual high and low market prices for the Ordinary Shares for the five most
recent full financial years are set forth below:

| | Year Ending         |  |  |    |  |  | Boston Stock
  Exchange |  |  | Nasdaq SmallCap
  Market | 
| | ------------------- |  |  | -- |  |  | ----------------------- |  |  | ------------------------ | 
| | December
  31, 2002 |  |  | Hi |  |  | 3.92                    |  |  | 3.92                     | 
| |                     |  |  | Lo |  |  | 0.42                    |  |  | 0.42                     | 
| |                     |  |  |    |  |  |                         |  |  |                          | 
| | December
  31, 2001 |  |  | Hi |  |  | 4.04                    |  |  | 4.90                     | 
| |                     |  |  | Lo |  |  | 0.99                    |  |  | 2.05                     | 
| |                     |  |  |    |  |  |                         |  |  |                          | 
| | December
  31, 2000 |  |  | Hi |  |  | 16.0                    |  |  | 16.688                   | 
| |                     |  |  | Lo |  |  | 1.875                   |  |  | 2.375                    | 
| |                     |  |  |    |  |  |                         |  |  |                          | 
| | December
  31, 1999 |  |  | Hi |  |  | 9.75                    |  |  | 10.313                   | 
| |                     |  |  | Lo |  |  | 2.5                     |  |  | 2.75                     | 
| |                     |  |  |    |  |  |                         |  |  |                          | 
| | December
  31, 1998 |  |  | Hi |  |  | 5.09                    |  |  | 4.063                    | 
| |                     |  |  | Lo |  |  | 1.63                    |  |  | 1.813                    | 

The
high and low market prices for the Ordinary Shares for each financial quarter
over the two most recent full financial years and any subsequent period are set
forth below:

| | Quarter Ending       |  |  |    |  |  | Boston Stock
  Exchange |  |  | Nasdaq SmallCap
  Market | 
| | -------------------- |  |  | -- |  |  | ----------------------- |  |  | ------------------------ | 
| | March
  31, 2003     |  |  | Hi |  |  | 0.77                    |  |  | 0.77                     | 
| |                      |  |  | Lo |  |  | 0.42                    |  |  | 0.42                     | 
| |                      |  |  |    |  |  |                         |  |  |                          | 
| | December
  31, 2002  |  |  | Hi |  |  | 0.99                    |  |  | 0.99                     | 
| |                      |  |  | Lo |  |  | 0.42                    |  |  | 0.42                     | 
| |                      |  |  |    |  |  |                         |  |  |                          | 
| | September
  30, 2002 |  |  | Hi |  |  | 2.63                    |  |  | 2.63                     | 
| |                      |  |  | Lo |  |  | 0.95                    |  |  | 0.95                     | 
| |                      |  |  |    |  |  |                         |  |  |                          | 
| | June
  30, 2002      |  |  | Hi |  |  | 3.20                    |  |  | 3.20                     | 
| |                      |  |  | Lo |  |  | 2.20                    |  |  | 2.20                     | 
| |                      |  |  |    |  |  |                         |  |  |                          | 
| | March
  31, 2002     |  |  | Hi |  |  | 3.92                    |  |  | 4.05                     | 
| |                      |  |  | Lo |  |  | 2.61                    |  |  | 2.31                     | 
| |                      |  |  |    |  |  |                         |  |  |                          | 
| | December
  31, 2000  |  |  | Hi |  |  | 6.375                   |  |  | 5.563                    | 
| |                      |  |  | Lo |  |  | 1.875                   |  |  | 2.375                    | 
| |                      |  |  |    |  |  |                         |  |  |                          | 
| | September
  30, 2000 |  |  | Hi |  |  | 8.313                   |  |  | 8.0                      | 
| |                      |  |  | Lo |  |  | 5.167                   |  |  | 5.5                      | 
| |                      |  |  |    |  |  |                         |  |  |                          | 
| | June 30, 2000        |  |  | Hi |  |  | 12.563                  |  |  | 10.625                   | 
| |                      |  |  | Lo |  |  | 6.125                   |  |  | 5.688                    | 
| |                      |  |  |    |  |  |                         |  |  |                          | 
| | March
  31, 2000     |  |  | Hi |  |  | 16                      |  |  | 16.688                   | 
| |                      |  |  | Lo |  |  | 8.375                   |  |  | 8.438                    | 

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For
the most recent six months, the high and low market prices of the Ordinary
Shares for each month are set forth below:

| | Month Ending         |  |  |    |  |  | Boston Stock
  Exchange |  |  | Nasdaq SmallCap
  Market | 
| | -------------------- |  |  | -- |  |  | ----------------------- |  |  | ------------------------ | 
| |                      |  |  |    |  |  |                         |  |  |                          | 
| | March
  31, 2003     |  |  | Hi |  |  | 0.61*                   |  |  | 0.61                     | 
| |                      |  |  | Lo |  |  | 0.42*                   |  |  | 0.42                     | 
| |                      |  |  |    |  |  |                         |  |  |                          | 
| | February
  28, 2003  |  |  | Hi |  |  | 0.59*                   |  |  | 0.59                     | 
| |                      |  |  | Lo |  |  | 0.48*                   |  |  | 0.48                     | 
| |                      |  |  |    |  |  |                         |  |  |                          | 
| | January
  31, 2003   |  |  | Hi |  |  | 0.77*                   |  |  | 0.77                     | 
| |                      |  |  | Lo |  |  | 0.50*                   |  |  | 0.50                     | 
| |                      |  |  |    |  |  |                         |  |  |                          | 
| | December
  31, 2002  |  |  | Hi |  |  | 0.60*                   |  |  | 0.60                     | 
| |                      |  |  | Lo |  |  | 0.46*                   |  |  | 0.46                     | 
| |                      |  |  |    |  |  |                         |  |  |                          | 
| | November
  30, 2002  |  |  | Hi |  |  | 0.59*                   |  |  | 0.59                     | 
| |                      |  |  | Lo |  |  | 0.42*                   |  |  | 0.42                     | 
| |                      |  |  |    |  |  |                         |  |  |                          | 
| | October
  31, 2002   |  |  | Hi |  |  | 0.99*                   |  |  | 0.99                     | 
| |                      |  |  | Lo |  |  | 0.66*                   |  |  | 0.66                     | 
| |                      |  |  |    |  |  |                         |  |  |                          | 
| | September
  30, 2002 |  |  | Hi |  |  | 1.37*                   |  |  | 1.37                     | 
| |                      |  |  | Lo |  |  | 0.95*                   |  |  | 0.95                     | 
| |                      |  |  |    |  |  |                         |  |  |                         
| |                      |  |  |    |  |  |                         |  |  |                          | 

*  See Markets below

Markets

Effective
November 1996, the Ordinary Shares were quoted on the Nasdaq SmallCap Market,
under the symbol TISAF and listed on the Boston Stock Exchange, under the
symbol TPM.  Effective April 29, 1999,
the symbol for the Ordinary Shares was changed to TISA on the Nasdaq SmallCap
Market.  While still listed on the
Boston Stock Exchange, there has been no trading activity in the Ordinary
Shares on that exchange since November 1999. 
The Ordinary Shares are not publicly traded outside the United States.

39

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ITEM 10.     ADDITIONAL
INFORMATION

Memorandum
and articles of association

General

TiS
is registered with the Israeli Registrar of Companies.  The registration number issued to TiS by the
Registrar of Companies is 52-004294-6. 
The objectives for which we were founded are set out in Section 2 of the
Memorandum of Association as follows: The Company is permitted to deal with any
activity that is meant to advance the interests of the Company and to act in
any field which the Companys management believes is beneficial to the
Company.

Directors

General

A
directors ability to vote on a proposal, arrangement or contract in which the
director is materially interested is codified, along with the fiduciary duties
of all office holders, in the Israeli Companies Law.  The issue is not dealt with separately in
our Articles of Association.  Under the
Israeli Companies Law the term office holders, is defined to mean, a
director, chief executive officer, president, chief business manager, deputy
chief executive officer, vice chief executive officer, executive vice
president, vice president, another manager directly subordinate to the managing
director or any other person assuming the responsibilities of any of the
forgoing positions without regard to such persons title.  An office holders fiduciary duties consist
of a duty of care and a duty of loyalty. The duty of care includes avoiding
negligent acts and acting skillfully as a reasonable office holder would
act.     The duty of loyalty includes
avoiding any conflict of interest between the office holders position in the
company and his personal affairs, avoiding any competition with the company,
avoiding exploiting any business opportunity of the company in order to receive
personal advantage for himself or others, and revealing to the company any
information or documents relating to the companys affairs which the office
holder has received due to his position as an office holder of the company.

The
Israeli Companies Law requires that an office holder promptly disclose any
personal interest that he or she may have and all related material information
known to him or her, in connection with any existing or proposed transaction by
the company.

In
the case of a transaction in which an office holder has a personal interest,
that is not an extraordinary transaction, as defined under Israeli law, and
after the office holder complies with the above disclosure requirement, only
board approval is required unless the Articles of Association of the company
provide otherwise.  Members of the board
having a personal interest should not be present at the vote or exercise their
vote unless a majority of the board has a personal interest.  The transaction must not be adverse to the
companys interest.  If the transaction
is an extraordinary transaction, then, in addition to any approval required by
the Articles of Association, it also must be approved by the audit committee
and by the board of directors, and, under specified circumstances, by a meeting
of the shareholders.  An office holder
who has a personal interest in  the approval
of a transaction brought before the board of directors or the audit committee
may not be present at this meeting or vote on this matter unless most of the
members have a personal interest in approving the transaction or the occurrence
of specific circumstances defined in the law.

With
the exception of Fixed Amounts compensation to external directors, arrangements regarding the
compensation of directors (whether regarding in their capacity as directors or regarding
the provision of other services) require audit committee, board of directors
and shareholder approval.

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External
Directors

Under
the Israeli Companies Law, which took effect on February 1, 2000, companies
registered under the laws of Israel whose shares have been offered to the
public in or outside of Israel are required to appoint two external
directors.  Any committee having the
power to act on behalf of a companys board (as opposed to an advisory
committee) must have at least one external director as a member. An external
director must be an individual resident of Israel, who is qualified to serve as
a director. Companies whose shares have been offered to the public outside of
Israel enjoy an easement in this matter so that external directors do not
have to be residents of Israel.  No
person may be appointed as an external director if the person or the persons
relative, partner, employer or any entity under the persons control, has or
had, on or within the two years preceding the date of the persons appointment
to serve as external director, any affiliation with the company or any entity
controlling, controlled by or under common control with the company.  The term affiliation includes:

| |  | an employment relationship;                                             
| | - | ------------------------------------------------------------------------
| |  | a business or professional relationship maintained
  on a regular basis;
| |  | control; and                                                            
| |  | service as an office holder.                                            

No
person may serve as an external director if the persons position or other
business creates, or may create, a conflict of interest with the persons
responsibilities as an external director or may otherwise interfere with the
persons ability to serve as an external director.  If, at the time external directors are to be appointed, all
current members of the board of directors are of the same gender, then at least
one external director must be of the other gender.

External
directors are to be elected by a majority vote at a shareholders meeting,
provided that either:

| |  | the majority of shares voted at the meeting,
  including at least one-third of the shares held by non-controlling
  shareholders voted at the meeting, vote in favor of election of the director;
  or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                       
| |  | the total number of shares held by non-controlling
  shareholders voted against the election of the directors does not exceed one
  percent of the aggregate voting rights in the company.            

The
initial term of an external director under the current law is three years and
may be extended for an additional term of three years.  External directors may be removed only by
the same percentage of shareholders as is required for their election, or by a
court, and then only if the external directors cease to meet the statutory
qualifications for their appointment or if they violate their duty of loyalty
to the company.  Each committee of a
companys board of directors must include at least one external director.

Notwithstanding
the foregoing, Israeli companies whose shares have only been offered to the
public outside of Israel or that are registered solely on a stock market
outside of Israel are entitled to some allowances in accordance with applicable
regulations with respect to the requirements for an independent director.  (Regulations for allowances for public
companies whose shares are registered for trade on a stock market external of
Israel  2000.)

An
external director is entitled to compensation as provided in regulations
adopted under the Israeli Companies Law and is otherwise prohibited from
receiving any other compensation, directly or indirectly in connection with
service provided as an external director.

Alternate
Directors

Under
the Israeli Companies Law, the Articles of Association of a company may entitle
a director to appoint another person to serve as an alternate director.  Our Articles entitle our directors by written
notice to us to make such an appointment and to cancel any such
appointment.  Our Articles also provide
that any person may act as an alternate director.  The Israeli Companies Law which now prohibits incumbent directors
from acting as alternate directors and a single person acting as an alternate
director for more than one incumbent director.

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The
term of appointment of a substitute director may be for one meeting of the
Board of Directors or for a specified period or until notice is given of the
cancellation of the appointment.  To our
knowledge, no director currently intends to appoint any other person as a
substitute director, except if the director is unable to attend a meeting of
the Board of Directors.

Internal
Auditor and Certified Public Accountant

Under
the Israeli Companies Law, the board of directors must appoint an internal
auditor, nominated by the audit committee. 
The role of the internal auditor is to examine, among other matters,
whether the companys actions comply with the law and orderly business
procedure.  Under the Israeli Companies
Law, the internal auditor may be an employee of the company but not an office
holder (as defined below), or an affiliate, or a relative of an office holder
or affiliate, and he may not be the companys independent accountant or its
representative.  In addition, the
internal auditor may not be a person who holds 5% or more of the companys
outstanding share capital or voting rights, or a person who has the right to
appoint one or more directors or the general manager. The Companys internal
auditor is Mr. Eyal Weitzman of Fahn Kanne Control Management Ltd., a member
firm of Grant Thornton International.

In
addition, under the Israeli Companies Law, all companies must appoint a
certified public accountant to audit the companys financial statements and to
report to the chairman of the board of directors any material improprieties
that it may discover with respect to the accounting control of the
company.  We have appointed Somekh
Chaikin, a member firm of KPMG International, certified public accountants in
Israel, as our certified public accountant for auditing services.

Indemnification
of Directors and Officers

The
Israeli Companies Law provides that an Israeli company cannot exempt an officer
from liability with respect to a breach of his fiduciary responsibilities.  While the Companies Ordinance, in effect
throughout 1999, provided that an Israeli company could not exempt an officer
from liability with respect to a breach of his duty of care or his duty of
loyalty, this is permissible now under the Israeli Companies Law, if done in
compliance with such law. The Israeli Companies Law also allows for granting an
office holder an indemnification undertaking in advance subject to certain
conditions.  However, an exemption
and/or undertaking in advance to indemnify may only be granted if provided for
in the Articles of Association of the company  in our case, they are not. Our
Articles provide that, subject to the provisions of the Companies Ordinance and
applicable law, we may enter into a contract for the insurance of the
liability, in whole or in part, of any of its Office Holders (as defined below)
with respect to; (i) a breach of his duty of care to us or to another person;
(ii) a breach of his fiduciary duty to us, provided that the Office Holder
acted in good faith and had reasonable cause to assume that his act would not
prejudice our interests; or (iii) a financial liability imposed upon him in
favor of another person by reason of an act or omission of such person in his
capacity as an Office Holder.  In
addition, we may indemnify an Office Holder against; (i) a financial liability
imposed on him in favor of another person by any judgment, including a judgment
given as a result of a settlement or an arbitrators award that has been
confirmed by a court in respect of an act or omission performed by him by
virtue of his being an Office Holder and (ii) reasonable litigation costs,
including attorneys fees, actually expended by such Office Holder or imposed
on him by a court, in an action, suit or proceeding brought against him by us
or in our name or by others or in respect of a criminal action in which he was
acquitted in each case, by reason of an act or omission of such person in his
capacity as an Office Holder.

Our
Articles state that for these purposes an Office Holder includes directors
and all persons defined as Office Holders in the Companies Ordinance.  The procurement of any such insurance or
provision of any such indemnification, as the case may be, must be approved by
our Audit Committee and otherwise as required by law.  We may not indemnify an Office Holder or enter into an insurance
contract which would provide coverage for any monetary liability incurred as a
result of the following:  (i) a breach
by the Office Holder of his duty of care if such breach was done intentionally
or in disregard of the circumstances of the breach of its consequences; (ii) a
breach by the Office Holder of his duty of loyalty unless he acted in good faith
and had a reasonable basis to believe that his act or omission would not
prejudice our interests; (iii) any act or omission done with the intent to
derive an illegal personal benefit; or (iv) any fine levied against the Office
Holder as a result of a criminal offense.

42

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Currently,
we hold an insurance policy for our Office Holders that provides coverage
limited to $5,000,000 in aggregate for the policy period, ending on December
20, 2003.

Rights,
Preferences, Restrictions of Shares

We
currently utilize one type of share, this being Ordinary Shares.  Dividends may be declared at a general
meeting, following a recommendation by the directors.  We may decide to declare a dividend in an amount that is less
than that recommended by the directors or decide not to declare a dividend at
all, despite a directors recommendation, but may not increase the amount of
the dividend to more than the amount recommended by the directors.  The directors may invest or use otherwise
for our benefit, any dividends that are not demanded within one year of their
being declared.  The directors shall pay
such dividends upon receipt of a valid demand; however we are not liable to pay
any interest on dividend.

Each
shareholder is entitled to one vote for each Ordinary Share held.  Except for the External Directors, each
director is elected to serve until the next annual general meeting of
shareholders and until his successor has been elected.  Our Articles do not grant shareholders any
rights to share in our profits other than through dividends.  In the event that we go into liquidation,
any surplus is distributed to the shareholders in proportion to the amount paid
by each on account of the nominal value of the shares paid.  No account is taken of any premiums paid in
excess of the nominal value.

We
may issue and redeem redeemable shares and redeemable warrants.  There are no sinking fund provisions
recorded in our Articles.  The directors
may only make calls upon shareholders in respect of sums unpaid on their
shares.  Our Articles contain no
provisions which discriminate against any existing or future shareholder as a
result of said shareholder holding a substantial number of shares.

If
at any time our share capital is divided into different classes of shares, we
may change the rights of shareholders following receipt in writing of the
agreement of 75% of the affected shareholders or following the passing of a
resolution at a general meeting which is supported by 75% of the affected
shareholders.  Any holder of shares the
rights of which we propose to change may demand a secret ballot on this issue.

Meetings
of Shareholders

An
annual general meeting must be held once in each year and not later than
fifteen months after the preceding annual general meeting.  All shareholders are entitled to attend and
vote at annual general meetings.  Notice
of annual general meetings may be sent by us by personal delivery, post,
facsimile or telex to shareholders at the address recorded in our records.  Any notice sent by post to a shareholders
address that is situated outside of Israel must be sent by airmail.  Any general meeting that is not an annual
general meeting is called an extraordinary general meeting.  All shareholders are entitled to attend and
vote at extraordinary general meetings.

Our
Board of Directors may convene an extraordinary general meeting when and as
they see fit.  In addition the Board
must, according to statute, convene an extraordinary general meeting if it
receives a demand to do so from either (i) at least two directors, (ii) at
least one quarter of the directors of the Board or (iii) one or more
shareholders who hold (A) an aggregate of at least five percent of our issued
share capital and one percent of all voting rights, or (B) at least five
percent of all voting rights.  Any
demand by a person or persons, as described in (i), (ii) and/or (iii) of this
paragraph, who wish to demand that an extraordinary general meeting be convened
must be made in writing and sent to our registered office.  The demand must detail the objects of the
meeting and must be signed by all those making the demand.

Notice
of an annual general meeting and of an extraordinary general meeting must be
sent at least 21 days in advance to all shareholders recorded in our register
of shareholders.  Such notice must include
the place, date and hour of the meeting, the agenda for the meeting, the
proposed resolutions and instructions for proxy voting.

Notwithstanding
the foregoing, Israeli companies whose shares have only been offered to the
public outside of Israel or that are registered solely on a stock market
outside of Israel are entitled to some allowances in accordance with applicable
regulations with respect to the requirements for notice of shareholder meetings
if there is compliance with applicable rules of the country in which such
shares have been offered or such a stock market is located.

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Limitations
of Shareholders

No
limitations exist or are imposed by Israeli law or our constituent documents
with regard to the right to own our shares, including any limitations upon the
rights of non-resident or foreign shareholders to hold or exercise voting
rights.

Limitations
on a Change of Control

There
are no provisions in our Articles or other constituent documents that would
have an effect of delaying, deferring or preventing a change in control of
us.

Provisions
Relating to Major Shareholders

We
are is required by law to maintain a separate register of shareholders that
hold five percent, or over five percent, of either our issued shares or voting
rights.

The
Israeli Companies Law applies the same disclosure requirements to a controlling
shareholder of a public company, which includes a shareholder that holds 5% or
more of the voting rights if no other shareholder owns more than 50% of the
voting rights in the company, as it does to office holders in the context of
a related party transaction.  See the
section entitled Directors-General in Item 10 of this annual report.  Extraordinary transactions with a
controlling shareholder or in which a controlling shareholder has a personal
interest, and agreements relating to employment and compensation terms of a
controlling shareholder, require the approval of the audit committee, the board
of directors and the shareholders of the company.

The
shareholder approval must either include at least one-third of the shares held
by disinterested shareholders who are present, in person or by proxy, at the
meeting, or, alternatively, the total shareholdings of the disinterested
shareholders who vote against the transaction must not represent more than one
percent of the voting rights in the company. 
In addition, a private placement of securities that will increase the
relative holdings of a shareholder that holds five percent or more of the
companys outstanding share capital, assuming the exercise of all of the
securities convertible into shares held by that person, or that will cause any
person to become, as a result of the issuance, a holder of more than five
percent of the companys outstanding share capital, requires approval by the
board of directors and the shareholder of the company.

Under
the Israeli Companies Law, a shareholder has a duty to act in good faith
towards the company and to the shareholders and refrain from abusing his power
in the company, including, among other things, voting in the general meeting of
shareholders on the following matters:

| |  | any amendment to the Articles of Association;                                 
| | - | ------------------------------------------------------------------------------
| |  | an increase of the companys authorized share
  capital;                      
| |  | a merger; or                                                                  
| |  | approval of interested party transactions that
  require shareholder approval.

In
addition, any controlling shareholder who can determine the outcome of a
shareholder vote and any shareholder who, under a companys Articles of
Association, can appoint or prevent the appointment of an office holder, is
under a duty to act with fairness towards the company.  The Israeli Companies Law does not describe
the substance of this duty.

Contracts

Neither
we nor any of our subsidiaries has entered into any material contracts, other
than contracts entered into in the ordinary course of business, during the two
years immediately preceding publication of this document and except for the
agreements relating to the investment of Charter and the related arrangements
with Mr. Nakar.  See the sections
entitled Major Shareholders and Related Party Transactions in Item 7 of
this annual report and Compensation in Item 6 of this annual report.

