---

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# UNITED STATESSECURITIES AND
EXCHANGE COMMISSIONWashington, D.C. 20549

# FORM 20-F

|  |                                                                                               
|- | ----------------------------------------------------------------------------------------------
|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 1934the fiscal year ended December 31, 2007

OR

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

OR

|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF 
THE SECURITIES EXCHANGE ACT OF 1934
|  |                                                                                             

# Commission File Number
001-14552

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

Israel(Jurisdiction of incorporation or organization)

---

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

---

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

|                         |                         
|------------------------ | ------------------------
|                         | Name of each exchange on
|Title of each class      | which registered        
|                         |                         
|Ordinary Shares, nominal | NASDAQ Capital Market   
|value NIS 0.04 per share |                         
|                         |                         

Securities registered or to be registered pursuant to Section 12(g) of the Act:None

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



---

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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:

8,909,138 Ordinary
Shares

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

Yes o No x

If this report is an annual or
transition report, indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o No x

Note  Checking the box above
will not relieve any registrant required to file reports pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 from their obligations under those Sections.

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

Yes x No o

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

|                          |                     |                        
|------------------------- | ------------------- | -----------------------
|Large accelerated filer o | Accelerated filer o | Non-accelerated filer x

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

Item 17 o Item 18 x

If this is an annual report, indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).

Yes o No x



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# TABLE OF CONTENTS

|          |                                                                              | Page
|--------- | ---------------------------------------------------------------------------- | ----
|
|PART I    |                                                                              | 1   
|         
|ITEM 1.   | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                        | 1   
|         
|ITEM 2.   | OFFER STATISTICS AND EXPECTED TIMETABLE                                      | 1   
|         
|ITEM 3.   | KEY INFORMATION                                                              | 1   
|         
|ITEM 4.   | INFORMATION ABOUT THE COMPANY                                                | 11  
|         
|ITEM 5.   | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 | 24  
|         
|ITEM 6.   | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   | 36  
|         
|ITEM 7.   | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            | 43  
|         
|ITEM 8.   | FINANCIAL INFORMATION                                                        | 44  
|         
|ITEM 9.   | LISTING                                                                      | 45  
|         
|ITEM 10.  | ADDITIONAL INFORMATION                                                       | 47  
|         
|ITEM 11.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 62  
|         
|PART II   |                                                                              | 62  
|         
|ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 62  
|         
|ITEM 13.  | DEFAULTS, DIVIDENDS, ARREARAGES AND DELINQUENCIES                            | 62  
|         
|ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 62  
|         
|ITEM 15.  | CONTROLS AND PROCEDURES                                                      | 62  
|         
|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 63  
|         
|ITEM 16B. | CODE OF ETHICS                                                               | 63  
|         
|ITEM 16C. | PRINCIPAL ACCOUNTANT FEE AND SERVICES                                        | 63  
|         
|ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS OF AUDIT COMMITTEES                    | 64  
|         
|ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 64  
|         
|PART III  |                                                                              | 64  
|         
|ITEM 17.  | FINANCIAL STATEMENTS                                                         | 64  
|         
|ITEM 18.  | FINANCIAL STATEMENTS                                                         | 64  
|         
|ITEM 19.  | EXHIBITS                                                                     | 64  
|          |                                                                              |     

- i -

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# Forward-Looking
Statements

Certain
matters discussed in this report on Form 20-F are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. From time to time, we
also provide forward-looking statements in other materials we release to the public as
well as oral forward-looking statements. The words or phrases will likely
result, are expected to, will continue, is
anticipated, estimate, intend, project,
believe, plan or similar expressions identify some, but not all,
of these forward-looking statements. These statements are based on managements
current expectations or beliefs and are subject to a number of risks and uncertainties
that could cause actual results to differ materially and adversely, including, but not
limited to, those described under Risk Factors herein and in our subsequent
filings with the United States Securities and Exchange Commission. 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 are under no obligation to, and expressly disclaim any
obligation to, update or alter our forward-looking statements, whether as a result of new
information, future events or otherwise.

# Use of Certain Terms

In
this report, we, us, our, TIS and the
Company refer to Top Image Systems Ltd. and its consolidated subsidiaries,
collectively. References to $ and U.S. dollars are to the lawful
currency of the United States of America.

# PART I

|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 consolidated financial data are presented in accordance with generally
accepted accounting policies in the United States, or U.S. GAAP. The Israeli Securities
Law  1968 allows Israeli companies, such as us, whose securities are listed both on
the Tel Aviv Stock Exchange and on certain stock exchanges in the United States (including
NASDAQ), to report to the Israel Securities Authority and the Tel Aviv Stock Exchange in
accordance with the reporting requirements under SEC rules and U.S. GAAP. All financial
statements included in this annual report and all financial information released in Israel
are presented solely under U.S. GAAP. The selected consolidated financial data should be
read in conjunction with and are qualified by reference to Item 5 of this report entitled
Operating and Financial Review and Prospects and the consolidated financial
statements and notes thereto and other financial information included elsewhere in this
report.

|                                    | 2003 | 2004 | 2005 | 2006  | 2007
|----------------------------------- | ---- | ---- | ---- | ----- | ----
|
|
|
|
|Statement of Operations Data:       |      |      |      |       |     
|Revenues                            |      |      | $    | 8,319 |     
|Cost of revenues                    |      |      |      | 2,340 |     
|Gross profit                        |      |      |      | 5,979 |     
|Research and development, net       |      |      |      | 863   |     
|Selling, administrative and general |      |      |      | 5,819 |     
|Restructuring and severance charges |      |      |      |       |     
|Operating profit (loss)             |      |      |      | (703  | )   
|                                    |      |      |      |       |     

- 1 -

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|                                  | 2003 | 2004 | 2005 | 2006      | 2007
|--------------------------------- | ---- | ---- | ---- | --------- | ----
|
|
|
|
|Financial expense (income), net   |      |      |      | (109      | )   
|Other (income) expense            |      |      |      | -         |     
|Tax on income                     |      |      |      |           |     
|Net income (loss)                 |      |      |      | (594      | )   
|Net basic and dilutive income     |      |     
|(loss) per share                  |      |      | $    | (0.11     | )   
|                                  |      |     
|Weighted average number of shares |      |     
|outstanding for basic net loss    |      |     
|per share                         |      |      |      | 6,102,496 |     
|Weighted average number of shares |      |     
|outstanding for dilutive net loss |      |     
|per share                         |      |      |      | 6,102,496 |     

|                               | 2003 | 2004 | 2005 | 2006   | 2007
|------------------------------ | ---- | ---- | ---- | ------ | ----
|
|
|
|
|Summary of Balance Sheet Data: |      |      |      |        |     
|Cash and cash equivalents      |      |      | $    | 5,854  |     
|Working capital                |      |      |      | 7,353  |     
|Total Assets                   |      |      |      | 12,130 |     
|Long Term debt                 |      |      |      | -      |     
|Total liabilities              |      |      |      | 4,490  |     
|Shareholders' equity           |      |      |      | 7,639  |     

# 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 including EMC (Captiva Software), Mitek, Banctec, Kofax
(Formerly : Dicom Group), Datacap, and ReadSoft, 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. The fact that our resources
are more limited places us at a significant disadvantage. This risk is particularly acute
during difficult economic times.

A slowdown in our customers
industries could adversely impact the sale of our products and our prospects of achieving
or maintaining profitability.

A
slowdown in the industries to 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
| | - | ---------------------------------------

- 2 -

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| |  | marketing
requirements.
| | - | -----------------------

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

Our
business and 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 with any one of our significant strategic partners could have a material and
adverse effect on our existing operations and growth prospects. We intend 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 industry is marked by rapid technological changes and frequent new or updated product introductions, and if
we do not respond to such rapid technological changes, 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 state-of-the-art products 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, 1998 and 2006, and our losses may continue. For the year ended December 31, 2007, we
had an accumulated deficit of $20,987,000. We plan to maintain the level of our aggregate
product development expenses and may significantly increase our sales and marketing and
administrative expenses in 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. Failure to increase revenues could result in a material adverse effect on our
business, prospects and financial results.

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.

Our
lengthy sales cycle increases our exposure to customer cancellations or delays in orders,
which may result in volatile quarterly revenues. Given the high average selling price of,
and the cost and time required to implement, our solutions, a customers decision to
license our products typically involves a significant commitment of resources and is
influenced by the customers budget cycles and internal approval procedures for
information technology purchases. In addition, selling our solutions requires us to
educate potential customers about our solutions uses and benefits. As a result, our
solutions have a long sales cycle, which can take 9 to 12 months or more. Consequently, we
have difficulty predicting the quarter in which sales to expected customers may occur. The
sale of our solutions is also subject to delays from the lengthy budgeting, approval and
competitive evaluation processes of our customers, which typically accompany significant
capital expenditures.

Other
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;
| | - | ----------------------------------------------------------------------------------------------------

- 3 -

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| |  | the
high level of competition that we encounter; and
| | - | ----------------------------------------------------

| |  | the
timing of our product introductions, upgrades or enhancements or those of our competitors
or of               providers of complementary products.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

Fluctuations
in our quarterly results could discourage investors and cause the market price of our
ordinary shares to decline.

Large customers
constitute a significant portion of our orders.

Sales
to large customers have historically accounted for a significant part of our sales. For
example, a sale to CSC Australia Pty. Ltd. accounted for 10% of our sales in 2005, and
sales to Swiss PostFinance accounted for 10% of our sales in 2004. In 2006 and 2007,
we had no customer who accounted for more than 10% of our sales. If we are unable in the
future to complete sales to large customers, our business, prospects and financial results
could be adversely affected.

Our success depends on
our key personnel.

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 person life insurance policies on
our officers, directors and key employees.