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Israeli
Exchange Control Laws

The
Government of Israel has promulgated a general permit under the Israeli
Currency Control Law. Pursuant to such general permit, substantially all
transactions in foreign currency are permitted. Any dividends or other
distributions paid in respect of Ordinary Shares and any amounts payable upon
our dissolution, liquidation or winding up of our affairs, as well as the
proceeds of any sale in Israel of our securities to an Israeli resident are
freely exchangeable into non-Israeli currencies at the appropriate rate of
exchange prevailing at the time of conversion, provided that Israeli income tax
has been paid on (or withheld from) such payments.  Because exchange rates between the NIS and the U.S. dollar
fluctuate continuously, U.S. shareholders will be subject to any such currency
fluctuation during the period from when such dividend is declared through the
date payment is made in U.S. dollars.

Taxation

Israeli
Tax Considerations

The
following is a summary of the current tax law applicable to companies in
Israel, with special reference to its effect on us.  The following also contains a discussion of specified Israeli Government
programs benefiting us.  To the extent
that the discussion is based on tax legislation that has not been subject to
judicial or administrative interpretation, we cannot assure you that the views
expressed in the discussion will be accepted by the authorities in question.

The
Law for Amendment of the Income Tax Ordinance (Amendment No. 132) came into
effect on January 1, 2003. The reform significantly changed the taxation basis
of corporate and individual taxpayers from a territorial basis to a worldwide
basis.  From such date an Israeli
resident taxpayer will be taxed on income produced and derived both in and out
of Israel.

The
tax reform, aimed at broadening the categories of taxable income and reducing
the tax rates imposed on employment income, introduced the following, among
other things:

| |  | Reduction of the tax rate levied on capital gains
  (other than gains deriving from the sale of listed securities) derived after
  January 1, 2003, to a general rate of 25% for both individuals and
  corporations. Regarding assets acquired prior to January 1, 2003, the reduced
  tax rate will apply to a proportionate part of the gain, in accordance with
  the holding periods of the asset, before or after January 1, 2003, on a
  linear basis;                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Imposition of Israeli tax on all income of Israeli
  residents, individuals and corporations, regardless of the territorial source
  of income, including income derived from passive sources such as interest,
  dividends and royalties;                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Introduction of controlled foreign corporation, or
  CFC, rules into the Israeli tax structure. Generally, under such rules, an
  Israeli resident who holds, directly or indirectly, 10% or more of the rights
  in a foreign corporation whose shares are not publicly traded, in which more
  than 50% of the rights are held directly or indirectly by Israeli residents,
  and a majority of whose income in a tax year is considered passive income,
  will be liable for tax on the portion of such income attributed to his
  holdings in such corporation, as if such income were distributed to him as a
  dividend;
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Imposition of capital gains tax on capital gains
  realized by individuals as of January 1, 2003, from the sale of shares of
  publicly traded companies (such gain was previously exempt from capital gains
  tax in Israel). For information with respect to the applicability of Israeli
  capital gains taxes on the sale of ordinary shares, see Capital Gains Tax
  below;                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Introduction of a new regime for the taxation of
  shares and options issued to employees and officers (including directors).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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The discussion is not
intended, and should not be construed, as legal or professional tax advice and
is not exhaustive of all possible tax considerations.  We express no opinion herein as to whether these recommendations
shall be accepted.

The
Israeli statutory corporate tax rate on taxable business income is currently
36%.  Notwithstanding the foregoing, the
effective tax rate payable by a company (such as us), which derives income from
an Approved Enterprise may be considerably less.  See the section entitled Law for the Encouragement of Capital
Investments, 1959 in Item 10 of this annual report.

As
of December 31, 2002, we had net operating loss carryforwards of approximately
$8,904,451 available to utilize against our taxable business income in future
tax years.  A portion of such losses
expires over a period from 2004 through 2016 and the rest remains available indefinitely.  Out of the net operating loss carryforwards,
an amount of approximately $3,141,855 is linked to the increase in the Israeli
Consumer Price Index.

Law
for the Encouragement of Capital Investments, 1959

General

The
Law for the Encouragement of Capital Investments, 1959 (the Investment Law)
provides that capital investments in certain production facilities (or other
eligible assets) may, upon application to the Israel Investment Center, be
designated as an Approved Enterprise. 
Each certificate of approval for an Approved Enterprise relates to a
specific investment program in the Approved Enterprise, delineated both by the
financial scope of the investment and by the physical characteristics of the
facility or other asset.

Tax Benefits

Income
derived from an Approved Enterprise is taxed at lower company tax rates than
would otherwise be applicable.  The
period of reduced taxation commences in the first year in which the Approved
Enterprise generates taxable income and continues for a maximum of seven
consecutive years, but such period ends not later than the twelfth year from
commencement of production or the fourteenth year from the date of approval of
such enterprise, whichever is earlier. 
Since we have not yet generated taxable income, the period of benefits
to which we are entitled as an Approved Enterprise has not yet begun.

We
have elected to apply the so-called Alternative Benefits Program with respect
to our income from Approved Enterprises. 
Under this program, the undistributed income derived from the Approved
Enterprise is exempt from company tax with respect to business income for a
defined period of time.  The period of
tax exemption ranges between 2 and 10 years, depending upon the location within
Israel and the type of the Approved Enterprise.  Because we are located in Tel Aviv, the period of tax exemption
applicable is two years.  On expiration
of the exemption period, the Approved Enterprise would be eligible for
beneficial tax rates otherwise available for Approved Enterprises under the
Investment Law (for the Company, a rate of 25%) for the remainder of the
otherwise applicable benefits period.

In
addition, a company that qualifies as a Foreign Investors Company is
entitled to further reductions in the tax rate otherwise applicable to Approved
Enterprises.  Such benefits will be
granted only to enterprises seeking approval not later than December 31, 2000.  Subject to certain conditions, a Foreign
Investors Company is a company which has more than 25% of its share capital
(in terms of rights to profits, voting and the appointment of directors) and of
its combined share and loan capital owned by persons who are not residents of
Israel.  The benefits enjoyed by a
Foreign Investors Company depend on the percentage of share capital owned by
non-residents, which percentage is determined for any tax year by the lowest
percentage of any of the above rights held by non-residents during that year.  A Foreign Investors Company pays tax at
reduced rates ranging from 25% to 10% over a ten-year period, commencing the
year in which each such Approved Enterprise first generates taxable income
(rather than the otherwise applicable seven-year period discussed above).

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For
a company with foreign investment of:

|                              |  |  | Company Tax Rate | 
|----------------------------- |  |  | ---------------- | 
|                              |  |  |                  | 
|Over 25% but less than 49%    |  |  | 25%              | 
|                              |  |  |                  | 
|49% or more but less than 74% |  |  | 20%              | 
|                              |  |  |                  | 
|74% or more but less than 90% |  |  | 15%              | 
|                              |  |  |                  | 
|90% or more                   |  |  | 10%              | 

Dividends
paid out of income derived by an Approved Enterprise are generally subject to
withholding tax at the rate of 15% (compared to the standard rate of 25%), and
the same rate will also be applicable to distributions made by a company out of
dividends which it had received out of income derived by an Approved
Enterprise.  The rate of 15% is limited
to those dividends and distributions paid out of income earned during the
seven-year benefits period provided that such dividends and distributions are
actually received by the shareholders at any time up to 12 years after the
expiration of the seven-year period discussed above.  A company such as us, which has elected to participate in the
Alternative Benefits Program and pays a dividend from income derived by an Approved
Enterprise during the tax exemption period under the Alternative Benefits
Program, would be liable for company tax in respect of the gross amount
distributed (i.e., the amount of the dividend grossed-up to include corporate
and income tax payable or withheld with respect to the dividend) at the rate
that would have been applicable had the Alternative Benefits Program not been
elected (25%).  The dividend recipient
is taxed at the reduced rate applicable to dividends from Approved Enterprises
(15% as compared to 25%), if the dividend is distributed during the tax
exemption period or within a specified period thereafter.  (In the event, however, that the company
also qualifies as a Foreign Investors Company, there is no such time
limit).  This tax must be withheld by
the company at source, regardless of whether the dividend is converted into
foreign currency.

The
tax benefits derived from a certificate of approval for an Approved Enterprise
relate only to taxable income attributable to the Approved Enterprise and are
conditioned upon fulfillment of the conditions stipulated by the Investment
Law, the regulations promulgated thereunder and the criteria set forth in the
certificate of approval. In the event of our failure to comply with these conditions,
the tax benefits could be cancelled in whole or in part, and we would be
required to refund the amount of the cancelled benefits with the addition of
CPI linkage differences and interest. 
We believe that our Approved Enterprises operate in substantial
compliance with all such conditions and criteria.

In
the event that only a part of a companys taxable income is derived from an
Approved Enterprise or the company operates under more than one approval, its
effective corporate tax rate is equal to a weighted average of the various
applicable rates.  A company owning
mixed enterprises (i.e., a company whose income is derived from both an
Approved Enterprise and other sources) may not distribute a dividend
attributable only to the Approved Enterprise alone.  Subject to certain provisions concerning income subject to the
Alternative Benefits Program, all dividends are considered to be attributable
to the entire enterprise, and the effective tax rate is equal to a weighted
combination of the various applicable tax rates.

Law
for the Encouragement of Industry (Taxes), 1969

We
currently qualify as an Industrial Company within the definition of the Law
for the Encouragement of Industry (Taxes), 1969 and are, therefore, entitled to certain benefits, which are described
below.

Under
the Industry Encouragement Law, a company qualifies as an Industrial Company
if it is resident in Israel and at least 90% of its income in any tax year,
determined in NIS (exclusive of income from government compulsory defense
loans, capital gains, interest, and dividends), is derived from Industrial
Enterprises owned by that company.  An
Industrial Enterprise is defined as an enterprise whose major activity in a
particular tax year is industrial production activity.  Pursuant to the Industry Encouragement Law,
an Industrial Company is entitled, under certain conditions, to a deduction of
12.5% of the purchase price of patents or certain other intangible property
rights for each of the first eight years from the tax year in which it
commenced use of such intangible property rights.  To the extent that the income from a companys Approved Enterprises
is exempt from taxation (see Law for the Encouragement of Capital Investments,
1959), the deduction that such company would have otherwise received under the
Industry Encouragement Law will be reduced accordingly.

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Eligibility
for the benefits under the Industry Encouragement Law is not conditioned upon
the receipt of prior approval from any Israeli Government authority.  No assurance can be given that we will
continue to qualify as an Industrial Company or will in the future be able to
avail ourselves of any benefits under the Industry Encouragement Law.

Taxation under Inflationary
Conditions

The
Income Tax Law (Adjustment for Inflation), 1985 (the Adjustment for Inflation
Law) represents an attempt to overcome some of the problems presented to a
traditional tax system by an economy undergoing rapid inflation.  Generally, the Adjustment for Inflation Law
provides significant tax deductions and adjustments to depreciation methods and
tax loss carryforwards to compensate for loss of value resulting from a
hyperinflationary economy.  We are
assessed under the Adjustment for Inflation Law.

The
Income Tax Ordinance and the Adjustment for Inflation Law allow Foreign-Invested
Companies which maintain their accounts in dollars in compliance with
regulations published by the Israeli Minister of Finance to base their tax
returns on the operating results as reflected in the dollar financial
statements (in lieu of the principles set forth by the Adjustment for Inflation
Law) or to adjust their tax returns based on exchange rate changes rather than
changes in the CPI.  For these purposes,
a Foreign-Invested Company is a company more than 25% of whose share capital
(in terms of rights to profits, voting and the appointment of directors) and of
whose combined share and loan capital is owned by persons who are not residents
of Israel.

Tax Benefits and Government Support
for Research and Development

Israels
tax law permits, under certain circumstances, a tax deduction for expenditures
(including capital expenditures) in scientific research and development
projects in the year incurred, if the expenditures are approved by the relevant
Israeli Government Ministry (determined by the field of research) and the
research and development is for the promotion of the enterprise and is carried
out by or on behalf of the company seeking such deduction. Expenditures not so
approved are deductible over a three-year period.  We have taken such deductions in the past for research and
development costs expended on projects so approved and expect to continue to
have such deductions available to it in the future.

Capital Gains Tax

Israels
law imposes a capital gains tax on the sale of capital assets, including
securities held by us and our Ordinary Shares sold by holders thereof.  The law distinguishes between Real Gain
and Inflationary Surplus.  Real Gain
is the excess of the total capital gain over Inflationary Surplus, computed on
the basis of the increase in the CPI between the date of purchase and the date
of sale.  Inflationary Surplus
accumulated until December 31, 1993 is taxed at a rate of 10% for residents of
Israel (reduced to no tax for non-residents if calculated according to the
exchange rate of the dollar instead of the CPI), while Real Gain is added to
ordinary income, which is taxed at the applicable ordinary rates for
individuals (up to a 50% marginal rate) and 36% for corporations, while
Inflationary Surplus accumulated from and after December 31, 1993 is exempt
from any capital gains tax.

Israeli law generally imposes a capital gains tax
on the sale of capital assets located in Israel, including shares in Israeli
companies, by both residents and non-residents of Israel, unless a specific
exemption is available or unless a tax treaty between Israel and the
shareholders country of residence provides otherwise. The law distinguishes
between real gain and inflationary surplus.
The inflationary surplus is equal to the increase in the purchase price
of the relevant asset attributable solely to the increase in the Israeli
consumer price index between the date of purchase and the date of sale.  The real gain is the excess of the total
capital gain over the inflationary surplus.

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Prior
to the tax reform, sales of our Ordinary Shares by individuals were generally
exempt from Israeli capital gains tax so long as (i) our Ordinary Shares were listed
on certain stock exchanges, including the NASDAQ SmallCap Market and the Boston
Stock Exchange, or listed on a stock
exchange in a country appearing on a list approved by the Controller of Foreign
Currency and (ii) we qualified as an Industrial Company.

Pursuant
to the tax reform, generally, capital gains tax is imposed at a rate of 15% on
real gains derived on or after January 1, 2003, from the sale of shares in
companies (i) publicly traded on the Tel Aviv Stock Exchange (TASE) or;
(ii) (subject to a necessary determination by the Israeli Minister of Finance)
Israeli companies publicly traded on a recognized stock exchange outside of
Israel (such as the Company). This tax rate does not apply to: (i) dealers
in securities; (ii) shareholders that report in accordance with the
Inflationary Adjustment Law; or (iii) shareholders who acquired their
shares prior to an initial public offering (that are subject to a different tax
arrangement).  The tax basis of shares
acquired prior to January 1, 2003 will be determined in accordance with the
average closing share price in the three trading days preceding January 1,
2003.  However, a request may be made to
the tax authorities to consider the actual adjusted cost of the shares as the
tax basis if it is higher than such average price.

Non-Israeli
residents are exempt from Israeli capital gains tax on any gains derived from
the sale of shares publicly traded on the TASE, and shall be exempt from
Israeli capital gains tax on any gains derived from the sale of shares of
Israeli companies publicly traded on a  recognized stock exchange outside of Israel, provided such
shareholders did not acquire their shares prior to an initial public offering.
However, non-Israeli corporations will not be entitled to such exemption if an
Israeli resident (i) has a controlling interest of 25% or more in such
non-Israeli corporation, or (ii) is the beneficiary or is entitled to 25% or
more of the revenues or profits of such non-Israeli corporation, whether
directly or indirectly.

In
any event, the provisions of the tax reform shall not affect the exemption from
capital gains tax for gains accrued before January 1, 2003, as described above.

Taxation
of Non-Residents of Israel

Individuals
who are non-residents of Israel are subject to a graduated income tax on income
derived from sources in Israel, unless such non-residents are subject to other
rules under an applicable treaty and unless the capital gains were derived from
sales of shares in an Industrial Company, as described above.  Israeli source income is defined under
Israeli law as income, including capital gains, derived or accrued in Israel
and income derived or accrued outside of Israel, if such income is received in
Israel.  On the distribution of
dividends other than bonus shares (stock dividends), income tax at the rate of
25% (15% in the case of dividends distributed from the taxable income
attributable to an Approved Enterprise) is required to be withheld at source
unless a different rate is provided for in a treaty between Israel and the
shareholders country of residence.  The
U.S.-Israel Tax Treaty provides for a maximum tax of 25% on dividends paid to a
Treaty U.S. Resident.

United
States Federal Income Tax Considerations

Subject
to the limitations described in the next paragraph, the following discussion
describes the material United States federal income tax consequences to a
holder of the Companys Ordinary Shares, referred to for purposes of this
discussion as a U.S. Holder, that is:

| |  | a citizen or resident of the United States;                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                   
| |  | a corporation (or entity treated as a corporation
  for U.S. tax purposes) created or organized in the United States or under the
  laws of the United States or of any state;                                                    
| |   |                                                                                                                                                                                                                                   
| |  | an estate, the income of which is includible in
  gross income for United States federal income tax purposes regardless of its
  source; or                                                                                       
| |   |                                                                                                                                                                                                                                   
| |  | a trust, if a court within the United States is able
  to exercise primary supervision over the administration of the trust and one
  or more U.S. persons have the authority to control all substantial decisions
  of the trust.

49

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In
addition, certain material aspects of United States federal income tax relevant
to a holder other than a U.S. Holder, referred to as a Non-U.S. Holder, are
discussed below.

This
summary is for general information purposes only.  It does not purport to be a comprehensive description of all of
the tax considerations that may be relevant to each persons decision to
purchase Ordinary Shares.

This
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended (the Code), current and proposed Treasury regulations promulgated thereunder,
and administrative and judicial decisions as of the date hereof, all of which
are subject to change, possibly on a retroactive basis.  This discussion does not address all aspects
of United States federal income taxation that may be relevant to any particular
shareholder based on such shareholders individual circumstances.  In particular, this discussion considers
only U.S. Holders that will own Ordinary Shares as capital assets and does not
address the potential application of the alternative minimum tax or United
States federal income tax consequences to U.S. Holders that are subject to
special treatment, including U.S. Holders that:

| |  | are broker-dealers or insurance companies;                                                               
| | - | ---------------------------------------------------------------------------------------------------------
| |   |                                                                                                          
| |  | have elected mark-to-marketing accounting;                                                               
| |   |                                                                                                          
| |  | are tax-exempt organizations;                                                                            
| |   |                                                                                                          
| |  | are financial institutions or financial services
  entities;                                           
| |   |                                                                                                          
| |  | hold Ordinary Shares as part of a straddle, hedge
  or conversion transaction with other investments;
| |   |                                                                                                          
| |  | own directly, indirectly or by attribution at least
  10% of our voting power; or                        
| |   |                                                                                                          
| |  | have a functional currency that is not the U.S.
  dollar.                                                

In
addition, this discussion does not address any aspect of state, local or
non-United States tax laws.

Additionally,
the discussion does not consider the tax treatment of persons who hold Ordinary
Shares through a partnership or other pass-through entity or the possible
application of United States federal gift or estate tax.

Each
holder of Ordinary Shares is advised to consult such persons own tax advisor
with respect to the specific tax consequences to such person of purchasing,
holding or disposing of the Companys Ordinary Shares.

Taxation of Ordinary Shares

Taxation
of Dividends Paid On Ordinary Shares

A
U.S. Holder will be required to include in gross income as ordinary income the
amount of any distribution paid on Ordinary Shares, including any Israeli taxes
withheld from the amount paid, to the extent the distribution is paid out of
our current or accumulated earnings and profits as determined for United States
federal income tax purposes. 
Distributions in excess of such earnings and profits will be applied
against and will reduce the U.S. Holders tax basis in the Ordinary Shares and,
to the extent in excess of such basis, will be treated as gain from the sale or
exchange of Ordinary Shares.

50

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U.S.
Holders may have the option of claiming the amount of any Israeli income taxes
withheld at source either as a deduction from gross income or as a
dollar-for-dollar credit against their United States federal income tax
liability.  Individuals who do not claim
itemized deductions, but instead utilize the standard deduction, may not claim
a deduction for the amount of the Israeli income taxes withheld, but such
amount may be claimed as a credit against the individuals United States
federal income tax liability.  The
amount of foreign income taxes which may be claimed as a credit in any year is
subject to complex limitations and restrictions, which must be determined on an
individual basis by each shareholder. 
Distributions of current or accumulated earnings and profits will be
foreign source passive income for United States foreign tax credit purposes and
will not qualify for the dividends received deduction available to
corporations.  The total amount of
allowable foreign tax credits in any year cannot exceed regular U.S. tax
liability for the year attributable to foreign source taxable income.  A U.S. Holder will be denied a foreign tax
credit with respect to Israeli income tax withheld from dividends received on
the Ordinary Shares to the extent such U.S. Holder has not held the Ordinary
Shares for at least 16 days of the 30-day period beginning on the date which is
15 days before the ex-dividend date or to the extent such U.S. Holder is under
an obligation to make related payments with respect to substantially similar or
related property.  Any days during which
a U.S. Holder has substantially diminished its risk of loss on the Ordinary
Shares are not counted toward meeting the 16-day holding period required by the
statute.

Taxation
of the Disposition of Ordinary Shares

Upon
the sale, exchange or other disposition of Ordinary Shares, a U.S. Holder will
recognize capital gain or loss in an amount equal to the difference between
such U.S. Holders basis in the Ordinary Shares, which is usually the cost of
such shares, and the amount realized on the disposition.  Capital gain from the sale, exchange or other
disposition of Ordinary Shares held more than one year is long-term capital
gain.  Gains and losses recognized by a
U.S. Holder on a sale, exchange or other disposition of Ordinary Shares will be
treated as United States source income or loss for United States foreign tax
credit purposes.  The deductibility
of  capital losses is subject to
limitations.

Tax
Consequences if the Company is a Passive Foreign Investment Company  need to
discuss this issue

The
Company will be a passive foreign investment company, or PFIC, if 75% or more
of its gross income in a taxable year, including the pro rata share of the
gross income of any company, U.S. or foreign, in which it is considered to own
25% or more of the shares by value, is passive income.  Alternatively, the Company will be
considered to be a PFIC if at least 50% of its assets in a taxable year,
averaged over the year and ordinarily determined based on fair market value and
including the pro rata share of the assets of any company in which it is
considered to own 25% or more of the shares by value, are held for the
production of, or produce, passive income. 
Passive income includes amounts derived by reason of the temporary
investment of funds raised in the Companys public offerings.  If the Company were a PFIC, and a U.S.
Holder did not make an election to treat the Company as a qualified electing
fund (as described below):

| |  | Excess distributions by us to a U.S. Holder would be
  taxed in a special way.  Excess
  distributions are amounts received by a U.S. Holder with respect to the
  Companys stock in any taxable year that exceed 125% of the average
  distributions received by such U.S. Holder from us in the shorter of either
  the three previous years or such U.S. Holders holding period for Ordinary
  Shares before the present taxable year. 
  Excess distributions must be allocated ratably to each day that a U.S.
  Holder has held the Companys stock. 
  A U.S. Holder must include amounts allocated to the current taxable
  year in its gross income as ordinary income for that year.  A U.S. Holder must pay tax on amounts
  allocated to each prior taxable year at the highest rate in effect for that
  year on ordinary income and the tax is subject to an interest charge at the
  rate applicable to deficiencies for income tax.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | The entire amount of gain that was realized by a
  U.S. Holder upon the sale or other disposition of Ordinary Shares will also
  be rated as an excess distribution and will be subject to tax as described
  above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | A U.S. Holders tax basis in shares of the Companys
  stock that were acquired from a decedent would not receive a step-up to fair
  market value as of the date of the decedents death but would instead be
  equal to the decedents basis, if lower.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

51

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The
special PFIC rules described above will not apply to a U.S. Holder if the U.S.
Holder makes an election to treat the Company as a qualified electing fund
(QEF) in the first taxable year in which the U.S. Holder owns Ordinary Shares
and if the Company complies with certain reporting requirements.  Instead, a shareholder of a qualified
electing fund is required for each taxable year to include in income a pro rata
share of the ordinary earnings of the qualified electing fund as ordinary
income and a pro rata share of the net capital gain of the qualified electing
fund as long-term capital gain, subject to a separate election to defer payment
of taxes, which deferral is subject to an interest charge.  The Company has agreed to supply U.S.
Holders with the information needed to report income and gain pursuant to a QEF
election in the event the Company is classified as PFIC.  The QEF election is made on a
shareholder-by-shareholder basis and can be revoked only with the consent of
the Internal Revenue Service, or IRS.  A
shareholder makes a QEF election by attaching a completed IRS Form 8621,
including the PFIC annual information statement, to a timely filed United
States federal income tax return and by filing such form with the IRS Service
Center in Philadelphia, Pennsylvania. 
Even if a QEF election is not made, a shareholder in a PFIC who is a
U.S. person must file a completed IRS Form 8621 every year.

A
U.S. Holder of PFIC stock which is publicly traded could elect to mark the
stock to market annually, recognizing as ordinary income or loss each year an
amount equal to the difference as of the close of the taxable year between the
holders fair market value of the PFIC stock and the adjusted basis in the PFIC
stock.  Losses would be allowed only to
the extent of net mark-to-market gain previously included by the U.S. Holder
under the election for prior taxable years. 
If the mark-to-market election were made, then the rules set forth above
would not apply for periods covered by the election.

The
Company believes that it was not a PFIC in 2002.  However, the tests for determining PFIC status are applied
annually, and it is difficult to make accurate predictions of future income and
assets which are relevant to this determination.  Accordingly, we cannot assure you that the Company will not
become a PFIC.  If the Company
determines that it has become a PFIC, it will notify its U.S. Holders and
provide them with the information necessary to comply with the QEF rules.  U.S. Holders who hold Ordinary Shares during
a period when the Company is a PFIC will be subject to the foregoing rules,
even if the Company ceases to be a PFIC, subject to certain exceptions for U.S.
Holders who made a QEF election.  U.S.
Holders are urged to consult their tax advisors about the PFIC rules, including
the consequences to them of making a mark-to-market or QEF election with
respect to the Companys Ordinary Shares in the event that the Company
qualifies as a PFIC.

Tax
Consequences for Non-U.S. Holders of Ordinary Shares

Except
as described in the section entitled Information Reporting and Back-up
Withholding, a Non-U.S. Holder of Ordinary Shares will not be subject to U.S.
federal income or withholding tax on the payment of dividends on, and the
proceeds from the disposition of, Ordinary Shares, unless:

| |  | such item is effectively connected with the conduct
  by the Non-U.S. Holder of a trade or business in the United States and, in
  the case of a resident of a country which has a treaty with the United
  States, such item is attributable to a permanent establishment or, in the
  case of an individual, a fixed place of business, in the United States;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                
| |  | the Non-U.S. Holder is an individual who holds the
  Ordinary Shares as a capital asset and is present in the United States for
  183 days or more in the taxable year of the disposition and does not qualify
  for an exemption; or                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                
| |  | the Non-U.S. Holder is subject to tax pursuant to
  the provisions of United States tax law applicable to U.S. expatriates.                                                                                                                                                                                                                                    

Information
Reporting and Back-up Withholding

U.S.
Holders generally are subject to information reporting requirements with
respect to dividends paid in the United States on Ordinary Shares.  U.S. Holders are also generally subject to
back-up withholding on dividends paid in the United States on Ordinary Shares
unless the U.S. Holder provides IRS Form W-9 or otherwise establishes an
exemption.  U.S. Holders are subject to
information reporting and back-up withholding at a rate of 31% on proceeds paid
from the disposition of Ordinary Shares unless the U.S. Holder provides IRS
Form W-9 or otherwise establishes an exemption.

52

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Non-U.S.
Holders generally are not subject to information reporting or back-up
withholding with respect to dividends paid on, or upon the disposition of,
Ordinary Shares, provided that such non-U.S. certifies to its foreign status,
or otherwise establishes an exemption.

The
amount of any back-up withholding will be allowed as a credit against a U.S. or
Non-U.S. Holders United States federal income tax liability and may entitle
such holder to a refund, provided that certain required information is
furnished to the IRS.

Documents
on display

The
exhibits to this report, including the exhibits incorporated herein by
reference, have been filed by the Company with the Securities and Exchange
Commission and can be inspected without charge at the public reference
facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, or at the Regional Offices of the SEC at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 233 Broadway, New York, New York 10279. 
Copies of all or any part of those documents may be obtained at prescribed
rates from the SECs public reference section at these addresses.

The
documents referred to in this document are also available for inspection at 2
Habarzel Street, Ramat Hahayal, Tel Aviv, Israel.

53

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ITEM 11.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK

Market
risk represents the risk of changes in the value of our financial instruments
caused by fluctuations in interest rates, foreign exchange rates and equity prices.  Because our short-term investments exceed
short-term and long-term debt, our exposure to interest rate risk and exchange
rate fluctuations, relates primarily to our investments.

Our
policy is to conservatively manage our excess currency.  All transactions are recommended by our
Investment Advisors and approved by Management.

Interest
rate risk

The
fair value of our cash and cash equivalents and short-term investment portfolio
at December 31, 2002 approximated carrying value due to its short-term
nature.  Market risk was estimated as
the potential decrease in fair value from a hypothetical 10% increase in
interest rates and is regarded as immaterial.

At
December 31, 2002 we had short-term bank loans in the amount of $848,310.  Market risk was estimated as the potential
increase in fair value resulting from a hypothetical 10% decrease in our
weighted average short-term and long-term borrowing rate at December 31, 2002,
and was not materially different from the year-end carrying value.

Foreign
exchange rate risk

Market
risk was estimated as the potential decrease in fair value resulting from a
hypothetical 10% increase in the year-end NIS exchange rate.  Assuming such increase in the NIS exchange
rate, the fair value would decrease by $25,062.

In
the ordinary course of business, we are exposed to foreign currency and
interest rate risks. These exposures primarily relate to purchases from local
suppliers in NIS, payroll expenses, which are paid in NIS, and changes in
interest rates.  We used to utilize
derivative options in order to reduce general foreign currency exposures.  Currently, we are no longer using derivative
options, yet our policy allows the use of such financial instruments when cash
is available and exposures exist.  We do
not issue financial instruments for trading purposes.

Equity
price risk

Marketable
securities at December 31, 2002 included corporate bonds and equity instruments
at a fair value of $528,327. Market risk was estimated as the potential
decrease in fair value resulting from a hypothetical 20% decrease in the value
of the marketable securities.  Assuming
such decrease, the fair value of the remaining marketable securities would decrease
by approximately $105,665.

ITEM 12.     DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

54

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PART II

ITEM 13.     DEFAULTS, DIVIDENDS, ARREARAGES AND DELINQUENCIES

None.

ITEM 14.     MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF                             PROCEEDS

None.

ITEM 15.     CONTROLS AND PROCEDURES

Within
90 days prior to the date of this report, our Chief Executive Officer and Chief
Financial Officer carried out an evaluation of the effectiveness of our
disclosure controls and procedures. 
Based on this evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
are effective to ensure that information required to be included in our
periodic reports to the Securities and Exchange Commission is recorded,
processed, summarized and reported in a timely manner.

There
have been no significant changes in our internal controls or in other factors
that could significantly affect those controls subsequent to the date of their
last evaluation.

Although
we believe that our pre-existing disclosure controls and procedures and
internal controls were adequate to enable us to comply with our disclosure
obligations, as a result of such review we intend to implement changes,
primarily to formalize and document procedures already in place.

ITEM 16.     [RESERVED]

55

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PART
III

ITEM
17.     FINANCIAL STATEMENTS

The Company has elected
to provide Financial Statements pursuant to Item 18.

ITEM
18.     FINANCIAL STATEMENTS

See pages 1 through 37.

ITEM
19.     EXHIBITS

|Number | Description                                                                                                                                                                                                                                                                                                          
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |                                                                                                                                                                                                                                                                                                                      
|1.1    | Articles of Association of the Company (incorporated
  by reference to exhibit 3.2 to the Companys Registration Statement on Form
  F-1 (registration number 333-05718).                                                                                                                                            
|       |                                                                                                                                                                                                                                                                                                                      
|1.2    | Amendment to the Articles of Association of the
  Company, dated May 5, 2000.                                                                                                                                                                                                                                        
|       |                                                                                                                                                                                                                                                                                                                      
|1.3    | Memorandum of Association of the Company)
  (incorporated by reference to exhibit 3.2 to the Companys Registration
  Statement on Form F-1 (registration number 333-05718).                                                                                                                                         
|       |                                                                                                                                                                                                                                                                                                                      
|2.1    | Form of Public Warrant Agreement between the
  Company, the Warrant Agent and the Underwriter (incorporated by reference to
  exhibit 4.2 to the Companys Registration Statement on Form F-1 (registration
  number 333-05718)).                                                                                    
|       |                                                                                                                                                                                                                                                                                                                      
|2.2    | Form of Public Warrant Certificate (incorporated by
  reference to exhibit 4.3 to the Companys Registration Statement on Form F-1
  (registration number 333-05718)).                                                                                                                                               
|       |                                                                                                                                                                                                                                                                                                                      
|2.3    | Form of Underwriters Warrant Agreement
  (incorporated by reference to exhibit 4.4 to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                                                                                                                          
|       |                                                                                                                                                                                                                                                                                                                      
|3.1    | Top Image Systems, Ltd. Employee Stock Option Plan
  (1996) (incorporated by reference to exhibit 10.1 to the Companys
  Registration Statement on Form S-8 (registration number 333-11560)).                                                                                                                       
|       |                                                                                                                                                                                                                                                                                                                      
|3.2    | Form of Stock Option Agreement covering grants to
  individuals dated August 20, 1996 (incorporated by reference to exhibit
  10.2 to the Companys Registration Statement on Form S-8 (registration number
  333-11560)).                                                                                           
|       |                                                                                                                                                                                                                                                                                                                      
|3.3    | Top Image Systems Ltd. Employee Share Option Plan
  (2000).                                                                                                                                                                                                                                                          
|       |                                                                                                                                                                                                                                                                                                                      
|3.4    | Contract between the Company and JCC Payments
  Systems, Ltd. for the Supply, Installation and Development of Bespoke
  Software of the JCC Image System, dated June 24, 1996 (incorporated by
  reference to exhibit 10.1(a) to the Companys Registration Statement on Form
  F-1 (registration number 333-05718)).
|       |                                                                                                                                                                                                                                                                                                                      
|3.5    | Contract for the Support & Maintenance of
  Software of the JCC Image System, between the Company and JCC Payments
  Systems, Ltd., dated June 24, 1996 (incorporated by reference to exhibit
  10.1(b) to the Companys Registration Statement on Form F-1 (registration
  number 333-05718)).                      

56

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|3.6  | Contract between the Company and Unicre, Cartao
  Internacional de Credito, SA., for the Supply, Installation and Development
  of Software System, dated June 20, 1994 (incorporated by reference to
  exhibit 10.1(c) to the Companys Registration Statement on Form F-1
  (registration number 333-05718)).      
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                      
|3.7  | Software Maintenance Agreement between the Company
  and Unicre, Cartao Internacional de Credito, SA., dated July 20, 1994
  (incorporated by reference to exhibit 10.1(d) to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                                   
|     |                                                                                                                                                                                                                                                                                                                      
|3.8  | English translation of Agreement between the Company
  and Isracard Ltd. for the Supply, Installation and Development of Software
  System, dated November 4, 1993 (incorporated by reference to exhibit 10.1(e)
  to the Companys Registration Statement on Form F-1 (registration number
  333-05718)).           
|     |                                                                                                                                                                                                                                                                                                                      
|3.9  | Agreement between the Company and Isracard Ltd. for
  the Supply, Installation and Development of Software System, dated November
  4, 1993 (incorporated by reference to exhibit 10.1(f) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                    
|     |                                                                                                                                                                                                                                                                                                                      
|3.10 | English translation of Agreement between the Company
  and Israel Credit Card, Ltd. for the Supply, Installation and Development of
  Software System, dated December 4, 1991 (incorporated by reference to exhibit
  10.1(g) to the Companys Registration Statement on Form F-1 (registration
  number 333-05718)).
|     |                                                                                                                                                                                                                                                                                                                      
|3.11 | Agreement between the Company and Israel Credit
  Card, Ltd. for the Supply, Installation and Development of Software System,
  dated December 4, 1991 (incorporated by reference to exhibit 10.1(h) to the
  Companys Registration Statement on Form F-1 (registration number
  333-05718)).                       
|     |                                                                                                                                                                                                                                                                                                                      
|3.12 | Exclusive Software Distribution Agreement between
  the Company and Hasso Corporation, dated June 28, 1996 (incorporated by
  reference to exhibit 10.1(i) to the Companys Registration Statement on Form
  F-1 (registration number 333-05718)).                                                                   
|     |                                                                                                                                                                                                                                                                                                                      
|3.13 | Second Amendment, dated March 27, 2001, to the
  Exclusive Software Distribution Agreement between the Company and Hasso
  Corporation, dated June 28, 1996.                                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                      
|3.14 | Memorandum Agreement between the Company and Hasso
  Corporation, dated March 13, 1996 (incorporated by reference to exhibit
  10.1(j) to the Companys Registration Statement on Form F-1 (registration
  number 333-05718)).                                                                                       
|     |                                                                                                                                                                                                                                                                                                                      
|3.15 | Exclusive Software Distribution Agreement between
  the Company and Daewoo Information Systems Co., Ltd. dated January 29, 1994
  (incorporated by reference to exhibit 10.1(k) to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                              
|     |                                                                                                                                                                                                                                                                                                                      
|3.16 | English translation of Entrepreneur Agreement among
  the Company, Micro Daf Industries 80, Ltd. and Israeli Credit Card, Ltd.
  dated October 31, 1995 (incorporated by reference to exhibit 10.2(a) to the
  Companys Registration Statement on Form F-1 (registration number
  333-05718)).                      
|     |                                                                                                                                                                                                                                                                                                                      
|3.17 | Entrepreneur Agreement among the Company, Micro Daf
  Industries 80, Ltd. and Israeli Credit Card, Ltd. dated October 31, 1995
  (incorporated by reference to exhibit 10.2(b) to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                               
|     |                                                                                                                                                                                                                                                                                                                      
|3.18 | Employee Agreement between the Company and Ofer
  Comay (incorporated by reference to exhibit 10.4(a) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                                                        
|     |                                                                                                                                                                                                                                                                                                                      
|3.19 | Employee Agreement between the Company and Yossi
  Karchi (incorporated by reference to exhibit 10.4(b) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                                                      

57

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---

|3.20 | Employee Agreement between the Company and Ziv Koren
  (incorporated by reference to exhibit 10.4(c) to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                                                                                            
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                         
|3.21 | Employee Agreement between the Company and Stuart
  Melnick (incorporated by reference to exhibit 10.4(d) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                                       
|     |                                                                                                                                                                                                                                                                                                         
|3.22 | Employee Agreement between the Company and Izhak
  Nakar (incorporated by reference to exhibit 10.4(e) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                                          
|     |                                                                                                                                                                                                                                                                                                         
|3.23 | Employee Agreement between the Company and Ido
  Schechter (incorporated by reference to exhibit 10.4(f) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                                        
|     |                                                                                                                                                                                                                                                                                                         
|3.24 | Employee Agreement between the Company and Yehezkel
  Yeshurun (incorporated by reference to exhibit 10.4(g) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                                    
|     |                                                                                                                                                                                                                                                                                                         
|3.25 | English translation of an Employment Agreement
  between the Company and Arie Rand (incorporated by reference to exhibit 3.25
  to the Companys annual report on Form 20-F (registration number 001-14552)).                                                                                           
|     |                                                                                                                                                                                                                                                                                                         
|3.26 | English translation of a Personal Employment
  Agreement between the Company and Tal Marom (incorporated by reference to
  exhibit 3.26 to the Companys annual report on Form 20-F (registration number
  001-14552)).                                                                                 
|     |                                                                                                                                                                                                                                                                                                         
|3.27 | English translation of an Amendment to Employment
  Agreement between the Company and Tal Marom (re: updating of compensation and
  position for 2001) (incorporated by reference to exhibit 3.27 to the
  Companys annual report on Form 20-F (registration number 001-14552)).                       
|     |                                                                                                                                                                                                                                                                                                         
|3.28 | English translation of a Personal Employment
  Agreement between the Company and Norman Kreger (incorporated by reference to
  exhibit 3.28 to the Companys annual report on Form 20-F (registration number
  001-14552)).                                                                             
|     |                                                                                                                                                                                                                                                                                                         
|3.29 | English translation of a Salary Adjustment letter
  for Norman Kreger (incorporated by reference to exhibit 3.29 to the Companys
  annual report on Form 20-F (registration number 001-14552)).                                                                                                        
|     |                                                                                                                                                                                                                                                                                                         
|3.30 | English translation of a Personal Employment
  Agreement between the Company and Amos Eliav (incorporated by reference to
  exhibit 3.30 to the Companys annual report on Form 20-F (registration number
  001-14552)).                                                                                
|     |                                                                                                                                                                                                                                                                                                         
|3.31 | English translation of a Salary Adjustment letter
  for Amos Eliav (incorporated by reference to exhibit 3.31 to the Companys
  annual report on Form 20-F (registration number 001-14552)).                                                                                                           
|     |                                                                                                                                                                                                                                                                                                         
|3.32 | Share Purchase Agreement, dated as of February 11,
  2000, by and between Charter-TIS LLC and the Company, as amended by Amendment
  #1 thereto, dated as of April 28, 2000 (incorporated by reference to exhibit
  3.32 to the Companys annual report on Form 20-F (registration number
  001-14552)).
|     |                                                                                                                                                                                                                                                                                                         
|3.33 | Registration Rights Agreement, dated as of May 8,
  2000, among the Company, Charter-TIS LLC and Izhak Nakar (incorporated by
  reference to exhibit 3.33 to the Companys annual report on Form 20-F
  (registration number 001-14552)).                                                               
|     |                                                                                                                                                                                                                                                                                                         
|3.34 | Preemptive Rights Agreement, dated as of May 8,
  2000, between the Company and Izhak Nakar (incorporated by reference to
  exhibit 3.34 to the Companys annual report on Form 20-F (registration number
  001-14552)).                                                                                

58

---

---

|3.35     | English translation of Employment Agreement between
  the Company and Jonathan Heller dated December 24, 2001. (incorporated by
  reference to exhibit 3.35 to the Companys annual report on Form 20-F for the
  fiscal year ended December 31, 2001).                                                                                                                        
|-------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                                                                                                                                                                                                
|3.36     | English translation of Update to Employment
  Agreement between the Company and Jonathan Heller dated February 28, 2002.
  (incorporated by reference to exhibit 3.36 to the Companys annual report on
  Form 20-F for the fiscal year ended December 31, 2001).                                                                                                              
|         |                                                                                                                                                                                                                                                                                                                                                                                
|3.37     | English translation of Employment Agreement between
  the Company and Oded Leiba dated March 19, 2001. (incorporated by reference
  to exhibit 3.37 to the Companys annual report on Form 20-F for the fiscal
  year ended December 31, 2001).                                                                                                                                
|         |                                                                                                                                                                                                                                                                                                                                                                                
|3.38     | English translation of Employment Agreement between
  the Company and Dan Inbar dated December 31, 2001. (incorporated by reference
  to exhibit 3.38 to the Companys annual report on Form 20-F for the fiscal
  year ended December 31, 2001).                                                                                                                              
|         |                                                                                                                                                                                                                                                                                                                                                                                
|3.39     | Value-Added Reseller Agreement for ODT Document
  Technologies Products between the Company and Océ Document Technologies
  dated August 2, 2001. (incorporated by reference to exhibit 3.39 to the
  Companys annual report on Form 20-F for the fiscal year ended December 31,
  2001).                                                                                    
|         |                                                                                                                                                                                                                                                                                                                                                                                
|3.40     | OEM License Agreement between the Company and
  CharacTell Ltd. dated July 16, 2001. (incorporated by reference to exhibit
  3.40 to the Companys annual report on Form 20-F for the fiscal year ended
  December 31, 2001).                                                                                                                                                  
|         |                                                                                                                                                                                                                                                                                                                                                                                
|3.41     | Second Amendment to the Exclusive Software
  Distribution Agreement Dated June 28, 1996, as amended, between the Company
  and Hasso Corporation (as a predecessor entity to Toyo Ink Manufacturing Co.,
  Ltd.) dated March 27, 2001. (incorporated by reference to exhibit 3.41 to the
  Companys annual report on Form 20-F for the fiscal year ended December 31,
  2001).
|         |                                                                                                                                                                                                                                                                                                                                                                                
|3.42     | Agreement between the Company and Elsag spa
  regarding software and services for the population census of Italy dated
  March 18, 2002. (incorporated by reference to exhibit 3.42 to the Companys
  annual report on Form 20-F for the fiscal year ended December 31, 2001).                                                                                                
|         |                                                                                                                                                                                                                                                                                                                                                                                
|3.43     | Statement of Work to Subcontractor Agreement between
  the Company and NCR (Cyprus) Ltd. regarding software and services for the
  population census of Italy dated June 22, 2001. (incorporated by reference to
  exhibit 3.43 to the Companys annual report on Form 20-F for the fiscal year
  ended December 31, 2001).                                                    
|         |                                                                                                                                                                                                                                                                                                                                                                                
|3.44     | Agreement between the Company and CMC Ltd. regarding
  software and services for the population census of India dated December 12,
  2001. (incorporated by reference to exhibit 3.44 to the Companys annual
  report on Form 20-F for the fiscal year ended December 31, 2001).                                                                                              
|         |                                                                                                                                                                                                                                                                                                                                                                                
|3.45     | Separation Agreement between the Company and Mr.
  Peter Nowak dated May 15, 2002. (incorporated by reference to exhibit 3.45 to
  the Companys annual report on Form 20-F for the fiscal year ended December
  31, 2001).                                                                                                                                                    
|         |                                                                                                                                                                                                                                                                                                                                                                                
|8        | List of Subsidiaries. (filed herewith).                                                                                                                                                                                                                                                                                                                                        
|         |                                                                                                                                                                                                                                                                                                                                                                                
|10.1     | Consent of Somekh Chaikin  member firm of KPMG
  International. (filed herewith).                                                                                                                                                                                                                                                                                             
|         |                                                                                                                                                                                                                                                                                                                                                                                
|10.2     | Consent of Arthur M. DeBenedictis. (filed herewith).                                                                                                                                                                                                                                                                                                                           
|         |                                                                                                                                                                                                                                                                                                                                                                                
|10.3     | Consent of Kost, Forer and Gabbay. (filed herewith).                                                                                                                                                                                                                                                                                                                           
|         |                                                                                                                                                                                                                                                                                                                                                                                
|10.4(i)  | Certification of the Chief Executive Officer pursuant
  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002. (filed herewith).                                                                                                                                                                                                   
|         |                                                                                                                                                                                                                                                                                                                                                                                
|10.4(ii) | Certification of the Chief Financial Officer
  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002. (filed herewith).                                                                                                                                                                                                   