Our
solutions require a sophisticated sales effort targeted at senior management of our
prospective customers. New employees in our sales department require extensive training
and typically take several months to achieve full productivity. There is no assurance that
new sales representatives will ultimately become productive. If we were to lose qualified
and productive sales personnel, our revenues could be adversely impacted.

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 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 under 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, or if
infringement claims are asserted against third parties whom we are obligated to indemnify,
we could become liable for damages, which could have a material adverse effect on us.

ReadSoft,
one of our competitors, filed a patent application entitled Method and Arrangement
for Automatic Data Acquisition of Forms. The patent was granted on August 13, 2003
(EP 0976092). Although the patent was not enforced against us, we became aware of the
patent and, in May 2004, filed a Notice of Opposition with the European Patent Office
requesting that the patent be revoked in its entirety. After a number of written
exchanges, the dispute was heard on March 8, 2007 in a proceeding at the European Patent
Office in Germany. At the end of the oral proceeding, Readsofts patent was revoked
in its entirety. Readsoft has appealed this decision and has petitioned for the patent to
be reinstated. Although we do not believe that any of our products would infringe upon
this patent, if ReadSoft were to prevail on its appeal, and it subsequently was decided
that we infringed the patent, there could be a material adverse effect on our business,
prospects and financial condition.

- 4 -

---

---

NMS
Imaging Inc., a company headquartered in Maryland (NMS) filed a trademark
application for the registration of the name eFlow which has been used by the
Company for approximately 7 years, for a product similar to the Companys products on
June 8, 2007. Although the trademark was not enforced against us, we became aware of the
application and, in the course of August, 2007, filed a trademark application in the
United States Patent and Trademark Office, for the registration of the name
EFLOW for use in connection with computer software applications namely
software applications that processes and integrates data from various sources and or of
different types. In such application TIS claims to have been using the mark in
commerce since 1999 in the United States. Concurrently, the Company has filed trademark
applications for the names Top Image Systems and TIS. If NMSs trademark shall be
registered and such trademark will be enforced against us, there could be a material
adverse effect on our business, prospects and financial condition.

We
license components of our software systems and technology from third parties in reliance
on such parties representations as to ownership of the licensed intellectual
property. If our licensors are found not to own or have rights to sublicense such rights
to us and we are unable to replace the licensed technology with a comparable substitute,
there could be a material adverse effect on our business prospects and financial results.
Even if we were to replace licensed technology with available alternatives, it could take
time to identify the best replacement and integrate it into our software. The delay and
uncertainly could negatively impact our financial results.

Yehezkel
Yeshurun, our former Chief Scientist, and currently a member of our board of directors,
was, at the time of his employment with us, a Professor of the Tel Aviv University
Computer Science Department (the University) where he conducted research in
the areas of computer vision, neural computation and robotics. While the University
consented to Prof. Yeshuruns employment by us and has not asserted any claim that
intellectual property developed by Prof. Yeshurun on our behalf belongs to the University,
the University has not acknowledged our rights to any intellectual property developed by
Prof. Yeshurun. 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.

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 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. We have not 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;
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 U.S. law.

If we are unable to build awareness
of our brands, we may not be able to compete effectively against competitors with greater
name recognition and our sales could be adversely affected.

If
we are unable to economically achieve and maintain a leading position in data recognition
software or to promote and maintain our brands, our business, results of operations and
financial condition could suffer. Development and awareness of our brands will depend
largely on our success in increasing our customer base. In order to attract and retain
customers and to promote and maintain our brands in response to competitive pressures, we
may be required to increase our marketing and advertising budget or increase our other
sales expenses. There can be no assurance that our efforts will be sufficient or that we
will be successful in attracting and retaining customers or promoting our brands. Failure
in this regard could harm our business and results of operations.

- 5 -

---

---

Our products may contain defects,
damaging our reputation, causing a loss of customers, requiring us to allocate significant
time and financial resources to correct, and potentially resulting in liability claims.

Our
products may contain undetected errors or defects, particularly when first introduced or
when new versions or enhancements are released. In the past, we have discovered minor
software bugs in certain products after they were released to the market. Such errors or
defects could require us to divert financial and other resources to correct the problems.

In
addition, our products are combined with complex products developed by other vendors. As a
result, should problems occur, it may be difficult to identify the source or sources of
the problems. Defects and errors, or end-user perception of defects and errors, found in
current versions, new versions or enhancements of these products after commencement of
commercial shipments may result in:

| |  | damage
to brand reputation;
| | - | ---------------------------

| |  | loss
of customers;
| | - | ------------------

| |  | delay
in market acceptance of current and future products;
| | - | ----------------------------------------------------------

| |  | diversion
of development and engineering resources to correct defects or errors; and
| | - | ------------------------------------------------------------------------------------

| |  | warranty
or product liability claims.
| | - | -------------------------------------

Defects,
errors or successful product liability claims against us could have a material adverse
effect on our business, prospects and financial results. For addition information on our
warranty policy, see the subsection below entitled Warranty and service.

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. As a result of our product sales in various
geographic regions, which we may expand in the future to new geographic regions, we are
subject to the risks associated with international sales, including license requirements,
economic and political instability, terrorism, 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.

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 current resources and
that provided from our operations. 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 expectation that our 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 substantial 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.

Because
our principal offices 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, and especially since Hamas, an Islamic movement responsible for many
attacks against Israelis, has led government of the Palestinian Authority. Continuing or
escalating hostilities in the region or curtailment of trade between Israel and its
present trading partners may have an adverse effect on our business conditions, including
our ability to develop, manufacture and market our products.

- 6 -

---

---

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 the varying levels of hostilities
and threats of armed conflict which have marked the Middle East since October 2000, our
executive officers and employees may be called for active military duty for an unlimited
period of time. Increased military activity could also result in a reduction of
prospective qualified employees available to work for us to increase our business or
replace employees on active military duty. 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.

We may be adversely
impacted by fluctuations in currency exchange rates.

We
maintain operations and generate revenues in a number of countries. The results of
operations and the financial position of our local operations are generally reported in
the relevant local currencies and then translated into U.S. dollars at the applicable
exchange rates for inclusion in our consolidated financial statements, exposing us to
currency translation risk. In addition, we are exposed to currency transaction risk
because some of our expenses are incurred in a different currency from the currency in
which our revenues are received. Our most significant currency exposures are to the Euro,
New Israeli Shekel, UK Pound, Singapore dollars, Hong Kong dollars, Chinese Yuan,
Australian dollars and Japanese yen. In periods when the U.S. dollar strengthens against
these other currencies, our reported results of operations may be adversely affected.
Although from time to time we may purchase forward exchange contracts to reduce currency
transaction risk, these purchases will not eliminate translation risk or all currency
risk.

In
addition, our convertible debentures issued in December 2006 are payable in New Israeli
Shekels. Since the date of issuance of the debentures, the U.S. dollar has fallen against
the NIS. If this decrease remains while the debentures are payable, we will need to use
more U.S. dollars to make the payments.

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. Furthermore, in
order to remain competitive and keep our products up to date, we need to continue to
attract and retain a qualified team of employees. If we fail to obtain the human resources
our business requires, there could be a material adverse effect on our business,
prospects, and financial results.

Our expansion through acquisitions, including our recent purchases of Capture Projects Ltd. ("CPL") and Asiasoft
Global Pte. Ltd., ("AsiaSoft") could lead to increased expenditures and integration costs, and could strain
management, financial, and operational resources.

We
may pursue the acquisition of related businesses or complementary businesses, including
individual products or technologies, in an effort to expand capacity, enter new markets
and diversify our sources of revenue. In December 2006, we raised net proceeds of
$13,505,000 through the issuance of convertible debentures. In 2007, we used some of these
proceeds to acquire CPL, a provider of document management solutions in the United
Kingdom, and to acquire a 51% holding (and an option over the remaining 49% holding) in
Asiasoft, a holding company of a group of subsidiaries and affiliated companies in China,
Hong-Kong and Singapore, which are each information technology solutions providers. We may
also pursue additional acquisition opportunities. Acquisitions and expansions may require
significant additional expenditures, including integration and absorption costs, before we
are able to obtain any benefits of integration resulting from them. These expenditures may
strain management, financial and operational resources. Future acquisitions may also
result in potentially dilutive issuances of equity securities, the incurring of additional
debt, the assumption of known and unknown liabilities, the amortization of expenses
related to intangible assets and the impairment of goodwill, all of which could harm our
business, financial condition and operating results. Acquisitions in foreign countries may
pose additional problems, and we could experience inefficiencies in conducting our
business as we integrate new operations and manage geographically dispersed operations.

- 7 -

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Additionally,
we may not succeed in retaining or hiring qualified management, sales, customer support,
and technical personnel to integrate acquired operations, manage future growth
effectively, and accomplish our overall objectives. Competition for qualified personnel is
intense. If we expand too fast, or fail to integrate our recently acquired businesses or
other new businesses, or lose key personnel from our recently acquired businesses or other
businesses, there could be a material adverse effect on our business, prospects and
financial condition.

Some of our operations
are conducted in China. Accordingly, our results of operations and prospects will be
subject, to some degree, to the economic, political and legal developments in China.

The
Chinese economic, political and social conditions, as well as government policies, could
affect our business. The Chinese economy differs from the economies of most developed
countries in many respects. Since 1978, China has been one of the worlds
fastest-growing economies in terms of gross domestic product (GDP) growth. We cannot
assure you, however, that such growth will be sustained in the future. If in the future
Chinas economy experiences a downturn or grows at a slower rate than expected, there
may be less demand for spending in certain industries.

In
addition, the Chinese government continues to play a significant role in regulating
industry development by imposing industrial policies. It also exercises significant
control over Chinese economic growth through the allocation of resources, controlling
payment of foreign currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. We cannot assure you that
Chinas economic, political or legal systems will not develop in a way that becomes
detrimental to our business, prospects, financial conditions and results of operations.