59

---

---

|SIGNATURES                                                                                                                                                                                        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The registrant hereby certifies that it meets all of
the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf.

|                       | TOP IMAGE SYSTEMS LTD.
|---------------------- | ----------------------
|                       |                       
|                       | By:                   
|                       |                       
|                       |                       
|                       |                       
|                       |                       
|Date:  June
  26, 2003 |                       

---

---

CERTIFICATION
of the Chief Executive Officer

|    | I, Ido Schechter, Chief Executive Officer of Top
  Image Systems Ltd., certify that:                                                                                                                                                                                                                                                                                                            
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|1.  | I have reviewed this annual report on Form 20-F of
  Top Image Systems Ltd. (the Registrant);                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|2.  | Based on my knowledge, this annual report does not
  contain any untrue statement of a material fact or omit to state a material fact
  necessary to make the statements made, in light of the circumstances under
  which such statements were made, not misleading with respect to the period
  covered by this annual report;                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|3.  | Based on my knowledge, the financial statements and
  other financial information included in this annual report fairly present in
  all material respects the financial condition, results of operations and cash
  flows of the registrant as of, and for, the period presented in this annual
  report;                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|4.  | The registrants other certifying officers and I are
  responsible for establishing and maintaining disclosure controls and
  procedures for the registrant and have:                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|    | a)                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|    | b)                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|    | c)                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|5.  | The registrants other certifying officers and I
  have disclosed, based on our most recent evaluation, to the registrants
  auditors and audit committee of the board of directors (or persons performing
  the equivalent function):                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|    | a)                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|    | b)                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|(6) | The registrants other certifying officers and I
  have indicated in this annual report whether or not there were significant
  changes in internal controls or in other factors that could significantly
  affect internal controls subsequent to the date of our most recent
  evaluation, including any corrective actions with regard to significant
  deficiencies and material weaknesses.
|    |                                                                                                                                                                                                                                                                                                                                                                                                 

Date: June 26, 2003

| | /s/ Ido Schechter      
| | -----------------------
| |                        
| | Ido Schechter          
| | Chief Executive Officer



---

---

CERTIFICATION
of the Chief Financial Officer

|    | I, Arie Rand, Chief Financial Officer of Top Image
  Systems Ltd., certify that:                                                                                                                                                                                                                                                                                                                
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|1.  | I have reviewed this annual report on Form 20-F of
  Top Image Systems Ltd. (the Registrant);                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|2.  | Based on my knowledge, this annual report does not
  contain any untrue statement of a material fact or omit to state a material
  fact necessary to make the statements made, in light of the circumstances
  under which such statements were made, not misleading with respect to the
  period covered by this annual report;                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|3.  | Based on my knowledge, the financial statements and
  other financial information included in this annual report fairly present in
  all material respects the financial condition, results of operations and cash
  flows of the registrant as of, and for, the period presented in this annual report;                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|4.  | The registrants other certifying officers and I are
  responsible for establishing and maintaining disclosure controls and
  procedures for the registrant and have:                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|    | a)                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|    | b)                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|    | c)                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|5.  | The registrants other certifying officers and I
  have disclosed, based on our most recent evaluation, to the registrants
  auditors and audit committee of the board of directors (or persons performing
  the equivalent function):                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|    | a)                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|    | b)                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|(6) | The registrants other certifying officers and I
  have indicated in this annual report whether or not there were significant
  changes in internal controls or in other factors that could significantly
  affect internal controls subsequent to the date of our most recent
  evaluation, including any corrective actions with regard to significant
  deficiencies and material weaknesses.

Date: June 26, 2003

| | /s/ Arie Rand          
| | -----------------------
| |                        
| | Arie Rand              
| | Chief Financial Officer



---

---

EXHIBIT INDEX

|Exhibit
  No. |  | Document Description                                                                                                                                                                                                                                                                                                  |  | Page No.
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|              |  |                                                                                                                                                                                                                                                                                                                       |  |         
|1.1           |  | Articles of Association of the Company (incorporated
  by reference to exhibit 3.2 to the Companys Registration Statement on Form
  F-1 (registration number 333-05718).                                                                                                                                             |  |         
|              |  |                                                                                                                                                                                                                                                                                                                       |  |         
|1.2           |  | Amendment to the Articles of Association of the Company,
  dated May 5, 2000 (incorporated by reference to exhibit 1.2 to the Companys
  annual report on Form 20-F (registration number 001-14552)).                                                                                                                |  |         
|              |  |                                                                                                                                                                                                                                                                                                                       |  |         
|1.3           |  | Memorandum of Association of the Company)
  (incorporated by reference to exhibit 3.2 to the Companys Registration
  Statement on Form F-1 (registration number 333-05718).                                                                                                                                          |  |         
|              |  |                                                                                                                                                                                                                                                                                                                       |  |         
|2.1           |  | Form of Public Warrant Agreement between the
  Company, the Warrant Agent and the Underwriter (incorporated by reference to
  exhibit 4.2 to the Companys Registration Statement on Form F-1 (registration
  number 333-05718)).                                                                                     |  |         
|              |  |                                                                                                                                                                                                                                                                                                                       |  |         
|2.2           |  | Form of Public Warrant Certificate (incorporated by
  reference to exhibit 4.3 to the Companys Registration Statement on Form F-1
  (registration number 333-05718)).                                                                                                                                                |  |         
|              |  |                                                                                                                                                                                                                                                                                                                       |  |         
|2.3           |  | Form of Underwriters Warrant Agreement
  (incorporated by reference to exhibit 4.4 to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                                                                                                                           |  |         
|              |  |                                                                                                                                                                                                                                                                                                                       |  |         
|3.1           |  | Top Image Systems, Ltd. Employee Stock Option Plan
  (1996) (incorporated by reference to exhibit 10.1 to the Companys
  Registration Statement on Form S-8 (registration number 333-11560)).                                                                                                                        |  |         
|              |  |                                                                                                                                                                                                                                                                                                                       |  |         
|3.2           |  | Form of Stock Option Agreement covering grants to
  individuals dated August 20, 1996 (incorporated by reference to exhibit
  10.2 to the Companys Registration Statement on Form S-8 (registration number
  333-11560)).                                                                                            |  |         
|              |  |                                                                                                                                                                                                                                                                                                                       |  |         
|3.3           |  | Top Image Systems Ltd. Employee Share Option Plan
  (2000) (incorporated by reference to exhibit 3.3 to the Companys annual
  report on Form 20-F (registration number 001-14552)).                                                                                                                                  |  |         
|              |  |                                                                                                                                                                                                                                                                                                                       |  |         
|3.4           |  | Contract between the Company and JCC Payments
  Systems, Ltd. for the Supply, Installation and Development of Bespoke
  Software of the JCC Image System, dated June 24, 1996 (incorporated by
  reference to exhibit 10.1(a) to the Companys Registration Statement on Form
  F-1 (registration number 333-05718)). |  |         
|              |  |                                                                                                                                                                                                                                                                                                                       |  |         
|3.5           |  | Contract for the Support & Maintenance of
  Software of the JCC Image System, between the Company and JCC Payments
  Systems, Ltd., dated June 24, 1996 (incorporated by reference to exhibit
  10.1(b) to the Companys Registration Statement on Form F-1 (registration
  number 333-05718)).                       |  |         
|              |  |                                                                                                                                                                                                                                                                                                                       |  |         

1

---

---

|3.6  |  | Contract between the Company and Unicre, Cartao
  Internacional de Credito, SA., for the Supply, Installation and Development
  of Software System, dated June 20, 1994 (incorporated by reference to
  exhibit 10.1(c) to the Companys Registration Statement on Form F-1
  (registration number 333-05718)).       |  | 
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|     |  |                                                                                                                                                                                                                                                                                                                       |  | 
|3.7  |  | Software Maintenance Agreement between the Company
  and Unicre, Cartao Internacional de Credito, SA., dated July 20, 1994
  (incorporated by reference to exhibit 10.1(d) to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                                    |  | 
|     |  |                                                                                                                                                                                                                                                                                                                       |  | 
|3.8  |  | English translation of Agreement between the Company
  and Isracard Ltd. for the Supply, Installation and Development of Software
  System, dated November 4, 1993 (incorporated by reference to exhibit 10.1(e)
  to the Companys Registration Statement on Form F-1 (registration number
  333-05718)).            |  | 
|     |  |                                                                                                                                                                                                                                                                                                                       |  | 
|3.9  |  | Agreement between the Company and Isracard Ltd. for
  the Supply, Installation and Development of Software System, dated November
  4, 1993 (incorporated by reference to exhibit 10.1(f) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                     |  | 
|     |  |                                                                                                                                                                                                                                                                                                                       |  | 
|3.10 |  | English translation of Agreement between the Company
  and Israel Credit Card, Ltd. for the Supply, Installation and Development of
  Software System, dated December 4, 1991 (incorporated by reference to exhibit
  10.1(g) to the Companys Registration Statement on Form F-1 (registration
  number 333-05718)). |  | 
|     |  |                                                                                                                                                                                                                                                                                                                       |  | 
|3.11 |  | Agreement between the Company and Israel Credit
  Card, Ltd. for the Supply, Installation and Development of Software System,
  dated December 4, 1991 (incorporated by reference to exhibit 10.1(h) to the
  Companys Registration Statement on Form F-1 (registration number
  333-05718)).                        |  | 
|     |  |                                                                                                                                                                                                                                                                                                                       |  | 
|3.12 |  | Exclusive Software Distribution Agreement between
  the Company and Hasso Corporation, dated June 28, 1996 (incorporated by
  reference to exhibit 10.1(i) to the Companys Registration Statement on Form
  F-1 (registration number 333-05718)).                                                                    |  | 
|     |  |                                                                                                                                                                                                                                                                                                                       |  | 
|3.13 |  | Second Amendment, dated March 27, 2001, to the
  Exclusive Software Distribution Agreement between the Company and Hasso
  Corporation, dated June 28, 1996 (incorporated by reference to exhibit 3.13
  to the Companys annual report on Form 20-F (registration number 001-14552)).                                |  | 
|     |  |                                                                                                                                                                                                                                                                                                                       |  | 
|3.14 |  | Memorandum Agreement between the Company and Hasso
  Corporation, dated March 13, 1996 (incorporated by reference to exhibit 10.1(j)
  to the Companys Registration Statement on Form F-1 (registration number
  333-05718)).                                                                                        |  | 
|     |  |                                                                                                                                                                                                                                                                                                                       |  | 
|3.15 |  | Exclusive Software Distribution Agreement between
  the Company and Daewoo Information Systems Co., Ltd. dated January 29, 1994
  (incorporated by reference to exhibit 10.1(k) to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                               |  | 

2

---

---

|3.16 |  | English translation of Entrepreneur Agreement among
  the Company, Micro Daf Industries 80, Ltd. and Israeli Credit Card, Ltd.
  dated October 31, 1995 (incorporated by reference to exhibit 10.2(a) to the
  Companys Registration Statement on Form F-1 (registration number
  333-05718)). |  | 
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|     |  |                                                                                                                                                                                                                                                                                                 |  | 
|3.17 |  | Entrepreneur Agreement among the Company, Micro Daf
  Industries 80, Ltd. and Israeli Credit Card, Ltd. dated October 31, 1995
  (incorporated by reference to exhibit 10.2(b) to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                          |  | 
|     |  |                                                                                                                                                                                                                                                                                                 |  | 
|3.18 |  | Employee Agreement between the Company and Ofer
  Comay (incorporated by reference to exhibit 10.4(a) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                                   |  | 
|     |  |                                                                                                                                                                                                                                                                                                 |  | 
|3.19 |  | Employee Agreement between the Company and Yossi
  Karchi (incorporated by reference to exhibit 10.4(b) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                                 |  | 
|     |  |                                                                                                                                                                                                                                                                                                 |  | 
|3.20 |  | Employee Agreement between the Company and Ziv Koren
  (incorporated by reference to exhibit 10.4(c) to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                                                                                    |  | 
|     |  |                                                                                                                                                                                                                                                                                                 |  | 
|3.21 |  | Employee Agreement between the Company and Stuart
  Melnick (incorporated by reference to exhibit 10.4(d) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                               |  | 
|     |  |                                                                                                                                                                                                                                                                                                 |  | 
|3.22 |  | Employee Agreement between the Company and Izhak
  Nakar (incorporated by reference to exhibit 10.4(e) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                                  |  | 
|     |  |                                                                                                                                                                                                                                                                                                 |  | 
|3.23 |  | Employee Agreement between the Company and Ido
  Schechter (incorporated by reference to exhibit 10.4(f) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                                |  | 
|     |  |                                                                                                                                                                                                                                                                                                 |  | 
|3.24 |  | Employee Agreement between the Company and Yehezkel
  Yeshurun (incorporated by reference to exhibit 10.4(g) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                            |  | 
|     |  |                                                                                                                                                                                                                                                                                                 |  | 
|3.25 |  | English translation of an Employment Agreement
  between the Company and Arie Rand (incorporated by reference to exhibit 3.25
  to the Companys annual report on Form 20-F (registration number 001-14552)).                                                                                   |  | 
|     |  |                                                                                                                                                                                                                                                                                                 |  | 
|3.26 |  | English translation of a Personal Employment
  Agreement between the Company and Tal Marom (incorporated by reference to
  exhibit 3.26 to the Companys annual report on Form 20-F (registration number
  001-14552)).                                                                         |  | 
|     |  |                                                                                                                                                                                                                                                                                                 |  | 
|3.27 |  | English translation of an Amendment to Employment
  Agreement between the Company and Tal Marom (re: updating of compensation and
  position for 2001) (incorporated by reference to exhibit 3.27 to the
  Companys annual report on Form 20-F (registration number 001-14552)).               |  | 
|     |  |                                                                                                                                                                                                                                                                                                 |  | 
|3.28 |  | English translation of a Personal Employment
  Agreement between the Company and Norman Kreger (incorporated by reference to
  exhibit 3.28 to the Companys annual report on Form 20-F (registration number
  001-14552)).                                                                     |  | 

3

---

---

|3.29 |  | English translation of a Salary Adjustment letter
  for Norman Kreger (incorporated by reference to exhibit 3.29 to the Companys
  annual report on Form 20-F (registration number 001-14552)).                                                                                                         |  | 
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|     |  |                                                                                                                                                                                                                                                                                                          |  | 
|3.30 |  | English translation of a Personal Employment
  Agreement between the Company and Amos Eliav (incorporated by reference to
  exhibit 3.30 to the Companys annual report on Form 20-F (registration number
  001-14552)).                                                                                 |  | 
|     |  |                                                                                                                                                                                                                                                                                                          |  | 
|3.31 |  | English translation of a Salary Adjustment letter
  for Amos Eliav (incorporated by reference to exhibit 3.31 to the Companys
  annual report on Form 20-F (registration number 001-14552)).                                                                                                            |  | 
|     |  |                                                                                                                                                                                                                                                                                                          |  | 
|3.32 |  | Share Purchase Agreement, dated as of February 11,
  2000, by and between Charter-TIS LLC and the Company, as amended by Amendment
  #1 thereto, dated as of April 28, 2000 (incorporated by reference to exhibit
  3.32 to the Companys annual report on Form 20-F (registration number
  001-14552)). |  | 
|     |  |                                                                                                                                                                                                                                                                                                          |  | 
|3.33 |  | Registration Rights Agreement, dated as of May 8,
  2000, among the Company, Charter-TIS LLC and Izhak Nakar (incorporated by
  reference to exhibit 3.33 to the Companys annual report on Form 20-F
  (registration number 001-14552)).                                                                |  | 
|     |  |                                                                                                                                                                                                                                                                                                          |  | 
|3.34 |  | Preemptive Rights Agreement, dated as of May 8,
  2000, between the Company and Izhak Nakar (incorporated by reference to
  exhibit 3.34 to the Companys annual report on Form 20-F (registration number
  001-14552)).                                                                                 |  | 
|     |  |                                                                                                                                                                                                                                                                                                          |  | 
|3.35 |  | English translation of Employment Agreement between
  the Company and Jonathan Heller dated December 24, 2001. (incorporated by
  reference to exhibit 3.35 to the Companys annual report on Form 20-F for the
  fiscal year ended December 31, 2001).                                                  |  | 
|     |  |                                                                                                                                                                                                                                                                                                          |  | 
|3.36 |  | English translation of Update to Employment
  Agreement between the Company and Jonathan Heller dated February 28, 2002.
  (incorporated by reference to exhibit 3.36 to the Companys annual report on
  Form 20-F for the fiscal year ended December 31, 2001).                                        |  | 
|     |  |                                                                                                                                                                                                                                                                                                          |  | 
|3.37 |  | English translation of Employment Agreement between
  the Company and Oded Leiba dated March 19, 2001. (incorporated by reference
  to exhibit 3.37 to the Companys annual report on Form 20-F for the fiscal
  year ended December 31, 2001).                                                          |  | 
|     |  |                                                                                                                                                                                                                                                                                                          |  | 
|3.38 |  | English translation of Employment Agreement between
  the Company and Dan Inbar dated December 31, 2001. (incorporated by reference
  to exhibit 3.38 to the Companys annual report on Form 20-F for the fiscal
  year ended December 31, 2001).                                                        |  | 
|     |  |                                                                                                                                                                                                                                                                                                          |  | 
|3.39 |  | Value-Added Reseller Agreement for ODT Document
  Technologies Products between the Company and Océ Document Technologies
  dated August 2, 2001. (incorporated by reference to exhibit 3.39 to the
  Companys annual report on Form 20-F for the fiscal year ended December 31,
  2001).              |  | 

4

---

---

|3.40      |  | OEM License Agreement between the Company and
  CharacTell Ltd. dated July 16, 2001. (incorporated by reference to exhibit
  3.40 to the Companys annual report on Form 20-F for the fiscal year ended
  December 31, 2001).                                                                                                                                                   |  | 
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|          |  |                                                                                                                                                                                                                                                                                                                                                                                 |  | 
|3.41      |  | Second Amendment to the Exclusive Software
  Distribution Agreement Dated June 28, 1996, as amended, between the Company
  and Hasso Corporation (as a predecessor entity to Toyo Ink Manufacturing Co.,
  Ltd.) dated March 27, 2001. (incorporated by reference to exhibit 3.41 to the
  Companys annual report on Form 20-F for the fiscal year ended December 31,
  2001). |  | 
|          |  |                                                                                                                                                                                                                                                                                                                                                                                 |  | 
|3.42      |  | Agreement between the Company and Elsag spa
  regarding software and services for the population census of Italy dated
  March 18, 2002. (incorporated by reference to exhibit 3.42 to the Companys
  annual report on Form 20-F for the fiscal year ended December 31, 2001).                                                                                                 |  | 
|          |  |                                                                                                                                                                                                                                                                                                                                                                                 |  | 
|3.43      |  | Statement of Work to Subcontractor Agreement between
  the Company and NCR (Cyprus) Ltd. regarding software and services for the
  population census of Italy dated June 22, 2001. (incorporated by reference to
  exhibit 3.43 to the Companys annual report on Form 20-F for the fiscal year
  ended December 31, 2001).                                                     |  | 
|          |  |                                                                                                                                                                                                                                                                                                                                                                                 |  | 
|3.44      |  | Agreement between the Company and CMC Ltd. regarding
  software and services for the population census of India dated December 12,
  2001. (incorporated by reference to exhibit 3.44 to the Companys annual
  report on Form 20-F for the fiscal year ended December 31, 2001).                                                                                               |  | 
|          |  |                                                                                                                                                                                                                                                                                                                                                                                 |  | 
|3.45      |  | Separation Agreement between the Company and Mr.
  Peter Nowak dated May 15, 2002. (incorporated by reference to exhibit 3.45 to
  the Companys annual report on Form 20-F for the fiscal year ended December
  31, 2001).                                                                                                                                                     |  | 
|          |  |                                                                                                                                                                                                                                                                                                                                                                                 |  | 
|8*        |  | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                           |  | 
|          |  |                                                                                                                                                                                                                                                                                                                                                                                 |  | 
|10.1*     |  | Consent of Somekh Chaikin  member firm of KPMG
  International.                                                                                                                                                                                                                                                                                                                |  | 
|          |  |                                                                                                                                                                                                                                                                                                                                                                                 |  | 
|10.2*     |  | Consent of Arthur M. DeBenedictis.                                                                                                                                                                                                                                                                                                                                              |  | 
|          |  |                                                                                                                                                                                                                                                                                                                                                                                 |  | 
|10.3*     |  | Consent of Kost, Forer and Gabbay.                                                                                                                                                                                                                                                                                                                                              |  | 
|          |  |                                                                                                                                                                                                                                                                                                                                                                                 |  | 
|10.4(i)*  |  | Certification of the Chief Financial Officer
  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                      |  | 
|          |  |                                                                                                                                                                                                                                                                                                                                                                                 |  | 
|10.4(ii)* |  | Certification of the Chief Financial Officer
  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                      |  | 

---

*              Filed herewith

5

---

---

EXHIBIT 8

List of
Subsidiaries

|TiS America, Inc. | Delaware, USA
|----------------- | -------------
|                  |              
|TiS B.V.          | Netherlands  
|                  |              
|e-Mobilis, Ltd.   | Israel       



---

---

EXHIBIT 10.1

Consent of Somekh
Chaikin  member firm of KPMG International

[Somekh Chaikin
Letterhead]

June 26, 2003

The Board of DirectorsTop Image Systems Ltd.Tel Aviv
Israel

We hereby consent to the
incorporation by reference in the Registration Statement of Top Image Systems
Ltd. on Form S-8 (File No. 333-101990), Form S-8 (File No. 333-11560), and Form
F-3 (File No. 333-05718) of our report dated March 11, 2003, relating to the
consolidated balance sheets of Top Image Systems Ltd. and its consolidated
subsidiaries as of December 31, 2001 and 2002 and the related consolidated
statements of operations, stockholders equity and cash flows for each of the
years in the three-year period ended December 31, 2002, which report appears in
the annual report on Form 20-F of Top Image Systems Ltd. for the fiscal year
ended December 31, 2002.

|/s/ Somekh Chaikin                   
|-------------------------------------
|                                     
|Somekh Chaikin                       
|Certified Public Accountants (Isr.)  
|(A member firm of KPMG International)



---

---

EXHIBIT 10.2

Consent of Arthur M. DeBenedictis

[Arthur M. DeBenedictis Letterhead]

# CONSENT OF INDEPENDENT
PUBLIC ACCOUNTANT

June 26, 2003

The Board of Directors
Top Image Systems Ltd.Tel AvivIsrael

I hereby consent to the incorporation
by reference in the Registration Statement of Top Image Systems Ltd. on Form S-8 (File No.
333-101990), Form S-8 (File No. 333-11560) and Form F-3 (File No. 333-05718) of my report
dated January25, 2001, relating to the balance sheets of TIS America, Inc. as of
December 31, 2000 and the related statements of operations, shareholders equity and
cash flows for each of the years in the two-year period ended December 31, 2000, which
report appears in the Annual Report on Form 20-F of Top Image Systems Ltd. for the fiscal
year ended December 31, 2002.