Government grants we received for research and development expenditures may be reduced or eliminated in the
future due to Israeli government budget cuts. Furthermore, our receipt of such grants limits 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, under the Law for the
Encouragement of Industrial Research and Development, 1984 for the financing of a portion
of our research and development expenditures in Israel. The Israeli government has reduced
the benefits available under this program in recent years and may decide not to continue
the program in the future at its current level or to terminate it altogether. 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 from the OCS,
together with interest and penalties. See also Governmental Regulation in Item
4 herein.

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 Israeli Ministry of Industry and Trade has granted us
Approved Enterprise status to certain development programs under The Law for
the Encouragement of Capital Investments, 1959, or the Investment Law. The benefits
available to an Approved Enterprise program are dependent upon the continuing fulfillment
of ongoing 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 us in the future.

On
April 1, 2005, an amendment to the Investment Law came into effect (the
Amendment) that significantly changed the provisions of the Investment Law.
The Amendment limits the scope of enterprises which may be approved by the Investment
Center by setting criteria for the approval of a facility as an Approved Enterprise, such
as provisions generally requiring that at least 25% of the Approved Enterprises
income will be derived from export. Additionally, the Amendment enacted major changes in
the manner in which tax benefits are awarded under the Investment Law so that companies no
longer require Investment Center approval in order to qualify for tax benefits.

However,
the Investment Law provides that terms and benefits included in any certificate of
approval already granted will remain subject to the provisions of the law as they were on
the date of such approval. Therefore, our existing Approved Enterprise status will
generally not be subject to the provisions of the Amendment. As a result of the amendment,
tax-exempt income generated under the provisions of the new law will subject us to taxes
upon distribution or liquidation and we may be required to record deferred tax liability
with respect to such tax-exempt income. As of December 31, 2007, we did not generate
income subject to the provisions of the new law.

- 8 -

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Our ordinary shares have been subject
to frequent significant price fluctuations. If we fail to maintain minimum bid
requirements, we could be delisted.

Our
ordinary shares are quoted on the NASDAQ Capital Market, and have been subject to frequent
significant price fluctuations, due in part to speculative activity.

In
addition, trading in shares of companies listed on the NASDAQ Capital Market in general
and trading in shares of technology companies in particular have experienced extreme price
and volume fluctuations that have often been unrelated or disproportionate to operating
performance. These broad market and industry factors may depress our share price,
regardless of our actual operating results. In addition, if we issue additional shares in
financings or acquisitions, our shareholders will experience additional dilution and the
existence of more shares could decrease the amount that purchasers are willing to pay for
our ordinary shares.

We
must continue to meet certain maintenance requirements, including minimum bid
requirements, in order for such securities to continue to be listed on the NASDAQ Capital
Market. If our securities are delisted from the NASDAQ Capital Market, investors
liquidity in our securities could be reduced.

In
addition, if our securities were to be delisted from the NASDAQ Capital Market, our
ordinary shares could be considered a penny stock under federal securities
law. Additional regulatory requirements apply to trading by broker-dealers of penny stocks
that could result in the loss of an effective trading market for our securities.

Our ordinary shares are
traded on more than one market and this may result in price variations.

Our
ordinary shares are traded on the NASDAQ Capital Market and on the Tel Aviv Stock
Exchange. Trading in our ordinary shares on these markets is effected in different
currencies (US dollars on the NASDAQ Capital Market, and New Israeli Shekels on the Tel
Aviv Stock Exchange) and at different times (resulting from different time zones,
different trading days and different public holidays in the United States and Israel).
Consequently, the trading prices of our ordinary shares on these two markets often differ,
resulting from the factors described above as well as differences in exchange rates and
from political events and economic conditions in the United States and Israel. Any
decrease in the trading price of our ordinary shares on one of these markets could cause a
decrease in the trading price of our ordinary shares on the other market.

We do not intend to pay
dividends.

We
have never declared or paid any cash dividends on our ordinary shares. We currently intend
to retain any future earnings to finance operations and to expand our business and,
therefore, do not expect to pay any cash dividends in the foreseeable future.

The application and/or amendment of
Israeli laws or laws of other countries may adversely affect our ability to enforce
judgments or other rights.

Because
our principal offices are located in Israel, we are subject to Israeli law. Many of our
contracts with third parties are subject to the laws of other jurisdictions. We cannot
assure you that any judgments granted in the United States or any jurisdiction other than
Israel would be capable of enforcement or execution in Israel. Nor can we assure you that
any of our contracts pursuant to the laws of any foreign country are enforceable by us.
The inability to enforce or execute judgments or other rights and/or the possibility of
the laws of various jurisdictions being amended from time to time may have a material
adverse effect on our business, prospects, and financial condition.

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We may not be able to
make our debt payments in the future.

In
December 2006 through the issuance of convertible debentures, we raised net proceeds of
$13,505,000. Our ability to meet our obligations under the convertible notes and our other
debt obligations will depend on whether we can successfully implement our strategy, as
well as on financial, competitive, and other factors, including some factors that are
beyond our control. If we are unable to generate sufficient cash flow from operations to
meet principal and interest payments on our debt, we may have to refinance all or part of
our indebtedness. In addition, cash flows from our operations may be insufficient to repay
in full at maturity the convertible notes, in which case the convertible notes may need to
be refinanced. Our ability to refinance our indebtedness, including the convertible notes,
will depend on, among other things:

| |  | our
financial condition at the time;
| | - | ------------------------------------

| |  | restrictions
in agreements governing our debt; and
| | - | --------------------------------------------------

| |  | other
factors, including market conditions
| | - | ------------------------------------------

We
cannot ensure that any such refinancing would be possible on terms that we could accept or
that we could obtain additional financing. If refinancing will not be possible or if
additional financing will not be available, we may have to sell our assets under
circumstances that might not yield the highest prices, or default on our debt obligations,
including the convertible notes, which would permit our noteholders and holders of other
outstanding indebtedness to accelerate their maturity dates.

Our cash may be
insufficient to fund our liquidity needs after the repurchase of the convertible
debentures

We
recently announced that the Board of Directors has approved the payment of up to
$2,500,000 (9,000,000 NIS) to repurchase outstanding Series A convertible debentures that
the Company issued in December 2006 on the Tel Aviv Stock Exchange. These repurchases may
be in open market transactions, privately negotiated transactions or a combination of the
two. Because we will be using cash to repurchase this debt, we may be left with
insufficient cash to fund our other liquidity needs.

Our indebtedness and debt service
obligations have increased with the issuance of the convertible notes, which may adversely
affect our cash flow, cash position and share price.

We
intend to fulfill our debt service obligations from existing cash, investments and our
operations. In the future, if we are unable to generate cash or raise additional cash
financings sufficient to meet these obligations and need to use existing cash or liquidate
investments in order to fund these obligations, we may have to delay or curtail research
and development programs.

Our
indebtedness could have significant additional negative consequences, including, without
limitation:

| |  | requiring
the dedication of a portion of our expected cash flow to service our indebtedness,
thereby reducing the amount of our expected cash flow available for other purposes,
including funding our research and development programs and other capital expenditures;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | increasing
our vulnerability to general adverse economic conditions;
| | - | --------------------------------------------------------------------

| |  | limiting
our ability to obtain additional financing; and
| | - | --------------------------------------------------------

| |  | placing
us at a possible competitive disadvantage to less leveraged competitors and competitors
that have better access to capital resources.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

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Conversion of the
convertible notes would dilute the ownership interest of our existing shareholders.

The
conversion of some or all of the convertible notes would dilute the ownership interests of
our existing shareholders. Any sales in the public market of our ordinary shares issuable
upon such conversion could adversely affect the prevailing market prices of our ordinary
shares. In addition, the existence of the convertible notes may encourage short selling by
market participants because the conversion of the convertible notes could depress the
price of our ordinary shares.

Our restructuring of operations and
other measures we take to reduce costs may not achieve the results we intend and may
adversely affect our revenues and profitability.

In
January 2008, we announced that we had restructured various aspects of our operations in
an effort to achieve efficiency and competitive standing in the global market. As part of
our restructuring, we reduced the size of our research and development staff. Our
restructuring of operations and other cost reducing measures may not achieve the results
we intend and may invoke restructuring and other costs and changes to our business that
adversely affect our revenues and profitability.

|ITEM 4. |  | INFORMATION ABOUT THE COMPANY
|------- |  | -----------------------------

# History and Development

# Establishment, Legal
Name, Office and Trading Markets

We
were incorporated in March of 1991, are domiciled in Israel and exist as a company with a
limited share capital subject to Israeli law. Our legal name is Top Image Systems Ltd. and
our registered and principal executive offices are located in Israel at 2 Habarzel Street,
Ramat Hahayal, Tel Aviv 69710, and our telephone number is 011-972-3-767-9100. Our website
is http://www.topimagesystems.com (the information contained in our website is not
a part of this annual report and no portion of such information is incorporated herein).

Our
ordinary shares began trading on the NASDAQ Capital Market in November 1996 and on the Tel
Aviv Stock Exchange in December 2006.

Recent
Developments

In
2004, we modified our corporate structure in Europe, and established a new wholly owned
subsidiary in the United Kingdom, Top Image Systems UK Limited, which owns a subsidiary in
Germany, TIS Deutschland GmbH. The activity and assets of our then-existing European
branches were transferred to the new entities. In August, 2004 we established Top Image
Systems Japan Ltd. in order to strengthen our increased presence in Japan. On April 11,
2007 we acquired all the outstanding shares of Capture Projects Ltd. (CPL) to
increase our presence in the UK as well as in the European market in general. In July
2007, we acquired 51% of Asiasoft Global Pte. Ltd. (Asiasoft) to provide us
with a comprehensive and established infrastructure in China, Singapore, Hong Kong and
Malaysia. For more about these acquisitions, see Business Overview-Marketing
Strategy.