/s/ Arthur M. DeBenedictis
Arthur M. DeBenedictisCertified Public Accountant




---

---

EXHIBIT 10.3

Consent of Kost, Forer
and Gabbay

[Kost, Forer and Gabbay
Letterhead]

# CONSENT OF INDEPENDENT
AUDITORS

June 29, 2003

The Board of Directors
Top Image Systems Ltd.Tel AvivIsrael

We consent to the incorporation by reference
in the Registration Statements of Top Image Systems Ltd. on Form S-8 (File No.
333-101990), Form S-8 (File No. 333-11560) and Form F-3 (File No. 333-05718) of our report
dated February 12, 2002, relating to the balance sheet of E-Mobilis Ltd. as of December
31, 2001 and the related statements of operations, changes in shareholders
deficiency and cash flows for the year ended December 31, 2001, which report appears in
the annual report on Form 20-F of Top Image Systems Ltd. for the fiscal year ended
December 31, 2002.

|/s/ Kost, Forer and Gabbay
Kost, Forer and GabbayA Member of Ernst & Young Global
|-----------------------------------------------------------------------------------------------



---

---

EXHIBIT 10.4(i)

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In
connection with the Annual Report of Top Image Systems Ltd. (the Company) on
Form 20-F for the period ending December 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the Report), I, Ido Schechter,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350,
as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully
complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and

(2) The information
contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.

A
signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.

Date: June 30, 2003

| | /s/ Ido Schechter             
| | ------------------------------
| |                               
| | Name: Ido Schechter           
| | Title: Chief Executive Officer



---

---

EXHIBIT 10.4(ii)

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In
connection with the Annual Report of Top Image Systems Ltd. (the Company) on
Form 20-F for the period ending December 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the Report), I, Arie Rand, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully
complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and

(2) The information
contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.

A
signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.

Date: June 30, 2003

| | /s/ Arie Rand                 
| | ------------------------------
| |                               
| | Name: Arie Rand               
| | Title: Chief Financial Officer



---

---

Top Image Systems Ltd.

Financial StatementsAs at December 31, 2002

---

---

|Top Image Systems Ltd.
  and its Consolidated Subsidiaries
|----------------------------------------------------------
|                                                          
|Consolidated Financial Statements as at December 31, 2002 
|                                                          

Contents

|                                                                                                    | Page
|--------------------------------------------------------------------------------------------------- | ----
|                                                                                                    |     
|                                                                                                    |     
|Report of
  the Independent Accountants                                                             | 2   
|                                                                                                    |     
|Financial Statements:                                                                               |     
|                                                                                                    |     
|Consolidated
  Balance Sheets as of December 31, 2002 and 2001                                      | 3   
|                                                                                                    |     
|Consolidated
  Statements of Operations for the years ended December 31, 2002, 2001 and 2000        | 4   
|                                                                                                    |     
|Statement of
  Changes in Shareholders Equity for the years ended December 31, 2002, 2001 and 2000 | 5   
|                                                                                                    |     
|Consolidated
  Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000        | 6   
|                                                                                                    |     
|Notes to the
  Consolidated Financial Statements                                                    | 7   

---

---

Report of Independent Auditors to the Board of Directors
and Shareholders of Top Image Systems Ltd. and its Consolidated Subsidiaries

We
have audited the accompanying Consolidated Balance Sheets of Top Image Systems
Ltd. and subsidiaries (the Company) as of December 31, 2002 and 2001, and the
related consolidated Statements of Operations, Changes in Shareholders Equity,
and Statements of Cash Flows, for each of the years in the three-year period
ended December 31, 2002.  These
consolidated financial statements are the responsibility of the Companys Board
of Directors and of its Management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.  We did
not audit the financial statements of certain subsidiaries, which statements
reflect total assets constituting 1%, and total revenues constituting 0% and
6.4% in 2001 and 2000, respectively of the related consolidated totals.  Those were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for the financial statements of these subsidiaries, is based
solely on the report of the other auditors.

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

In
our opinion, based on our audits and on the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 2002 and 2001 and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2002,
in conformity with accounting principles generally accepted  (GAAP) in Israel.

Accounting
principles generally accepted in Israel vary in certain significant respects
from accounting principles generally accepted in the United States of
America.  Application of accounting
principles generally accepted in the United States of America would have
affected the consolidated balance sheets as of December 31, 2002 and 2001 and
the results of operations for each of the years in the three-year period ended
December 31, 2002 and shareholders equity as of December 31, 2002 and 2001, to
the extent summarized in Note 18 to the consolidated financial statements.

/s/ Somekh Chaikin


---

Somekh Chaikin
Certified Public Accountants (Isr.)
A member firm of KPMG International


March
11, 2003

2

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries
|----------------------------------------------------------
|                                                          
|Consolidated Balance Sheets                               
|                                                          

|                                |  |      |       |   | December 31 |            | December 31 | 
|------------------------------- |  | ---- | ----- | - | ----------- | ---------- | ----------- | 
|                                |  |      |       |   |             |            |             | 
|                                |  |      |       |   | 2002        |            | 2001        | 
|                                |  |      |       |   |             |            |             | 
|                                |  | Note |       | $ |             | $          |            
|                                |  |      |       |   |             |            |            
|Assets                          |  |      |       |   |             |            |             | 
|                                |  |      |       |   |             |            |             | 
|Currentassets:                  |  |      |       |   |             |            |             | 
|                                |  |      |       |   |             |            |             | 
|Cash and
  cash equivalents     |  |      | 2D    |   |             | 7,400,889  |             | 
|Marketable
  securities         |  |      | 2E;3  |   |             | 528,327    |             | 
|Trade
  receivables, net        |  |      | 2F;4  |   |             | 3,148,781  |             | 
|Other
  current assets          |  |      | 5     |   |             | 299,164    |             | 
|                                |  |      |       |   |             |            |             | 
|                                |  |      |       |   |             |            |             | 
|Total current assets            |  |      |       |   |             | 11,377,161 |             | 
|                                |  |      |       |   |             |            |             | 
|Property and equipment          |  |      |       |   |             |            |             | 
|                                |  |      |       |   |             |            |             | 
|Cost                            |  |      | 2G; 6 |   |             | 1,694,686  |             | 
|Less
  accumulated depreciation |  |      |       |   |             | (1,160,368 | )           | 
|                                |  |      |       |   |             |            |             | 
|                                |  |      |       |   |             |            |             | 
|                                |  |      |       |   |             | 534,318    |             | 
|                                |  |      |       |   |             |            |             | 
|                                |  |      |       |   |             |            |             | 
|Other assets                    |  |      |       |   |             | 89,587     |             | 
|                                |  |      |       |   |             |            |             | 
|                                |  |      |       |   |             |            |             | 
|                                |  |      |       |   |             |            |             | 
|                                |  |      |       |   |             |            |             | 
|                                |  |      |       |   |             |            |             | 
|                                |  |      |       |   |             |            |             | 
|                                |  |      |       |   |             |            |             | 
|Total assets                    |  |      |       |   |             | 12,001,066 |             | 
|                                |  |      |       |   |             |            |             | 

March 11, 2003

|/s/ Tom Lavey                        |  | /s/ Ido Schechter       | 
|------------------------------------ |  | ----------------------- | 
|                                     |  |                         | 
|Tom Lavey                            |  | Ido Schechter           | 
|Chairman of
  the Board of Directors |  | Chief Executive Officer | 

3

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries
|----------------------------------------------------------
|                                                          
|Consolidated Balance Sheets                               
|                                                          

|                                                         |  |      |    | December 31 |  | December 31 |  
|-------------------------------------------------------- |  | ---- | -- | ----------- |  | ----------- | -
|                                                         |  |      |    |             |  |             |  
|                                                         |  |      |    | 2002        |  | 2001        |  
|                                                         |  |      |    |             |  |             |  
|                                                         |  | Note |    | $           |  | $           |  
|                                                         |  |      |    |             |  |             |  
|                                                         |  |      |    |             |  |             |  
|Liabilities and shareholders equity                     |  |      |    |             |  |             |  
|                                                         |  |      |    |             |  |             |  
|Current liabilities:                                     |  |      |    |             |  |             |  
|Short-term
  bank loans                                  |  |      | 7  |             |  | 848,310     |  
|Trade payables                                           |  |      |    |             |  | 352,597     |  
|Other
  payables and accruals                            |  |      | 8  |             |  | 2,436,745   |  
|                                                         |  |      |    |             |  |             |  
|                                                         |  |      |    |             |  |             |  
|Total
  current liabilities                              |  |      |    |             |  | 3,637,652   |  
|                                                         |  |      |    |             |  |             |  
|                                                         |  |      |    |             |  |             |  
|Long-term liabilities:                                   |  |      |    |             |  |             |  
|Liability
  for severance pay, net                       |  |      | 9  |             |  | 161,149     |  
|                                                         |  |      |    |             |  |             |  
|                                                         |  |      |    |             |  |             |  
|Total
  long-term liabilities                            |  |      |    |             |  | 161,149     |  
|                                                         |  |      |    |             |  |             |  
|                                                         |  |      |    |             |  |             |  
|Total
  Liabilities                                      |  |      |    |             |  | 3,798,801   |  
|                                                         |  |      |    |             |  |             |  
|                                                         |  |      |    |             |  |             |  
|Commitments, contingencies and liens                     |  |      | 10 |             |  |             |  
|                                                         |  |      |    |             |  |             |  
|Shareholders equity:                                    |  |      | 11 |             |  |             |  
|Share
  capital - Ordinary shares of NIS 0.04 par value. |  |      |    |             |  |             |  
|Authorized: December 31, 2002 and 2001
  125,000,000:    |  |      |    |             |  |             |  
|shares. 
  Issued and outstanding 6,098,890 shares at    |  |      |    |             |  |             |  
|December 31,
  2002 and 2001                             |  |      |    |             |  | 73,079      |  
|Surplus
  capital                                        |  |      |    |             |  | 22,338,969  |  
|Accumulated
  deficit                                    |  |      |    |             |  | (14,209,783 | )
|                                                         |  |      |    |             |  |             |  
|                                                         |  |      |    |             |  |             |  
|Total
  shareholders equity                             |  |      |    |             |  | 8,202,265   |  
|                                                         |  |      |    |             |  |             |  
|                                                         |  |      |    |             |  |             |  
|                                                         |  |      |    |             |  |             |  
|                                                         |  |      |    |             |  |             |  
|                                                         |  |      |    |             |  |             |  
|Total liabilities and shareholders equity               |  |      |    |             |  | 12,001,066  |  
|                                                         |  |      |    |             |  |             |  

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

3-A

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries
|----------------------------------------------------------
|                                                          
|Consolidated Statements of Operations                     
|                                                          

|                                                |  |      |             |   | Year ended December 31 |           
|----------------------------------------------- |  | ---- | ----------- | - | ---------------------- | ----------
|                                                |  |      |             |   |                        |           
|                                                |  |      |             |   | 2002                   |           
|                                                |  |      |             |   |                        |           
|                                                |  | Note |             | $ |                        | $         
|                                                |  |      |             |   |                        |           
|                                                |  |      |             |   |                        |           
|Revenues                                        |  |      | 2H;16(A)(B) |   |                        |           
|Product
  revenues                              |  |      |             |   |                        | 6,423,348 
|Service revenues                                |  |      |             |   |                        | 1,375,745 
|                                                |  |      |             |   |                        |           
|Total
  revenues                                |  |      |             |   |                        | 7,799,093 
|                                                |  |      |             |   |                        |           
|Cost of revenues                                |  |      |             |   |                        |           
|Product
  costs                                 |  |      |             |   |                        | 2,268,915 
|Service
  costs                                 |  |      |             |   |                        | 736,548   
|                                                |  |      |             |   |                        |           
|Total cost
  of revenues                        |  |      |             |   |                        | 3,005,463 
|                                                |  |      |             |   |                        |           
|Gross profit                                    |  |      |             |   |                        | 4,793,630 
|                                                |  |      |             |   |                        |           
|Research and development                        |  |      | 2I          |   |                        |           
|Research and
  development costs                |  |      |             |   |                        | 1,340,408 
|Less -
  royalty bearing participation          |  |      |             |   |                        | -         
|                                                |  |      |             |   |                        |           
|Research and development, net                   |  |      |             |   |                        | 1,340,408 
|                                                |  |      |             |   |                        |           
|Selling and
  marketing expenses                |  |      |             |   |                        | 5,386,460 
|General and
  administrative expenses           |  |      |             |   |                        | 1,764,157 
|Restructuring
  costs and other special charges |  |      | 12          |   |                        | 313,955   
|                                                |  |      |             |   |                        |           
|                                                |  |      |             |   |                        | 7,464,572 
|                                                |  |      |             |   |                        |           
|Operating
  loss                                |  |      |             |   |                        | (4,011,350
|Financing
  income, net                         |  |      | 13          |   |                        | 187,318   
|Other income
  (expenses), net                  |  |      | 14          |   |                        | (3,756    
|                                                |  |      |             |   |                        |           
|Loss before
  taxes on income                   |  |      |             |   |                        | (3,827,788
|Taxes on
  income                               |  |      | 2J;15       |   |                        | -         
|                                                |  |      |             |   |                        |           
|Loss after taxes
  on income                    |  |      |             |   |                        | (3,827,788
|Minoritys
  share in loss of a subsidiary      |  |      |             |   |                        | -         
|                                                |  |      |             |   |                        |           
|Net loss for
  the year                         |  |      |             |   |                        | (3,827,788
|                                                |  |      |             |   |                        |           
|Net loss per
  share                            |  |      | 2L;18       |   |                        | (0.628    
|                                                |  |      |             |   |                        |           
|                                                |  |      |             |   |                        |           
|Weighted
  average number of                    |  |      |             |   |                        |           
|shares outstanding used in basic and            |  |      |             |   |                        |           
|diluted loss
  per share calculation            |  |      | 18          |   |                        | 6,098,890 
|                                                |  |      |             |   |                        |           

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

4

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries
|----------------------------------------------------------
|                                                          
|Statement of Changes in Shareholders Equity              
|                                                          

|                                                                              |  | Share capital      |  |        |        |                   |   |                       |   |       |             |  
|----------------------------------------------------------------------------- |  | ------------------ |  | ------ | ------ | ----------------- | - | --------------------- | - | ----- | ----------- | -
|                                                                              |  |                    |  |        |        |                   |   |                       |   |       |             |  
|                                                                              |  | Number of
  shares |  | Amount |        | Surplus
  capital |   | Accumulated
  deficit |   | Total |            
|                                                                              |  |                    |  |        |        |                   |   |                       |   |       |            
|                                                                              |  |                    |  |        | $      |                   | $ |                       | $ |       | $           |  
|                                                                              |  |                    |  |        |        |                   |   |                       |   |       |             |  
|Balance as
  of January 1, 2000                                               |  | 4,026,625          |  |        | 53,154 |                   |   | 8,028,212             |   |       | (1,226,943  | )
|                                                                              |  |                    |  |        |        |                   |   |                       |   |       |             |  
|Changes during 2000:                                                          |  |                    |  |        |        |                   |   |                       |   |       |             |  
|Issue of
  shares *                                                           |  | 2,000,000          |  |        | 19,422 |                   |   | 13,974,514            |   |       | -           |  
|Amortization of deferred compensation expense                                 |  | -                  |  |        | -      |                   |   | 45,130                |   |       | -           |  
|Issue of shares upon exercise of stock options                                |  | 72,265             |  |        | 503    |                   |   | 149,516               |   |       | -           |  
|Net loss for
  the year                                                       |  | -                  |  |        | -      |                   |   | -                     |   |       | (6,363,623  | )
|                                                                              |  |                    |  |        |        |                   |   |                       |   |       |            
|Balance as of December 31, 2000                                               |  | 6,098,890          |  |        | 73,079 |                   |   | 22,197,372            |   |       | (7,590,566  | )
|                                                                              |  |                    |  |        |        |                   |   |                       |   |       |             |  
|Changes during 2001:                                                          |  |                    |  |        |        |                   |   |                       |   |       |             |  
|Amortization
  of deferred compensation expense                               |  | -                  |  |        | -      |                   |   | 42,141                |   |       | -           |  
|Acquisition
  of minority interest in a consolidated subsidiary (see Note 1C) |  | -                  |  |        | -      |                   |   | 90,000                |   |       | -           |  
|Net loss for the year                                                         |  | -                  |  |        | -      |                   |   | -                     |   |       | (2,791,429  | )
|                                                                              |  |                    |  |        |        |                   |   |                       |   |       |            
|Balance as of December 31, 2001                                               |  | 6,098,890          |  |        | 73,079 |                   |   | 22,329,513            |   |       | (10,381,995 | )
|                                                                              |  |                    |  |        |        |                   |   |                       |   |       |             |  
|Changes during 2002:                                                          |  |                    |  |        |        |                   |   |                       |   |       |             |  
|Amortization of deferred compensation expense                                 |  | -                  |  |        | -      |                   |   | 9,456                 |   |       | -           |  
|Net loss for the year                                                         |  | -                  |  |        | -      |                   |   | -                     |   |       | (3,827,788  | )
|                                                                              |  |                    |  |        |        |                   |   |                       |   |       |            
|Balance as of December 31, 2002                                               |  | 6,098,890          |  |        | 73,079 |                   |   | 22,338,969            |   |       | (14,209,783 | )
|                                                                              |  |                    |  |        |        |                   |   |                       |   |       |            

*   Net
of share issue expenses in the amount of $ 1,006,064.

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

5

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries
|----------------------------------------------------------
|                                                          
|Consolidated Statements of Cash Flows                     
|                                                          

|                                                                            |  | 2002       |   | 2001 |            | 2000 | 
|--------------------------------------------------------------------------- |  | ---------- | - | ---- | ---------- | ---- | 
|                                                                            |  |            |   |      |            |      | 
|                                                                            |  | $          |   | $    |            | $    | 
|                                                                            |  |            |   |      |            |      | 
|Cash flows from operating activities:                                       |  |            |   |      |            |      | 
|Net loss for
  the year                                                     |  | (3,827,788 | ) |      | (2,791,429 | )    | 
|                                                                            |  |            |   |      |            |      | 
|Adjustments to reconcile net loss to net cash used in operating activities: |  |            |   |      |            |      | 
|Amortization
  of deferred compensation expense                             |  | 9,456      |   |      | 42,141     |      | 
|In process
  research and development costs                                 |  | -          |   |      | 90,000     |      | 
|Minority
  interest                                                         |  | -          |   |      | -          |      | 
|Depreciation
  and amortization                                             |  | 304,390    |   |      | 307,995    |      | 
|Liability
  for severance pay, net                                          |  | (88,732    | ) |      | (111,451   | )    | 
|Loss (gain)
  from sale of property and equipment, net                      |  | 3,756      |   |      | (3,601     | )    | 
|Erosion of
  NIS linked securities                                          |  | 19,633     |   |      | 45,473     |      | 
|Gain on sale
  of marketable securities, net                                |  | (13,231    | ) |      | (8,109     | )    | 
|                                                                            |  |            |   |      |            |      | 
|Changes in operating assets and liabilities:                                |  |            |   |      |            |      | 
|Decrease
  (increase) in trade receivables                                  |  | 1,310,122  |   |      | (836,762   | )    | 
|Decrease (increase) in other receivables and prepaid expenses               |  | 103,741    |   |      | 115,608    |      | 
|Increase
  (decrease) in trade payables                                     |  | 18,331     |   |      | (517,263   | )    | 
|Increase in
  other payables and accruals                                   |  | 177,037    |   |      | 543,604    |      | 
|                                                                            |  |            |   |      |            |      | 
|Net cash used in operating activities                                       |  | (1,983,285 | ) |      | (3,123,794 | )    | 
|                                                                            |  |            |   |      |            |      | 
|Cash flows from investing activities:                                       |  |            |   |      |            |      | 
|Purchase of
  property and equipment                                        |  | (101,818   | ) |      | (222,174   | )    | 
|Proceeds
  from sale of property and equipment                              |  | 13,925     |   |      | 12,438     |      | 
|Proceeds from
  sale of marketable securities                               |  | 255,000    |   |      | 738,999    |      | 
|Purchase of
  marketable securities                                         |  | (500,000   | ) |      | (210,130   | )    | 
|Other assets                                                                |  | 133,865    |   |      | (107,148   | )    | 
|                                                                            |  |            |   |      |            |      | 
|Net cash provided by (used in) investing activities                         |  | (199,028   | ) |      | 211,985    |      | 
|                                                                            |  |            |   |      |            |      | 
|Cash flows from financing activities:                                       |  |            |   |      |            |      | 
|Proceeds
  from issue of shares, net                                        |  | -          |   |      | -          |      | 
|Increase in
  short-term bank borrowings                                    |  | 164,037    |   |      | 233,226    |      | 
|Repayment of
  long-term loans                                              |  | -          |   |      | (9,350     | )    | 
|                                                                            |  |            |   |      |            |      | 
|Net cash provided by financing activities                                   |  | 164,037    |   |      | 223,876    |      | 
|                                                                            |  |            |   |      |            |      | 
|Increase (decrease) in cash and cash equivalents                            |  | (2,018,276 | ) |      | (2,687,933 | )    | 
|Cash and cash equivalents at beginning of the year                          |  | 9,419,165  |   |      | 12,107,098 |      | 
|                                                                            |  |            |   |      |            |      | 
|Cash and cash equivalents at end of the year                                |  | 7,400,889  |   |      | 9,419,165  |      | 
|                                                                            |  |            |   |      |            |      | 

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

6

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

|Note 1 - General                          
|------------------------------------------
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|Note 2 -
  Significant Accounting Policies
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          

7

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

|Note 2 -
  Significant Accounting Policies (contd)
|---------------------------------------------------
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   