On
September 24, 2004, we sold 2,524,351 of our ordinary shares at a purchase price of $3.16
per share to investors for gross proceeds to us of approximately $8 million. The investors
also received warrants to purchase up to an additional 1,262,188 ordinary shares, with an
exercise price of $4.26 per share, which expired in 2007. On December 27, 2006, we
completed a public offering of approximately 61,900,000 NIS (approximately $14,800,000 at
the date of issuance) aggregate principal amount of convertible debentures on the Tel Aviv
Stock Exchange. In January 2008, we announced the completion of a restructuring plan aimed
at repositioning TIS as a leader in the end-to-end automated document capture solution
space, while laying the key foundations for future growth and profitability in 2008 and
beyond. The three pronged restructuring plan, initiated in the fourth quarter of 2007,
includes implementing a new Company-wide corporate and business structure aimed at
enhancing the Companys efficiency and competitive standing in the evolving global
market, while reducing corporate and global headcount; identifying new growth drivers
through synergies and joint development between the main business centers; and, enforcing
a meticulous performance and expense regime by creating business centers in each of the
main divisions worldwide, enhancing the commitment and responsibility of each division to
meet and surpass their predefined goals.

During
2007, 2006 and 2005, the aggregate amounts of our capital expenditures were $434,000,
$252,000 and $164,000, respectively. These expenditures were principally for the purchases
of computer hardware and software and facilities improvements, and were paid for with
internally generated funds and the proceeds of our private placement of ordinary shares in
2004 and our public offering of convertible debentures in 2006.

# Business Overview

General

We
develop and market automated data capture solutions for managing and validating content
gathered from customers, trading partners and employees. Whether originating from
electronic, paper, mobile or other sources, our solutions deliver digital content to the
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 different types of data from multiple sources.
Our products integrate information regardless of the source and format of the data,
whether 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, identifying,
interpreting and processing information, thereby increasing data capture accuracy and the
rate of information processing. The platform solution we offer replaces 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

eFLOW

TIS
signature solution is the eFLOW Unified Content Platform .
eFLOW provides the common architectural infrastructure for our solutions. We
anticipate that future developments will also be based on the Unified Content Platform.

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Based
on a single, integrated environment, the eFLOW platform provides a visual
application designed to enable the structure of a complete form processing and data
capture solution quickly and easily. Providing a modular platform with an open, scalable
and flexible architecture, eFLOW facilitates the development of applications
ranging from desktop, stand-alone applications to high-volume, network-based systems.

TIS
eFLOW provides enterprise-wide solutions for every data capture and content
delivery need, all on a single platform, using one set of business rules.
eFLOW allows a customer to integrate data of any format and from multiple
sources, including the Internet, paper, fax, microfilm, microfiche, electronic, and email,
and of different types such as invoices, freight and shipping bills, purchase orders and
others, to provide a single connection to the enterprise application system. Our
eFLOW platform allows maximum flexibility, using one set of rules for all
applications, dramatically reducing implementation time while broadening the utility of
the solution across the customers business.

eFLOW
is 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).

eFLOW
offers a definite advantage in mixed environments where documents in different formats
need simultaneous processing, sorting, and storing in databases for retrieval at a later
date. Our technology can easily process unstructured, semi-structured and structured
documents. eFLOW can manage these tasks without the need to pre-design a
working template.

eFLOWs
open architecture allows for integration with all major content management, enterprise
resource planning (ERP), CRM and workflow systems as well as major multi-function printers
and scanners. Therefore, eFLOW provides an end-to-end solution for managing
invoices and payments and eliminates a significant portion of 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.

eFLOWs
underlying infrastructure utilizes advanced technologies, such as Microsoft .NET Microsoft
Visual Basic and web 2.0 for applications, to provide an accelerated data capture solution
for paper, electronic forms, fax, and ftp files. Developing the advanced version of
eFLOW Unified Content Platform , eFLOW Version 3.0
and future version, based on the Microsoft .NET technology ensures its compatibility with
future Microsoft technologies and other technology partners, and gives our customers
shorter and easier implementation process, faster runtime, and a robust and secure
execution environment. The use of these technologies allows customers, developers and
partners to modify user interfaces, extend functionality and connect TIS
eFLOW  with other mission-critical applications to create fully integrated
business solutions. eFLOW includes support for the XML standard which enables
the interchange of documents between systems and applications in a standard format.

eFLOWs
Client/Server architecture allows users to access the solution through one channel, the
eFLOWserver which results in superior network security and efficiency. Customers
can select between a centralized or decentralized mode of operation. Multiple applications
and servers may be viewed and controlled at any given moment, on site or remotely and
additional servers may be added into a system without the need to halt production.

To
support the needs of clients global operations, the system can process multiple
languages at the interface, database (Unicode), and OCR / ICR levels. Currently the system
supports all major European languages, Chinese and Japanese.

Targeting
banking and finance, logistics, insurance, postal systems, healthcare, tax, statistics and
many other potential markets, eFLOW 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.