8

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

|Note 2 -
  Significant Accounting Policies (contd)
|---------------------------------------------------
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   

| |                                  |  | Years    | 
| | -------------------------------- |  | -------- | 
| |                                  |  |          | 
| | Computers                        |  | 3  5    | 
| | Furniture
  and office equipment |  | 5  16.5 | 
| | Motor
  vehicle                  |  | 6.5      | 
| | Leasehold
  improvements         |  | *        | 

| | *   Over
  the shorter of the relevant lease period or their useful life (mainly 10 years).
| | -------------------------------------------------------------------------------------------
| |                                                                                            
| | H.                                                                                         
| |                                                                                            
| | 1.                                                                                         

9

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

|Note 2 -
  Significant Accounting Policies (contd)
|---------------------------------------------------
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   

10

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 2 -
Significant Accounting Policies (contd)

| | J.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Income taxes     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                  
| | Income taxes
  are accounted for using the liability method.  Deferred 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 and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities are
  measured using enacted tax rates expected to apply to taxable income in the
  years in which those temporary differences are expected to be recovered or
  settled.  The effect on deferred tax
  assets and liabilities of a change in tax rates is recognized in income in
  the period that includes the enactment date. 
  Valuation allowances are provided when it is more likely than not that
  deferred tax assets will not be realized.                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Stock Option Plan
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                  
| | The Company
  applies the intrinsic value-based method of accounting prescribed by
  Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
  Issued to Employees, and related interpretations including interpretation
  No. 44, Accounting for Certain Transactions Involving Stock Compensation
  (FIN 44), in accounting for its stock option plans for employees and
  directors.  Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
  for Stock-Based Compensation, established accounting and disclosure
  requirements using a fair value-based method of accounting for stock-based
  employee stock compensation plans and as a measurement basis for transactions
  involving the acquisition of goods or services from non-employees.  As allowed by SFAS No. 123, the Company
  has elected to continue to apply the intrinsic value-based method of
  accounting for employee stock options and has adopted the disclosure
  requirements of SFAS No. 123.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Had
  compensation expense for stock options granted been determined based on the
  fair value at the grant dates, consistent with the method of SFAS No. 123, the
  effect on net loss and net loss per share would have been as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| |                                        |  |  | Year ended
  December 31
  2002 |   | Year ended
  December 31
  2001 |            | Year ended
  December 31
  2000
| | -------------------------------------- |  |  | ------------------------------- | - | ------------------------------- | ---------- | -------------------------------
| |                                        |  |  |                                 |   |                                 |            |                                
| |                                        |  |  | $                               |   | $                               |            | $                              
| |                                        |  |  |                                 |   |                                 |            |                                
| | Net loss:                              |  |  |                                 |   |                                 |            |                                
| | U.S. GAAP as
  reported in Note 18B(2) |  |  | (3,825,545                      | ) |                                 | (2,791,914 | )                              
| |                                        |  |  | (187,076                        | ) |                                 | (218,417   | )                              
| |                                        |  |  |                                 |   |                                 |            |                                
| |                                        |  |  |                                 |   |                                 |            |                                
| | Pro forma                              |  |  | (4,012,621                      | ) |                                 | (3,010,331 | )                              
| |                                        |  |  |                                 |   |                                 |            |                                
| |                                        |  |  |                                 |   |                                 |            |                                
| | Loss per
  share:                      |  |  |                                 |   |                                 |            |                                
| | U.S. GAAP as
  reported in Note 18B(3) |  |  | (0.627                          | ) |                                 | (0.458     | )                              
| |                                        |  |  |                                 |   |                                 |            |                                
| |                                        |  |  |                                 |   |                                 |            |                                
| | Pro forma                              |  |  | (0.658                          | ) |                                 | (0.493     | )                              
| |                                        |  |  |                                 |   |                                 |            |                                

| | See also Note 19 regarding SFAS No. 148  an amendment of SFAS No. 123.
| | -----------------------------------------------------------------------

11

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 2 - Significant Accounting Policies (contd)

| | L.                                                                                                                                                                                                                                                                                                                                      | Net loss per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Net loss per
  share in accordance with Opinion No. 55 of the Institute of Certified Public Accountants in Israel (ICPAI)  is computed using the
  weighted average number of shares outstanding during each period including
  share options as share equivalents if the probability of exercising the share
  option is reasonable.
| |                                                                                                                                                                                                                                                                                                                                        
| | M.                                                                                                                                                                                                                                                                                                                                      | Fair value of financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Unless
  otherwise noted, the carrying amount of financial instruments approximates
  fair value.                                                                                                                                                                                                                                      
| | Financial
  instruments consist of either cash and cash equivalents, marketable
  securities, trade receivables, short-term bank loans and credits or other instruments bearing
  interest at close to market rate.                                                                                                                    
| | In view of
  their nature, the fair value of financial instruments is usually identical to
  their carrying value.                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                        
| | N.                                                                                                                                                                                                                                                                                                                                      | Disclosure of the effect of new accounting standards in the pre-application
  period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 1.                                                                                                                                                                                                                                                                                                                                      | Accounting Standard No. 12 on
  Discontinuance of Adjustment of Financial Statements. Pursuant to this standard, commencing
  January 1, 2004, the adjustment of financial statements will be discontinued.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                         | Until December 31, 2003, the Company will continue to prepare
  adjusted financial statements in accordance with Opinion No. 36 of the
  ICPAI. The adjusted amounts
  included in the financial statements as at December 31, 2003, will constitute
  the starting point for the nominal financial report as of January 1,
  2004.  The extent of the effect of
  this change depends on the rate of inflation and the financing sources of the
  Company.  The Company believes that
  the adoption of this standard will not have a significant impact on the
  its financial position or results of operations.                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 2.                                                                                                                                                                                                                                                                                                                                      | Accounting Standard No. 13 on Effect of
  Changes in Exchange Rate of Foreign Currency. The standard discusses the translation
  of transactions in foreign currency and the translation of financial
  statements of foreign operations for the purpose of including them in the
  financial statements of the reporting entity and replaces the instructions in
  Clarifications 8 and 9 to Opinion No. 36 which will be annulled upon
  Accounting Standard No. 12 coming into effect. This standard will apply to
  financial statements for periods beginning after December 31, 2003. The
  adoption of Accounting Standard No. 13 will have no effect on the
  Companys consolidated financial statements.

12

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 2 - Significant Accounting Policies (contd)

| | N. | Disclosure of the effect of new accounting standards in the pre-application
  period (contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 3. | In August 2002, the Israel
  Accounting Standards Board published Standard No. 14, Interim Financial
  Reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The standard
  prescribes the minimum content of an interim financial report, including the
  disclosure required in the notes, and also prescribes the accounting
  recognition and measurement principles that should be applied in an interim
  financial report.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Standard No.
  14 will become effective for financial statements covering periods beginning
  on or after January 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | The adoption
  of Accounting Standard No. 14 will have no effect on the Companys consolidated
  financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 4. | In February 2003, the Israel
  Accounting Standards Board published Accounting Standard No. 15  Decline in
  Value of Assets.  The
  Standard provides procedures which a company must apply in order to ensure
  that its assets in the consolidated balance sheet, are not presented at an
  amount which is in excess of their recoverable value, which is the higher of
  the net selling price or the present value of the estimated future cash flows
  expected to be derived from use and disposal of the asset.  In addition, the Standard provides rules
  for presentation and disclosure with respect to assets whose value has
  declined.                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The Standard applies to financial statements for periods beginning
  January 1, 2003.  The Standard
  provides that in most cases, the transition will be effected by means of the
  from here on method, however, a loss from decline in value of an asset, in
  the amount of the difference between the book value on the commencement date
  of the Standard and the recoverable amount as at that date, shall be charged
  to the statement of operations in the category cumulative effect as at
  beginning of the year of change in accounting method if and only if, the
  said loss was not recognized in the past solely due to the fact that the net
  non-discounted future cash flows were greater than the book value.  The adoption of Accounting Standard No. 15
  will have no effect on the Companys consolidated financial statements.

Note 3 - Marketable Securities

| |                                                                              |  |  |         |  |      | December 31
| | ---------------------------------------------------------------------------- |  |  | ------- |  | ---- | -----------
| |                                                                              |  |  |        
| |                                                                              |  |  | 2002    |  | 2001
| |                                                                              |  |  |         |  |     
| |                                                                              |  |  | $       |  | $   
| |                                                                              |  |  |         |  |     
| |                                                                              |  |  |         |  |      |            
| | Marketable
  government bonds  linked to the NIS                            |  |  | -       |  |      | 93,468     
| | Mutual fund
  participation certificates  linked mainly to the U.S. dollars |  |  | 275,687 |  |      | 196,261    
| | Corporate bonds in U.S. dollars                                              |  |  | 252,640 |  |      | -          
| |                                                                              |  |  |         |  |      |            
| |                                                                              |  |  |         |  |      |            
| |                                                                              |  |  | 528,327 |  |      | 289,729    
| |                                                                              |  |  |         |  |      |            

13

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 4 - Trade Receivables, Net

| |                                                                             |  |  |           |   |      | December 31
| | --------------------------------------------------------------------------- |  |  | --------- | - | ---- | -----------
| |                                                                             |  |  |          
| |                                                                             |  |  | 2002      |   | 2001
| |                                                                             |  |  |           |   |     
| |                                                                             |  |  | $         |   | $   
| |                                                                             |  |  |           |   |     
| |                                                                             |  |  |           |   |     
| | Trade
  receivables                                                         |  |  | 3,617,306 |   |      | 5,346,066  
| | Allowance
  for doubtful debts                                              |  |  | (468,525  | ) |      | (887,163   
| |                                                                             |  |  |           |   |      |            
| |                                                                             |  |  |           |   |      |            
| |                                                                             |  |  | 3,148,781 |   |      | 4,458,903  
| |                                                                             |  |  |           |   |      |            
| |                                                                             |  |  |           |   |      |            
| | As at December 31, 2001 includes one customer in the amount of $
  600,000. | 

Note 5 -
Other Current Assets

| |                                              |  |  |         |  |      | December 31
| | -------------------------------------------- |  |  | ------- |  | ---- | -----------
| |                                              |  |  |        
| |                                              |  |  | 2002    |  | 2001
| |                                              |  |  |         |  |     
| |                                              |  |  | $       |  | $   
| |                                              |  |  |         |  |     
| |                                              |  |  |         |  |     
| | Employees                                    |  |  | 48,364  |  |      | 27,443     
| | Government
  institution                     |  |  | 170,695 |  |      | 164,884    
| | Grants
  receivable from government agencies |  |  | -       |  |      | 179,985    
| | Prepaid
  expenses                           |  |  | 37,924  |  |      | 28,301     
| | Other                                        |  |  | 42,181  |  |      | 2,292      
| |                                              |  |  |         |  |      |            
| |                                              |  |  |         |  |      |            
| |                                              |  |  | 299,164 |  |      | 402,905    
| |                                              |  |  |         |  |      |            

Note 6 - Property and Equipment

| |                                  |  |  | Cost        |  | Accumulated
  depreciation
| | -------------------------------- |  |  | ----------- |  | --------------------------
| |                                  |  |  |             |  |                           
| |                                  |  |  | December 31 |  | December 31               
| |                                  |  |  |             |  |                           
| |                                  |  |  | 2002        |  | 2001                      
| |                                  |  |  |             |  |                           
| |                                  |  |  | $           |  | $                         
| |                                  |  |  |             |  |                           
| |                                  |  |  |             |  |                           
| | Computers                        |  |  | 1,195,611   |  |                           
| | Furniture
  and office equipment |  |  | 397,947     |  |                           
| | Motor
  vehicles                 |  |  | -           |  |                           
| | Leasehold
  improvements         |  |  | 101,128     |  |                           
| |                                  |  |  |             |  |                           
| |                                  |  |  |             |  |                           
| |                                  |  |  | 1,694,686   |  |                           
| |                                  |  |  |             |  |                           
| | As to liens,
  see Note 10B(1).  |  |  |             |  |                           

14

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 7 - Short-Term Bank Loans

| | A. | Composition:
| | -- | ------------

| |                                         |  |  | December 31
| | --------------------------------------- |  |  | -----------
| |                                         |  |  |            
| |                                         |  |  | 2002       
| |                                         |  |  |            
| |                                         |  |  | $          
| |                                         |  |  |            
| |                                         |  |  |            
| | Short-term
  bank loans in NIS          |  |  | 605,943    
| | Short-term
  bank loans in U.S. dollars |  |  | 242,367    
| |                                         |  |  |            
| |                                         |  |  |            
| |                                         |  |  | 848,310    
| |                                         |  |  |            

| | B. | The Company
  has a revolving line of credit with banks for total borrowing of up to
  $1,500,000 based on 75% of its trade receivables.                                                                                                                                                                               
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                        
| |    | Borrowings
  under the revolving line of credit in NIS bearing interest at a rate of prime
  + 0.25% to 1% (As of December 31, 2002 prime rate is 10.4%).  Borrowings under the revolving line of
  credit in U.S. dollars bearing interest at a rate of Libor + 2% (As of December
  31, 2002 - Libor rate is 1.375%).
| |    | The
  financing arrangements are secured - see Note 10B(2).                                                                                                                                                                                                                                                            

Note 8 -
Other Payables and Accruals

| |                                                  |  |  | December 31
| | ------------------------------------------------ |  |  | -----------
| |                                                  |  |  |            
| |                                                  |  |  | 2002       
| |                                                  |  |  |            
| |                                                  |  |  | $          
| |                                                  |  |  |            
| |                                                  |  |  |            
| | Employees                                        |  |  | 175,663    
| | Government
  agencies                            |  |  | 176,132    
| | Accrued
  expenses                               |  |  | 770,301    
| | Provision
  for vacation pay                     |  |  | 169,543    
| | Deferred
  revenue                               |  |  | 190,260    
| | Other
  payables                                 |  |  | 41,982     
| | Provision
  for non-recurring retirement benefit |  |  | 912,864    
| |                                                  |  |  |            
| |                                                  |  |  |            
| |                                                  |  |  | 2,436,745  
| |                                                  |  |  |            

15

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 9 - Liability for Severance Pay, Net

| | A. | Under
  Israeli law, the Company is required to make severance payments to its
  dismissed employees (including officers) and to employees resigning under
  certain other circumstances.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | The
  liability is calculated based on the monthly salary of each employee as of
  the balance sheet date, multiplied by the number of years of employment.                              
| |    | The
  liability is partially covered by insurance policies purchased, and fundings
  with provident funds and by the unfunded provision.                                                 
| |    |                                                                                                                                                                                          
| |    | The balance
  of the liability is presented net of the amount deposited with a recognized
  severance pay fund as follows:                                                               

| |                               |                                                                                                  |  | December 31
| | ----------------------------- | ------------------------------------------------------------------------------------------------ |  | -----------
| |                               |                                                                                                  |  |            
| |                               |                                                                                                  |  | 2002       
| |                               |                                                                                                  |  |            
| |                               |                                                                                                  |  | $          
| |                               |                                                                                                  |  |            
| |                               |                                                                                                  |  |            
| | Provision
  for severance pay |                                                                                                  |  | 648,522    
| | Less -
  amounts funded *     |                                                                                                  |  | (487,373   
| |                               |                                                                                                  |  |            
| |                               |                                                                                                  |  |            
| |                               |                                                                                                  |  | 161,149    
| |                               |                                                                                                  |  |            
| |                               |                                                                                                  |  |            
| | *                             | The Company
  may only withdraw amounts funded for the purpose of severance pay
  disbursements.
| |                               | As to U.S.
  GAAP differences - see Note 18.                                                    
| |                               |                                                                                                  |  |            

| | B. | Severance
  pay expenses amounted to $ 234,819 for the year ended December 31, 2002 and
  $ 290,953 and $ 291,342 for the years ended December 31, 2001 and 2000,
  respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 10 - Commitments,
Contingencies and Liens

| | A. | Commitments                                                                                                                                                                                                                                                                                                                              
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                          
| | 1. | With respect
  to the participation of the Israeli government in software research and
  development costs, the Company is committed to pay to the government
  royalties at the rate of 2% of revenues from sale of its FormOut! Software, up to a maximum of
  150% of the amount of participation received, linked to the U.S. dollar.
| |    |                                                                                                                                                                                                                                                                                                                                          
| |    | The
  Companys total outstanding obligation in respect of royalty-bearing
  government participation received or accrued, net of royalties paid or
  accrued, amounted to $ 45,496 as of December 31, 2002.                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                          
| |    | Royalties
  payable to the OCS are classified as part of cost of revenues.                                                                                                                                                                                                                                                               

16

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 10 - Commitments,
Contingencies and Liens (contd)

| | A. | Commitments (contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 2. | Concentration
  of credit risk - Financial instruments which potentially subject the Company
  to significant concentrations of credit risk consist principally of cash
  investments and trade accounts receivable. 
  The Company maintains cash and cash equivalents, short and long-term
  investments, and certain other financial instruments with various major
  financial institutions mainly in the U.S.A. 
  Company policy is designed to limit exposure to any one institution.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | With respect
  to trade accounts receivable, credit risk is limited due to the number and
  geographical dispersion of government and corporate entities which constitute
  the Companys customer base.                                                                                                                                                                                                                                                                                    
| |    | See also
  Note 16 for concentration of sale risks.                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 3. | The Company
  has entered into an operating lease with Albar Ltd. and Eldan Ltd. for the
  lease of a fleet of 31 vehicles.  Each
  lease is for a period of three years with monthly payments linked to the
  Israeli Consumer Price Index (CPI). 
  As at December 31, 2002, commitments are as follows:                                                                                                                                                                                  

| |       |  |  | $      
| | ----- |  |  | -------
| |       |  |  |        
| |       |  |  |        
| | 2003  |  |  | 117,689
| | 2004  |  |  | 9,646  
| | 2005  |  |  | 5,513  
| |       |  |  |        
| |       |  |  |        
| | Total |  |  | 132,848
| |       |  |  |        

| | 4. | The Company
  leases offices for its activities. Such leases range from one year to six
  years including extension periods.  As
  at December 31, 2002, commitments for such leases are as follows:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                           |  |  | $        
| | ----------------------------------------------------------------------------------------- |  |  | ---------
| |                                                                                           |  |  |          
| |                                                                                           |  |  |          
| | 2003                                                                                      |  |  | 258,049  
| | 2004                                                                                      |  |  | 208,643  
| | 2005                                                                                      |  |  | 208,643  
| | 2006                                                                                      |  |  | 208,643  
| | 2007                                                                                      |  |  | 182,563  
| |                                                                                           |  |  |          
| |                                                                                           |  |  |          
| | Total                                                                                     |  |  | 1,066,541
| |                                                                                           |  |  |          
| |                                                                                           |  |  |          
| | Part of the lease agreements are secured by a bank guarantee in the
  amount of $ 48,995. |  |  |          

17

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 10 - Commitments, Contingencies and Liens (contd)

| | B. | Liens                                                                                                                                                                                                                                                                                                                                                         
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                               
| | 1. | To secure
  compliance with the conditions related to the Companys Approved Enterprise
  status, the Company registered a floating charge on machinery, equipment and
  other assets.  The liens are unlimited
  in amount and it was agreed that the said assets might not be further pledged
  or transferred without prior consent of the beneficiaries.
| |    |                                                                                                                                                                                                                                                                                                                                                               
| | 2. | To secure
  revolving credit facilities from a bank, the Company registered a floating
  charge on its plant, assets and goodwill in favor of this bank.                                                                                                                                                                                                      

Note 11
- Shareholders Equity

| | A. | Stock Options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 1. | Employee share option plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | Of the
  options granted to these employees, options to purchase 50,000 shares expired
  when they left the Company.  Pursuant
  to the terms of the option grant letters, the options granted to three other
  employees were to become exercisable in four equal parts upon each of the
  first four anniversary dates of the issuance of the options provided that the
  employees continue to be employed by the Company on such dates.  Of the options granted to two of the said
  employees, options to purchase 12,250 shares expired when they left the
  Company.

18

---

---

|Top Image Systems Ltd.
  and its  consolidated subsidiaries             
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 11
- Shareholders Equity (contd)

| | A. | Stock Options (contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 1. | Employee share option plans (contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | In September
  1996, the Board of Directors of the Company adopted, and the shareholders
  approved, the Employee Share Option Plan (1996) (the ESOP 96).  The ESOP 96 authorizes the granting of
  options to purchase up to 250,000 Ordinary Shares, consisting of options
  intended to qualify as incentive stock options within the meaning of Section
  422 of the United States Internal Revenue Code of 1986, as amended, and
  options not intended to satisfy the requirements for incentive stock options.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | As of
  December 31, 2002, options to purchase 233,000 Ordinary Shares
  are outstanding under the plan at an exercise prices between $ 0.52 and $ 5 per share
  and options to purchase 66,242 ordinary shares are currently available for
  future grant.  The outstanding options
  under the plan become exercisable in four equal parts upon each of the first
  four anniversaries of the option grant dates.                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The Employee
  Share Option Plan (2000) (ESOP 2000) is designed to benefit from, and is
  made pursuant to the provisions of Section 102 of the Israeli Income Tax
  Ordinance (New Version) 1961 and the rules promulgated thereunder (Section
  102).                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | A total of
  240,000 shares have been reserved for the purposes of ESOP 2000.  At December 31, 2002, an aggregate of
  201,500 had been granted to employees and 38,500 options are currently
  available for future grant.  All of
  the options vest over a three-year period, and have exercise prices between $ 0.99 and $ 4.125 per share.                                                                                                                                                                          

19

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 11
- Shareholders Equity (contd)

| | A. | Stock Options (contd)                                                                                                                                                                                                                   
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                          
| | 1. | Employee share option plans (contd)                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                          
| |    | (d)                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                          
| |    | Had
  compensation expense for stock options granted been determined based on the
  fair value at the grant date, consistent with the method of SFAS No. 123, the
  effect on net loss and net loss per share would have been as follows:

| |                                        |  |  | Year endedDecember 312002 |   | Year endedDecember 312001 |            | Year endedDecember 312000
| | -------------------------------------- |  |  | ------------------------- | - | ------------------------- | ---------- | -------------------------
| |                                        |  |  |                           |   |                           |            |                          
| |                                        |  |  | $                         |   | $                         |            | $                        
| |                                        |  |  |                           |   |                           |            |                          
| | Net loss:                              |  |  |                           |   |                           |            |                          
| |                                        |  |  |                           |   |                           |            |                          
| | U.S. GAAP as
  reported in Note 18B(2) |  |  | (3,825,545                | ) |                           | (2,791,914 | )                        
| |                                        |  |  |                           |   |                           |            |                          
| |                                        |  |  | (187,076                  | ) |                           | (218,417   | )                        
| |                                        |  |  |                           |   |                           |            |                          
| |                                        |  |  |                           |   |                           |            |                          
| | Pro forma                              |  |  | (4,012,621                | ) |                           | (3,010,331 | )                        
| |                                        |  |  |                           |   |                           |            |                          
| | Loss per
  share:                      |  |  |                           |   |                           |            |                          
| |                                        |  |  |                           |   |                           |            |                          
| | U.S. GAAP as
  reported in Note 18B(3) |  |  | (0.627                    | ) |                           | (0.458     | )                        
| |                                        |  |  |                           |   |                           |            |                          
| |                                        |  |  |                           |   |                           |            |                          
| | Pro forma                              |  |  | (0.658                    | ) |                           | (0.493     | )                        
| |                                        |  |  |                           |   |                           |            |                          

20

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 11
- Shareholders Equity (contd)

| | A. | Stock Options (contd)                                                                                                                                                          
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                 
| | 1. | Employee share option plans (contd)                                                                                                                                            
| |    |                                                                                                                                                                                 
| |    | (d)                                                                                                                                                                             
| |    |                                                                                                                                                                                 
| |    | A summary of
  the status of the Companys 1996 and 2000 plans as of December 31, 2002, 2001
  and 2000 and changes during the years ending on those dates is presented
  below:

| |                                                                                                      |  |  | Number of
  options |   | Weighted
  average
  exercise price |       | Weighted 
  average grant 
  date fair 
  value
| | ---------------------------------------------------------------------------------------------------- |  |  | ------------------- | - | ----------------------------------- | ----- | -----------------------------------------------
| |                                                                                                      |  |  |                     |   |                                     |       |                                                
| |                                                                                                      |  |  |                     |   |                                     | $     |                                                
| |                                                                                                      |  |  |                     |   |                                     |       |                                                
| | Options unexercised as at January 1, 2000                                                            |  |  | 293,000             |   |                                     | 3.01  |                                                
| | Granted during 2000                                                                                  |  |  | 272,000             |   |                                     | 4.125 |                                                
| | Exercised during 2000                                                                                |  |  | (37,458             | ) |                                     | 2.83  |                                                
| | Forfeited during 2000                                                                                |  |  | (130,250            | ) |                                     | 3.17  |                                                
| |                                                                                                      |  |  |                     |   |                                     |       |                                                
| | Options unexercised as at December 31, 2000                                                          |  |  | 397,292             |   |                                     | 3.74  |                                                
| | Granted during 2001                                                                                  |  |  | 160,500             |   |                                     | 1.74  |                                                
| | Exercised during 2001                                                                                |  |  | -                   |   |                                     | -     |                                                
| | Forfeited during 2001                                                                                |  |  | (143,125            | ) |                                     | 3.7   |                                                
| |                                                                                                      |  |  |                     |   |                                     |       |                                                
| | Options unexercised as at December 31, 2001                                                          |  |  | 414,667             |   |                                     | 2.53  |                                                
| | Granted during 2002                                                                                  |  |  | 54,000              |   |                                     | 2.60  |                                                
| | Exercised during 2002                                                                                |  |  | -                   |   |                                     | -     |                                                
| | Forfeited during 2002                                                                                |  |  | (34,167             | ) |                                     | 3.54  |                                                
| |                                                                                                      |  |  |                     |   |                                     |       |                                                
| |                                                                                                      |  |  |                     |   |                                     |       |                                                
| | Options unexercised as at December 31, 2002                                                          |  |  | 434,500             |   |                                     | 2.81  |                                                
| |                                                                                                      |  |  |                     |   |                                     |       |                                                
| | The
  following table summarizes information about stock options outstanding at
  December 31, 2002: | 

| |  |  |                             |  | Options outstanding                 |         | Option exercisable                  
| |  |  | --------------------------- |  | ----------------------------------- | ------- | ------------------------------------
| |  |  |                             |  |                                     |         |                                     
| |  |  | Rates of 
  exercise prices |  | Number outstanding at
  December 31 |         | Weighted 
  remainingcontractuallife
| |  |  |                             |  |                                     |         |                                     
| |  |  | in US Dollars               |  | 2002                                |         | In years                            
| |  |  |                             |  |                                     |         |                                     
| |  |  | 0.52 - 1.7                  |  |                                     | 135,500 |                                     
| |  |  | 2.08 - 2.85                 |  |                                     | 151,500 |                                     
| |  |  | 3.35 - 4.125                |  |                                     | 131,500 |                                     
| |  |  | 5                           |  |                                     | 16,000  |                                     
| |  |  |                             |  |                                     |         |                                     
| |  |  |                             |  |                                     |         |                                     
| |  |  |                             |  |                                     | 434,500 |                                     
| |  |  |                             |  |                                     |         |                                     

21

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 11
- Shareholders Equity (contd)

| | A. | Stock Options (contd)                                                                                                                                     
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                            
| | 1. | Employee share option plans (contd)                                                                                                                       
| |    |                                                                                                                                                            
| |    | (d)                                                                                                                                                        
| |    |                                                                                                                                                            
| |    | The fair value of each
  option grant was estimated on the date of the grant using the Black Scholes
  option pricing model with the following assumptions:

| | Year of
  grant |  |  | Option term
  (years) |  |  | Expectedvolatility |   | Dividendyield |   | Risk-freeinterest rate
| | --------------- |  |  | --------------------- |  |  | ------------------ | - | ------------- | - | ----------------------
| |                 |  |  |                       |  |  |                    |   |               |   |                       
| |                 |  |  |                       |  |  |                    |   |               |   |                       
| | 2002            |  |  | 7                     |  |  | 85                 | % |               | 0 | %                     
| |                 |  |  |                       |  |  |                    |   |               |   |                       
| | 2001            |  |  | 7                     |  |  | 108                | % |               | 0 | %                     
| |                 |  |  |                       |  |  |                    |   |               |   |                       
| | 2000            |  |  | 7                     |  |  | 74                 | % |               | 0 | %                     

| | 2.                                                                                                                                                                                                                                                                                                                                                                                                                            | Share Purchase Agreement
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                               |                         
| | In
  consideration for the purchase of 990,000 of E - Mobilis shares, the Board of Directors
  of the Company granted the sellers on November 8, 2001, options to purchase
  100,000 ordinary shares that vested immediately, at an exercise price of
  $2 per share.  The options will expire three
  years from the date of grant and will be cancelled and returned to the
  Company if not exercised by November 7, 2004.
| |                                                                                                                                                                                                                                                                                                                                                                                                                              
| | The option shares were valued using the Black Scholes valuation
  model.                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 3.                                                                                                                                                                                                                                                                                                                                                                                                                            | Options to directors    
| |                                                                                                                                                                                                                                                                                                                                                                                                                               |                         
| | On November
  25, 2002, the shareholders of the Company approved the grant of an option to
  purchase 20,000 fully vested Ordinary Shares to the Chairman of the Board of
  Directors at a purchase price equal to the market price of the shares on the
  date of the grant.                                                                                                                                                

22

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 11
- Shareholders Equity (contd)

| | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Dividends
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |          
| | Dividends
  may be paid by the Company only out of the Israeli Company earnings and other
  surpluses in Israeli currency as defined in the Companies Law as of the end
  of the most recent fiscal year or as accrued over a period of the last two
  years whichever is higher.  Such
  dividends will be declared and paid in NIS. 
  There are no restrictions on the transfer of funds to non-resident
  shareholders for the payment of dividends.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Distribution
  of cash dividends out of retained earnings would subject TiS to a 25% tax in
  respect of the income from which it was distributed, according to the terms
  of tax exemption due to its Approved Enterprise status, as explained in
  Note 15A.                                                                                                                                                                                       
| | In the event of dividend distribution as above, the
  said tax amount would be charged as an expense in the statement of income.                                                                                                                                                                                                                                                                                                                        

Note 12 - Restructuring Costs and Other Special Charges

| | 1. | During
  December 2000, the Company adopted a strategy of transfer of its critical
  mass to business activities abroad. 
  According to this strategy, the major part of the Companys revenues
  for the years to come, is expected to be derived from its business activities
  in Europe and the U.S.  As part of
  this strategy, Management approved a restructuring plan
  according to which the headquarters in Israel were reduced in size, while
  business activities abroad were enlarged. 
  According to the plan, the Company implemented the lay-off and
  relocation of certain employees, out of which three were management
  positions.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | The above
  action was decided on and executed at the end of December 2000.  The implication of the above-mentioned
  restructuring plan consisted mainly of employee salaries and vehicle expenses
  during the advance notice period as well as employee relocation expenses.  Management estimated these expenses to
  amount to approximately $ 540,000. 
  During 2001, this provision was utilized in full.                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 2. | As at
  December 31, 2001, in accordance with an agreement with an officer of the
  Company, upon termination of employment, the officer was entitled to receive
  certain benefits which amount to approximately $ 706,000 which was paid over
  an 18-month period.                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 3. | During
  October 2002, the Companys management adopted and began the execution of a
  restructuring plan.  According to such
  plan, the Companys personnel was reduced in size.  Furthermore, certain positions were cancelled, while certain
  other positions were altered. 
  According to the plan, the Company implemented lay-offs mainly in the
  Companys headquarters located in Israel that included, among others, four
  employees in management positions.                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | Costs
  related to the restructuring plan consist mainly of employee salaries and
  vehicle expenses during the advance notice period.  Management estimates these expenses will amount to
  approximately $ 314,000.                                                                                                                                                                                                                                                                                                                                                                                                                                       

23

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 13 - Financing Income, Net

| |                                              |  |  | Year
  ended December 31
| | -------------------------------------------- |  |  | ------------------------
| |                                              |  |  |                         
| |                                              |  |  | 2002                    
| |                                              |  |  |                         
| |                                              |  |  | $                       
| |                                              |  |  |                         
| |                                              |  |  |                         
| | Interest
  income                            |  |  | 143,543                 
| | Exchange
  rate gain (loss) and bank charges |  |  | 38,504                  
| | Income from
  marketable securities          |  |  | 5,271                   
| |                                              |  |  |                         
| |                                              |  |  |                         
| |                                              |  |  | 187,318                 
| |                                              |  |  |                         

Note 14 - Other Income (Expenses),
Net

| |                                                        |  |  | Year ended December 31
| | ------------------------------------------------------ |  |  | ----------------------
| |                                                        |  |  |                       
| |                                                        |  |  | 2002                  
| |                                                        |  |  |                       
| |                                                        |  |  | $                     
| |                                                        |  |  |                       
| |                                                        |  |  |                       
| | Gain (loss)
  from sale of property and equipment, net |  |  | (3,756                
| | Other                                                  |  |  | -                     
| |                                                        |  |  |                       
| |                                                        |  |  |                       
| |                                                        |  |  | (3,756                
| |                                                        |  |  |                       

Note 15 - Taxes on Income

| | A.                                                                                                                                                                                                                                                                                                                                                             | Israel tax reform                                                                                                                                                                                                                                               
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                 
| | During the
  year 2002, tax reform legislation was enacted with effect from January 1,
  2003, which significantly changed the taxation basis of corporate and
  individual taxpayers from a territorial basis to a worldwide basis.  From such date, an Israeli resident
  taxpayer will be taxed on income produced and derived both in and out of
  Israel.
| | The main
  provisions of the tax reform that may affect the Company are as follows:                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                               
| | 1.                                                                                                                                                                                                                                                                                                                                                             | Transfer
  pricing of international transactions with related parties.                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                | The Income
  Tax Ordinance was amended to include provisions concerning transfer pricing
  between related parties, where one of the parties is situated abroad.  Detailed provisions are to be included in
  Income Tax Regulations that have yet to be issued.
| |                                                                                                                                                                                                                                                                                                                                                                | Although the
  Company considers that the transfer pricing policy adopted with foreign
  affiliates is economically fair, an adjustment may be required following the
  issue of these Regulations.                                                             

24

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries        
|------------------------------------------------------------------
|                                                                  
|Notes to Consolidated Financial Statements as at December 31, 2002
|                                                                  

Note 15 -
Taxes on Income (contd)

| | A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Israel tax reform (contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Employee
  stock incentive plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | The tax reform
  codified past practice and determined three alternative tracks for taxing
  employee stock option plans.  Where a
  trustee arrangement is in place, the employer can either claim an expense for
  tax purposes while the employee will be fully taxed up to the maximum
  marginal tax rate of 50% or the Company can waive the tax expense and the
  employee will pay a reduced tax rate of 25%. 
  Where there is no trustee arrangement, the employee is fully taxable
  and no expense is allowed to the Company. 
  There are detailed provisions for implementing these tracks.  The Company is considering the
  alternatives.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Controlled
  foreign company (CFC)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | The
  amendment to the law introduced Controlled Foreign Company (CFC) provisions,
  which, in certain circumstances, will lead to the Israeli company being
  charged to tax on passive income of foreign affiliates as if it had received
  a dividend from such companies.                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Capital
  gains tax is reduced to 25% from 36%, except with respect to capital gains
  from marketable securities, with transitional provisions for assets acquired
  prior to January 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | The seven
  year limit for carrying forward of capital losses has been removed with
  respect to capital losses arising from 1996 and thereafter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | The Law for the Encouragement of Capital Investments 1959
  (hereinafter the Law)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The Company
  is eligible to receive certain tax benefits in Israel, particularly as a
  result of the Approved Enterprise status of a majority of the Companys
  facilities and programs, and has benefited in the past from certain Israeli
  government research and development grants. 
  To continue to be eligible for tax benefits, the Company must meet
  certain conditions, relating principally to compliance with the investment
  program filed with the Israeli Investment Center of the Israeli Ministry of
  Industry and Trade and to periodic reporting obligations.  The Company believes that it will be able
  to meet such conditions.  Should the
  Company fail to meet such conditions in the future, however, it would be
  subject to corporate tax in Israel at the standard rate of 36% and could be
  required to refund tax benefits already received.  See also Note 16.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | According to
  the provisions of this Law, the Company is entitled to tax benefits in respect
  of income earned from an investment program which received Approved
  Enterprise status.  Under the Law,
  income derived from this program is fully exempt from tax for the first two
  years and is taxed at an annual rate of 25% for the following five years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

25

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries        
|------------------------------------------------------------------
|                                                                  
|Notes to Consolidated Financial Statements as at December 31, 2002
|                                                                  

Note 15 -
Taxes on Income (contd)

| | B.                                                                                                                                                                                                                                                                                                                                                                            | The Law for the Encouragement of Capital Investments 1959
  (hereinafter the Law) (contd)                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                          
| | In the event
  that the Company distributes a cash dividend to shareholders from tax-exempt
  income attributable to the Approved Enterprise, it will incur a tax
  liability of 25% of the earnings so distributed.  However, in the event that this income is transferred to a
  legal reserve or is declared as a stock dividend then there would be no tax
  liability.
| |                                                                                                                                                                                                                                                                                                                                                                              
| | Approved
  enterprises generate taxable income and continue for a maximum of seven
  consecutive years, but not later than the twelfth year from commencement of
  production or the fourteenth year from the date of approval of such
  enterprise, whichever is earlier.  The
  date of the approval of the Company is May 1990.                                           
| |                                                                                                                                                                                                                                                                                                                                                                              
| | Since the
  Company has not yet generated taxable income, the period of benefits to which
  it is entitled, as an Approved Enterprise has not yet begun.                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                              
| | C.                                                                                                                                                                                                                                                                                                                                                                            | Under the
  Income Tax Law (Adjustments for inflation), 1985, income for tax purposes is
  measured in terms of earnings in NIS as adjusted for changes in the Israeli
  Consumer Price Index (hereinafter CPI).       
| |                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                          
| | D.                                                                                                                                                                                                                                                                                                                                                                            | The Company
  currently qualifies as an Industrial Company under the above Law.                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                               | As such, it
  is entitled to certain tax benefits, mainly the right to deduct share
  issuance costs for tax purposes in the event of a public offering, and the
  amortization of know-how, acquired from a third party.
| |                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                          
| | E.                                                                                                                                                                                                                                                                                                                                                                            | The Company
  has received final tax assessments through the 1999 tax year.                                                                                                                                              

26

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries        
|------------------------------------------------------------------
|                                                                  
|Notes to Consolidated Financial Statements as at December 31, 2002
|                                                                  

Note 15 -
Taxes on Income (contd)

| | F. | A
  reconciliation of the theoretical tax expense, assuming all income was taxed
  at the regular tax rate applicable to an Israeli company and the actual tax
  expense is as follows:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                                                                             |  | Year ended December 31 |  
| | ------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | -
| |                                                                                                                                             |  |                        |  
| |                                                                                                                                             |  | 2002                   |  
| |                                                                                                                                             |  |                        |  
| |                                                                                                                                             |  | $                      |  
| |                                                                                                                                             |  |                        |  
|
| | Theoretical
  taxes on income*                                                                                                              |  | (1,378,004             | )
| |                                                                                                                                             |  |                        |  
| | Increase
  (decrease) in taxes:                                                                                                             |  |                        |  
| | Tax-exempt
  income                                                                                                                         |  | (50,972                | )
| | Non-deductible expenses                                                                                                                     |  | 27,726                 |  
| | Valuation
  allowance                                                                                                                       |  | 643,461                |  
| | Adjustments
  arising from differences on the basis of
   measurement for tax purposes and for financial
   reporting purposes and other ** |  | 757,789                |  
| |                                                                                                                                             |  |                        |  
| |                                                                                                                                             |  |                        |  
| | Reported
  taxes on income                                                                                                                  |  | -                      |  
| |                                                                                                                                             |  |                        |  
| |                                                                                                                                             |  |                        |  
| | *    Applicable tax rate                                                                                                                    |  | 36                     | %
| |                                                                                                                                             |  |                        |  

| | ** | Resulting from the difference between the changes in the Israeli CPI,
  which forms the basis for computation of taxable income of the Company, and
  the exchange rate of Israeli currency relative to the dollar.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                    

| | G.                                                                                                                                                                                                                                                                                                                                                              | Carryforward losses
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------
| |                                                                                                                                                                                                                                                                                                                                                                 |                    
| | As at
  December 31, 2002, the Company had, for tax purposes, operating loss
  carryforwards in the amount of $ 8,904,451. 
  The amount of the companys carryforward operating losses will be
  offset against taxable future income. 
  A portion of such losses expires over a period from 2004 through 2016
  and the rest remains available indefinitely.
| |                                                                                                                                                                                                                                                                                                                                                                
| | Due to the
  uncertainty of realizing the benefit of the losses, carryforward a valuation
  allowance for related deferred tax assets has been recorded.                                                                                                                                                                                                       

27

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries        
|------------------------------------------------------------------
|                                                                  
|Notes to Consolidated Financial Statements as at December 31, 2002
|                                                                  

Note 15 -
Taxes on Income (contd)

| | H.                                                            | Deferred income taxes
| | ------------------------------------------------------------- | ---------------------
| |                                                               |                      
| | Deferred taxes which were
  not recognized, are comprised of:

| |                                                                  |  | December 31 |  
| | ---------------------------------------------------------------- |  | ----------- | -
| |                                                                  |  |             |  
| |                                                                  |  | 2002        |  
| |                                                                  |  |             |  
| |                                                                  |  | $           |  
| |                                                                  |  |             |  
|
| | Losses
  carried forward                                         |  | 3,205,602   |  
| | Severance
  pay                                                  |  | 58,014      |  
| | Vacation pay                                                     |  | 61,400      |  
| | Allowance
  for doubtful debts                                   |  | 168,669     |  
| | Provision
  for restructuring costs and
   other special charges |  | 328,631     |  
| |                                                                  |  |             |  
| |                                                                  |  | 3,822,316   |  
| |                                                                  |  |             |  
| | Valuation
  allowance                                            |  | (3,822,316  | )
| |                                                                  |  |             |  
| |                                                                  |  |             |  
| |                                                                  |  | -           |  
| |                                                                  |  |             |  

28

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries        
|------------------------------------------------------------------
|                                                                  
|Notes to Consolidated Financial Statements as at December 31, 2002
|                                                                  

Note 16 -
Selected Statement of Operations Data

| | A.                        | Revenues *
| | ------------------------- | ----------
| |                           |           
| | Geographic
  information:

| |                                                  |                                                                           | Year ended December 31 |  
| | ------------------------------------------------ | ------------------------------------------------------------------------- | ---------------------- | -
| |                                                  |                                                                           |                        |  
| |                                                  |                                                                           | 2002                   |  
| |                                                  |                                                                           |                        |  
| |                                                  |                                                                           | $                      |  
| |                                                  |                                                                           |                        |  
|
| | Product sales                                    |                                                                           |                        |  
| | Israel                                           |                                                                           | 13,166                 |  
| | Far East (excluding Japan)                       |                                                                           | 690,769                |  
| | Europe                                           |                                                                           | 2,656,670              |  
| | North America                                    |                                                                           | 934,335                |  
| | South
  America                                  |                                                                           | 70,000                 |  
| | Africa                                           |                                                                           | 432,478                |  
| | Middle East (excluding Israel)                   |                                                                           | 90,393                 |  
| | Japan                                            |                                                                           | 1,485,537              |  
| | Other                                            |                                                                           | 50,000                 |  
| |                                                  |                                                                           |                        |  
| |                                                  |                                                                           |                        |  
| |                                                  |                                                                           | 6,423,348              |  
| |                                                  |                                                                           |                        |  
| | Service revenues                                 |                                                                           |                        |  
| | Israel                                           |                                                                           | 32,908                 |  
| | Far East (excluding Japan)                       |                                                                           | 125,348                |  
| | Europe                                           |                                                                           | 834,663                |  
| | South
  America                                  |                                                                           | 23,544                 |  
| | Middle East (excluding Israel)                   |                                                                           | 3,436                  |  
| | North
  America                                  |                                                                           | 192,756                |  
| | Africa                                           |                                                                           | 70,976                 |  
| | Japan                                            |                                                                           | 92,114                 |  
| | Other                                            |                                                                           | -                      |  
| |                                                  |                                                                           |                        |  
| |                                                  |                                                                           |                        |  
| |                                                  |                                                                           | 1,375,745              |  
| |                                                  |                                                                           |                        |  
| |                                                  |                                                                           |                        |  
| | Total revenues                                   |                                                                           | 7,799,093              |  
| |                                                  |                                                                           |                        |  
| | Sales to single customers exceeding 10% of sales |                                                                           |                        |  
| | Customer A                                       |                                                                           | 19                     | %
| |                                                  |                                                                           |                        |  
| | *  1.                                            | Revenues are
  attributed to countries based on the location of customer.
| | 2.                                               | Substantially
  all long-lived assets are located in Israel.             
| |                                                  |                                                                           |                        |  

29

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries        
|------------------------------------------------------------------
|                                                                  
|Notes to Consolidated Financial Statements as at December 31, 2002
|                                                                  

Note 16 -
Selected Statement of Operations Data (contd)

| | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Business segment, geographical areas and foreign operations
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                            
| | The Company
  operates in a single business segment with facilities in Israel, the United
  States, Germany, Netherlands and the United Kingdom. 
  The Company reports under one segment the operations of all its
  marketing due to the fact that this economic activity constitutes a direct
  continuity of the operation in Israel. 
  Therefore, the Company considered all sales except those made in
  Israel as export sales of the primary activity located in Israel.

Note 17 -
Transactions and Balances with Related Parties

| | The
  following transactions between the Company and related parties are included
  in the financial statements:
| | ----------------------------------------------------------------------------------------------------------------

| |                                                                           |  | Year ended
  December 31 | 
| | ------------------------------------------------------------------------- |  | ------------------------ | 
| |                                                                           |  |                          | 
| |                                                                           |  | 2002                     | 
| |                                                                           |  |                          | 
| |                                                                           |  | $                        | 
| |                                                                           |  |                          | 
|
| | Statement of operations                                                   |  |                          | 
| |                                                                           |  |                          | 
| | Salaries and
  benefits to officers who are directors
   and shareholders |  | 331,161                  | 
| |                                                                           |  |                          | 
| |                                                                           |  |                          | 
| | Directors
  fees                                                          |  | 17,285                   | 
| |                                                                           |  |                          | 

30

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 18 - Effect of Material Differences Between Generally Accepted Accounting
                 
  Principles in Israel and in the United
  States

| | A.                                                                                                                                                                                                                                                                                                                   | Details of Differences     
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------
| |                                                                                                                                                                                                                                                                                                                      |                            
| | The Company
  prepares its financial statements in conformity with Israeli GAAP.  As applicable to these financial
  statements, Israeli GAAP and U.S. GAAP differ in certain significant respects
  as described below:                                                                                            
| |                                                                                                                                                                                                                                                                                                                     
| | 1.                                                                                                                                                                                                                                                                                                                   | Marketable securities      
| |                                                                                                                                                                                                                                                                                                                      |                            
| | Under
  Israeli GAAP, marketable securities should be stated at market value.  Both realized and unrealized gains and
  losses are included in financial income (expenses), net.                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                     
| | Under U.S.
  GAAP, according to statement of Financial Accounting Standards No. 115
  Accounting for Certain Investments and Debt and Equity Securities (SFAS No.
  115) the Company has classified its marketable securities as
  available-for-sale.  Such marketable
  securities are stated at market value.
| |                                                                                                                                                                                                                                                                                                                     
| | Unrealized
  gains and losses are reported as a separate component of shareholders
  equity, as comprehensive income (loss). 
  Realized gains and losses are included in financial income (expenses)
  net.                                                                                                       
| |                                                                                                                                                                                                                                                                                                                     
| | 2.                                                                                                                                                                                                                                                                                                                   | Liability for severance pay
| |                                                                                                                                                                                                                                                                                                                      |                            
| | Under
  Israeli GAAP, amounts funded by purchase of insurance policies are deducted
  from the related severance pay liability.                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                     
| | Under U.S.
  GAAP, the cash surrender value of such insurance policies should be presented
  in the Consolidated Balance Sheets as a long-term investment.                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                     
| | 3.                                                                                                                                                                                                                                                                                                                   | Comprehensive income       
| |                                                                                                                                                                                                                                                                                                                      |                            
| | Israeli GAAP
  does not require disclosure of comprehensive income.                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                     
| | Under U.S.
  GAAP, according to SFAS No. 130 Reporting Comprehensive Income, all items
  that are required to be recognized under accounting standards as components
  of comprehensive income be reported in a financial statement that is
  displayed with the same prominence as other financial statements.   
| |                                                                                                                                                                                                                                                                                                                     
| | Comprehensive
  income consists of net income and net unrealized gain (losses) on securities
  and is presented as a separate component in the statement of changes in
  shareholders equity.                                                                                                                      

31

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 18 - Effect of Material Differences
  Between Generally Accepted Accounting
                 
 Principles in Israel and in the United
  States (contd)

| | A.                                                                                                                                                                                                    | Details of Differences (contd)                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 4.                                                                                                                                                                                                    | Loss per share                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | There is a
  difference between U.S. GAAP and Israeli GAAP relating to the calculation of
  number of shares used for computation of loss per share due to a different
  approach to options granted:
| |                                                                                                                                                                                                      
| | (a)                                                                                                                                                                                                   | For Israeli
  GAAP purposes if the probability of exercising the options is not reasonable
  such options are not considered as share equivalents.                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (b)                                                                                                                                                                                                   | For U.S.
  GAAP purposes, according to FASB Statement No. 128 - Earnings Per Share-
  earnings per share are based upon net income divided by the weighted average
  number of shares outstanding.  For the
  Company there is no difference between the shares used in the basic and
  diluted earnings per share calculation, as there are no shares that would
  create a dilutive effect on the weighted average number of shares.
| |                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | B.                                                                                                                                                                                                    | The effect of the differences between Israeli GAAP and U.S. GAAP of
  the above mentioned items on the financial statements are as follows:                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 1.                                                                                                                                                                                                    | Balance sheets                                                                                                                                                                                                                                                                                                                                                                                                                          

| |                                                |  | December 31 | 
| | ---------------------------------------------- |  | ----------- | 
| |                                                |  |             | 
| |                                                |  | 2002        | 
| |                                                |  |             | 
| |                                                |  | $           | 
| |                                                |  |             | 
| |                                                |  |             | 
| | Long-term
  investments under Israeli GAAP     |  | -           | 
| | Amounts
  funded with respect of severance pay |  | 487,373     | 
| |                                                |  |             | 
| |                                                |  |             | 
| |                                                |  | 487,373     | 
| |                                                |  |             | 
| |                                                |  |             | 
| | Total
  liabilities under Israeli GAAP         |  | 3,798,801   | 
| | Amounts
  funded in respect of severance pay   |  | 487,373     | 
| |                                                |  |             | 
| |                                                |  |             | 
| | Total
  liabilities under U.S. GAAP            |  | 4,286,174   | 
| |                                                |  |             | 

32

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 18 - Effect of Material Differences
  Between Generally Accepted Accounting
                 
Principles in Israel and in the United
  States (contd)

| | B.                                                                                    | Effect of material differences (contd)
| | ------------------------------------------------------------------------------------- | ---------------------------------------
| |                                                                                       |                                        
| | 2.                                                                                    | Statements of operations               
| |                                                                                       |                                        
| | Loss from
  securities defined as available for sale should be reconciled as follows:

| |                                          |  | Year ended December 31 |  
| | ---------------------------------------- |  | ---------------------- | -
| |                                          |  |                        |  
| |                                          |  | 2002                   |  
| |                                          |  |                        |  
| |                                          |  | $                      |  
| |                                          |  |                        |  
| |                                          |  |                        |  
| | Net loss for
  the year - Israeli GAAP   |  | (3,827,788             | )
| | Net
  adjustment to comprehensive income |  | 2,243                  |  
| |                                          |  |                        |  
| |                                          |  |                        |  
| | Net loss for
  the year - U.S. GAAP      |  | (3,825,545             | )
| |                                          |  |                        |  

| | 3.                                                                                                                | Loss per ordinary share
| | ----------------------------------------------------------------------------------------------------------------- | -----------------------
| |                                                                                                                   |                        
| | Following is
  the computation of the weighted average number of shares issued and
  outstanding under U.S. GAAP:

| |  |  | Number of ordinary shares | 
| |  |  | ------------------------- | 
| |  |  |                           | 
| |  |  | Year ended December 31    | 
| |  |  |                           | 
| |  |  | 2002                      | 
| |  |  |                           | 
| |  |  |                           | 
| |  |  | 6,098,890                 | 
| |  |  |                           | 

| |                                              |  | Year ended December 31 |  
| | -------------------------------------------- |  | ---------------------- | -
| |                                              |  |                        |  
| |                                              |  | 2002                   |  
| |                                              |  |                        |  
| |                                              |  | $                      |  
| |                                              |  |                        |  
| | Basic and
  diluted EPS:                     |  |                        |  
| |                                              |  |                        |  
| | Net basic
  loss per share under U.S. GAAP   |  | (0.627                 | )
| |                                              |  |                        |  
| |                                              |  |                        |  
| | Net diluted
  loss per share under U.S. GAAP |  | (0.627                 | )
| |                                              |  |                        |  
| |                                              |  |                        |  
| | Net loss per
  share under Israeli GAAP      |  | (0.628                 | )
| |                                              |  |                        |  

33

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 18 - Effect of Material Differences
  Between Generally Accepted Accounting
                 
 Principles in Israel and in the United
  States (contd)

| | B. | Effect of material differences (contd)                            
| | -- | -------------------------------------------------------------------
| |    |                                                                    
| | 4. | Statement of changes in shareholders equity and comprehensive loss

|                                                                            |  | Amount |  | Surplus
  capital |            | Accumulated
  deficit |  | Accumulated
  other
  comprehensive
  income |   | Total |       
|--------------------------------------------------------------------------- |  | ------ |  | ----------------- | ---------- | --------------------- |  | -------------------------------------------- | - | ----- | ------
|                                                                            |  |        |  |                   |            |                       |  |                                              |   |       |       
|                                                                            |  | $      |  | $                 |            | $                     |  | $                                            |   | $     |       
|                                                                            |  |        |  |                   |            |                       |  |                                              |   |       |       
|                                                                            |  |        |  |                   |            |                       |  |                                              |   |       |       
|Balance as
  of January 1, 2000                                             |  | 53,154 |  |                   | 8,028,212  |                       |  | (1,235,874                                   | ) |       | 8,931 
|                                                                            |  |        |  |                   |            |                       |  |                                              |   |       |       
|Changes during 2000:                                                        |  |        |  |                   |            |                       |  |                                              |   |       |       
|Net loss                                                                    |  | -      |  |                   | -          |                       |  | (6,364,386                                   | ) |       | -     
|Net
  unrealized change on
   available for sale securities                 |  | -      |  |                   | -          |                       |  | -                                            |   |       | 763   
|                                                                            |  |        |  |                   |            |                       |  |                                              |   |       |       
|Comprehensive
  loss                                                        |  |        |  |                   |            |                       |  |                                              |   |       |       
|Issue of
  shares *                                                         |  | 19,422 |  |                   | 13,974,514 |                       |  | -                                            |   |       | -     
|Amortization
  of deferred
   compensation expense                          |  | -      |  |                   | 45,130     |                       |  | -                                            |   |       | -     
|Issue of
  shares upon
   exercise of stock options                         |  | 503    |  |                   | 149,516    |                       |  | -                                            |   |       | -     
|                                                                            |  |        |  |                   |            |                       |  |                                              |   |       |       
|Balance as
  of
   December 31, 2000                                        |  | 73,079 |  |                   | 22,197,372 |                       |  | (7,600,260                                   | ) |       | 9,694 
|                                                                            |  |        |  |                   |            |                       |  |                                              |   |       |       
|Changes during 2001:                                                        |  |        |  |                   |            |                       |  |                                              |   |       |       
|Net loss                                                                    |  | -      |  |                   | -          |                       |  | (2,791,914                                   | ) |       | -     
|Net
  unrealized change on
   available for sale securities                 |  | -      |  |                   | -          |                       |  | -                                            |   |       | 485   
|                                                                            |  |        |  |                   |            |                       |  |                                              |   |       |       
|Comprehensive
  loss                                                        |  |        |  |                   |            |                       |  |                                              |   |       |       
|Amortization
  of deferred
   compensation expense                          |  | -      |  |                   | 42,141     |                       |  | -                                            |   |       | -     
|Acquisition
  of minority
   interest in consolidated
   subsidiary company |  | -      |  |                   | 90,000     |                       |  | -                                            |   |       | -     
|                                                                            |  |        |  |                   |            |                       |  |                                              |   |       |       
|Balance as
  of
   December 31, 2001                                        |  | 73,079 |  |                   | 22,329,513 |                       |  | (10,392,174                                  | ) |       | 10,179
|                                                                            |  |        |  |                   |            |                       |  |                                              |   |       |       
|Changes during 2002:                                                        |  |        |  |                   |            |                       |  |                                              |   |       |       
|Net loss                                                                    |  | -      |  |                   | -          |                       |  | (3,825,545                                   | ) |       | -     
|Net
  unrealized change on
   available for sale securities                 |  | -      |  |                   | -          |                       |  | -                                            |   |       | (2,243
|                                                                            |  |        |  |                   |            |                       |  |                                              |   |       |       
|Comprehensive
  loss                                                        |  |        |  |                   |            |                       |  |                                              |   |       |       
|Amortization
  of deferred
   compensation expense                          |  | -      |  |                   | 9,456      |                       |  | -                                            |   |       | -     
|                                                                            |  |        |  |                   |            |                       |  |                                              |   |       |       
|Balance as of December 31,
  2002                                           |  | 73,079 |  |                   | 22,338,969 |                       |  | (14,217,719                                  | ) |       | 7,936 
|                                                                            |  |        |  |                   |            |                       |  |                                              |   |       |       

|* | Net of share
  issue expenses in the amount of $1,006,064.
|- | ----------------------------------------------------------

34

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 18 - Effect of Material Differences
  Between Generally Accepted Accounting
                
 Principles in Israel and in the United
  States (contd)

| | B. | Effect of material differences (contd)
| | -- | ---------------------------------------
| |    |                                        
| | 5. | Statements of cash flows               

| | 1) | Cash paid
  for taxes on income during the years ended December 31, 2002, 2001 and 2000
  were U.S. $33,296, U.S. $34,257 and U.S. $42,506, respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                          
| | 2) | Cash paid
  for interest during the years ended December 31, 2002, 2001 and 2000 were
  U.S. $123,692, U.S. $24,861 and U.S. $0, respectively.           
| |    |                                                                                                                                                          
| | 3) | a)                                                                                                                                                       
| |    |                                                                                                                                                          
| |    | b)                                                                                                                                                       

Note 19 - Recent Pronouncements

| | In June
  2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
  Obligations.  SFAS No. 143 requires the
  Company to record the fair value of an asset retirement obligation as a
  liability in the period in which it incurs a legal obligation associated with
  the retirement of tangible long-lived assets that result from the
  acquisition, construction, development and/or normal use of the assets.  The Company also records a corresponding
  asset which is depreciated over the life of the asset.  Subsequent to the initial measurement of
  the asset retirement obligation, the obligation will be adjusted at the end
  of each period to reflect the passage of time and changes in the estimated
  future cash flows underlying the obligation. 
  The Company is required to adopt SFAS No. 143 on January 1, 2003.  The Company does not believe the adoption
  of SFAS No. 143 will have a significant impact on its consolidated financial
  statements.                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | In April
  2001, the FASB  issued SFAS No. 145, Rescission
  of FASB Statement 4, 44 and 64, Amendment of FASB No. 13 and Technical
  Corrections (hereinafter SFAS No. 145). SFAS No. 145 rescinds FASB
  Statement No. 4, Reporting Gains and
  Losses from Extinguishments of Debt, and an amendment of that
  Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
  Sinking-Fund Requirements. FASB 145 also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor
  Carriers.  This Statement
  amends FASB Statement No. 13, Accounting
  for Leases, to eliminate an inconsistency between the required
  accounting for sale-leaseback transactions and the required accounting for
  certain lease modifications that have economic effects that are similar to
  sale-leaseback transactions.  SFAS No. 145
  also amends other existing authoritative pronouncements to make various
  technical corrections, clarify meanings, or describe their applicability
  under changed conditions.

35

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 19 - Recent Pronouncements (cont'd)

| | The
provisions of this Statement related to the rescission of Statement 4 are applicable in
fiscal years beginning after May 15, 2002. Early adoption in encouraged. A calendar-year
entity may early adopt the Statement 4 rescission in the fourth quarter of 2002. The
provisions of this Statement related to Statement 13 are effective for transactions
occurring after May 15, 2002, with early application encouraged. All other provisions of
this Statement are effective for financial statements issued on or after May 15, 2002,
with early application encouraged. The Company will adopt SFAS No. 145 beginning January 1,
2003, except for the provisions relating to the amendment of SFAS No. 13 which was adopted
for transactions subsequent to May 15, 2002. The Company believes the adoption of
SFAS No. 145 will not have significant impact on the consolidated financial statements.
In
July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities (SFAS No. 146). According to SFAS No. 146, commitment to a
plan to exit an activity or dispose of long-lived assets will no longer be enough to
record a one-time charge for most anticipated costs. Instead, companies will record exit
or disposal costs when they are incurred and can be measured at fair value,
and they will subsequently adjust the recorded liability for changes in estimated cash
flows. SFAS No. 146 revises accounting for specified employee and contract terminations that
are part of restructuring activities. SFAS No. 146 is effective for exit or disposal
activities initiated after December 31, 2002, however earlier adoption is encouraged. The
Company does not believe the adoption of SFAS No. 146 will have a significant impact on the
Companys consolidated financial statements.
In
November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. The initial recognition and initial measurement provisions of
this Interpretation are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002, regardless of the guarantors fiscal year-end. The guarantor
may not revise or restate its previous accounting for guarantees issued before the date of
the Interpretations initial application to reflect the effect of the recognition and
measurement provisions of the Interpretation. The disclosure requirements in this
Interpretation are effective for financial statements of interim or annual periods ending
after December 15, 2002. The guidance on indirect guarantees of the indebtedness of
others, which previously was included in FASB Interpretation No. 34, Disclosure of
Indirect Guarantees of Indebtedness of Others, continues to apply to financial
statements for fiscal years ended after June 15, 1981. The Company does not believe the
adoption of interpretation No. 45 will have a significant impact on the Companys
consolidated financial statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

36

---

---

|Top Image Systems Ltd.
  and its consolidated subsidiaries              
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as at December 31,
  2002
|                                                                        

Note 19 - Recent Pronouncements (cont'd)

| | In
November 2002, the Emerging Task-Force issued its consensus on EITF 00-21, Revenue
Arrangements with Multiple Deliverables (EITF 00-21) on an approach to
determine whether an entity should divide an arrangement with multiple deliverables into
separate units of accounting. According to the EITF in an arrangement with multiple
deliverables, the delivered item(s) should be considered a separate unit of accounting if
all of the following criteria are met: (1) The delivered item(s) has value to the customer
on a standalone basis, (2) There is objective and reliable evidence of the fair value of
the undelivered item(s), (3) If the arrangement includes a general right of return,
delivery or performance of the undelivered item(s) is considered probable and
substantially in the control of the vendor. If all the conditions above are met and there
is objective and reliable evidence of fair value for all units of accounting in an
arrangement, the arrangement consideration should be allocated to the separate units of
accounting based on their relative fair values. However, there may be cases in which there
is objective and reliable evidence of the fair value(s) of the undelivered item(s) in an
arrangement but no such evidence for one or more of the delivered items. In those cases,
the residual method should be used to allocate the arrangement consideration. The guidance
in this Issue is effective for revenue arrangements entered into in fiscal years beginning
after June 15, 2003. Alternatively, entities may elect to report the change in accounting
as a cumulative-effect adjustment in accordance with Opinion 20. If so elected, disclosure
should be made in periods subsequent to the date of initial application of this consensus
of the amount of recognized revenue that was previously included in the cumulative effect
adjustment. The Company believes that the adoption of EITF 00-21 will not have a
significant impact on the Companys consolidated financial statements.
In
December 2002, the FASB  issued SFAS No. 148, Accounting for Stock Based
Compensation  Transition and Disclosure  an amendment of FASB statement No.
123 (SFAS No. 148). SFAS No. 148 permits two additional transition methods for
entities that adopt the fair value based method of accounting for stock-based employee
compensation. The Statement also requires new disclosures about the ramp-up effect of
stock-based employee compensation on reported results. The Statement also requires that
those effects be disclosed more prominently by specifying the form, content, and location
of those disclosures. The transition guidance and annual disclosure provisions of SFAS 148
are effective for fiscal years ending after December 15, 2002, with earlier application
permitted in certain circumstances. The interim disclosure provisions are effective for
financial reports containing financial statements for interim periods beginning after
December 15, 2002. As the balance sheet date, the Company continues to apply APB Opinion
No. 25 
In
January 2003, the Financial Accounting Standard Board issued Interpretation No. 46,
Consolidation of Variable Interest Entities (hereinafter
the Interpretation). According to Interpretation, a Variable Interest Entity
will be consolidated by an enterprise that is subject to a majority of the risk of loss
from the Variable Interest Entitys activities or entitled to receive a
majoritys of the entitys residual returns or both. The enterprise that
consolidates a Variable Interest Entity is called the primary beneficiary of that entity.
The Interpretation requires certain disclosures to be made by the primary beneficiary and
by an enterprise that holds a significant variable interest in a Variable Interest Entity
but is not the primary beneficiary. The consolidation requirements of Interpretation 46
apply immediately to Variable Interest Entities created after January 31, 2003. The
consolidation requirements apply to older entities in the first fiscal year or interim
period beginning after June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company does not expect the adoption of FIN 46 to
have any significant impact on its consolidated financial statement.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

37

---

---

E RNST
& Y OUNG


| |  Kost Forer & Gabbay  | Phone: | 972-3-6232525
| | ---------------------- | ------ | -------------
| | 3 Aminadav St.         | Fax:   | 972-3-5622555
| | Tel-Aviv 67067, Israel |        |              
| |                        |        |              

AUDITORS REPORT

To the Shareholders of

E-MOBILIS LTD.

We
have audited the accompanying balance sheets of E-Mobilis Ltd. (the Company)
as of December 31, 2001 and 2000, and the related statements of operations, changes in
shareholders deficiency and cash flows for the years then ended. These financial
statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audits.

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

In
our opinion, the financial statements referred to above present fairly in all material
respects, the financial position of the Company as of December 31, 2001 and 2000, and
the results of its operations, changes in shareholders deficiency and cash flows for
the years then ended, in conformity with generally accepted accounting principles in the
United States.

Without
qualifying our opinion, we wish to draw attention to the matters discussed in Note 1b. In
November 2001, the Company transferred its activity and employees to the parent company,
according to resolution made by the board of directors of the parent company. The
Companys accumulated deficit and shareholders deficiency as of December 31, 2001
amounted to approximately $ 2,535 thousand. The Companys ability to continue as
a going concern is dependent upon additional support from the parent company.

| |  | /S/ KOST FORER & GABBAY

KOST FORER & GABBAY
A Member of Ernst & Young International
| |  | --------------------------------------------------------------------------------------------------

Tel-Aviv, Israel
February 12, 2002



---

---

ARTHUR M. DeBENEDICTISCertified Public Accountant
3 Lakeside Office Park
Wakefield, MA 01880
(781) 245-1190 FAX (781) 245-2999

To the Board of Directors
T.I.S. America Inc.Carlsbad, California

I
have audited the accompanying balance sheets of T.I.S. America, Inc. as of December 31,
2000 and 1999, and the related statements of income, retained earnings, stockholders
equity and cash flows for the two year period ended December 31, 2000. These financial
statements are the responsibility of the Companys management. My responsibility is
to express an opinion on these financial statements based on my audit.

I
conducted my audit in accordance with generally accepted auditing standards. Those
auditing standards require that I 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. I believe that my audit provide a reasonable basis for
my opinion.

In
my opinion, the financial statements referred to above present fairly in all material
respects, the financial position of T.I.S. America, Inc. as of December 31, 2000 and
1999, and the results of its operations and cash flows and changes in stockholder equity
for the two year period ended December 31, 2000 in conformity with generally accepted
accounting principles applied on a consistent basis.

| |  | /S/ Arthur M. DeBenedictis
Arthur M. DeBenedictisCertified Public Accountant
| |  | ------------------------------------------------------------------------------------------

Wakefield, Massachusetts
January 25, 2001



---

---