In
mid 2007, we released eFLOW Version 4.0 which provides our customers an enhanced
user experience, powerful user-interface, increased efficiency and superior data
recognition. Its enhanced completion module introduces a new user interface to meet
customers demands and ergonomic needs. Thus, greater efficiency and productivity are
achieved Extensive research and development processes led to a state-of-the art
recognition algorithm for unprecedented recognition rates unique intelligent matching of
different recognition technologies, freeform and secured character recognition and perfect
document classification. The latest versions of market leading recognition engines were
embedded in eFLOW4 for the best performance and greatest accuracy. eFLOW4
includes analyzing tools for improving and maximizing control over recognition rates,
enhanced look-up tables are available at any stage to speed up recognition and validation
processes. eFLOW4 also includes automatic dynamic learning to ensure greater
accuracy of information. Any editing and changing done by the users is automatically
learned and stored by the system for future use. Resources and processing time are reduced
to a minimum.

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The
eFLOW solution includes a robust set of applications that run on top of the core
platform and enable invoice processing, accounts payable processing and mailroom
automation:

Smart
for Unstructured Content, a Mailroom Classification Solution

Smart,the eFLOW plug-in for unstructured content, is an automated
classification solution. By automatically capturing, recognizing, classifying and routing
all incoming information, regardless of format or origin, Smart functions as the
gateway to enterprise information systems.

Smart
offers a single point of entry for any kind of information entering the organization.
Whether originating from paper mail, fax, email, or any other source, Smart
automatically recognizes the image, understands it, and accordingly defines its
destination within the organization. Smart consists of sophisticated artificial
intelligence and machine learning algorithms, and provides tracking capabilities, while
the digitized image of the document is routed for further processing. Additional benefits
of Smart include reduced operational costs, quick and accurate delivery of
business-critical information, elimination of burdensome paper-based information, and much
improved mail security.

Freedom
for Semi-Structured Content, a Complete Invoices and Related AP Documents Processing
Solution

Freedom,
the eFLOW 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. Based on artificial intelligence, Freedom is
designed to understand the format of a document without the need to predefine its
structure. Freedom is able to locate, identify, capture and validate critical data
contained in the document. The market for this product includes 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.

By
automating the entire process of invoice handling, Freedom allows companies to
improve efficiency, reduce cost, limit process cycles and eliminate errors, while
improving business relationships with suppliers. Seamlessly integrating with any financial
workflow and ERP systems such as SAP, Oracle and JD Edwards, eFLOW Freedom provides
support throughout the entire invoice processing. eFLOW Freedom captures and
classifies all kinds of invoices in paper or electronic formats. Line items are extracted
and interpreted in both single and multi-page invoices.

The
Learning module is one of eFLOWs innovative modules which 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 to
locate certain important fields. The new information would then be available for the
system to recognize a similar, although not necessarily identical, form in the future.

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Integra
for Structured Content

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

eFLOW
Ability for SAP-users

eFLOW
Ability is an integrated module interfacing with SAP systems for automated parking,
approval and posting of invoices and any other document within SAP systems. eFLOW
Ability improves invoice processing, reduces the time it takes for an invoice to be
approved for payment and eliminates double payments, lost invoices and other human
mistakes along the way.

In
addition, eFLOW Ability offers a complete SAP-oriented business workflow and
an accounts payable document processing, approval, and validation solution.

eFLOW
Ability is a result of a successful cooperation between TIS and Beck-IT GmbH, a
German based leading developer of standard-add-ons in the sector of SAP business workflow.
The ability to seamlessly integrate into SAP R/3 creates a high-performance product line
that companies can utilize to increase productivity, enhance the precision of entries and
optimize cash management.

eFLOW
Ability empowers users to streamline and accelerate the processing of invoices and
any other document, take advantage of efficient accounts receivable and accounts payable
management, eliminate periodic posting peaks, reduce errors and increase financial
reporting accuracy and transparency.

eFLOW
Invoice Reader

eFLOW
Invoice Reader is a standard, generic and easy-to-implement invoice capture and
approval solution. This solution can be deployed and integrated in any enterprise
accounting environment including SAP, Oracle and other financial systems.

eFLOW
Invoice Reader is pre-adapted to specific country regulations and business practices,
and thus can be implemented in a relatively short timeframe. eFLOW Invoice Reader
minimizes resources for operating an effective invoice capturing process, shortens
delivery time and purchase-to-pay cycle, employs the most advanced character recognition
technology for fast data capture, and automatically verifies the vendor data and PO
information on the incoming invoices.

AFPSPro

AFPSPro
had been our flagship product until the introduction of the eFLOW Unified
Content Platform. We are at the end of the process of upgrading
AFPSPro customers to eFLOW and plan to gradually phase out
AFPSPro.

Asiasoft Products

Asiasoft, which was recently acquired by
TIS, also has a broad portfolio of data extraction and content delivery software products.
Currently, these products are being sold in the Far East only and are not yet integrated
into the eFLOW platform. Nevertheless, in the future, these products may be
developed in conjunction with eFLOW and will be sold and implemented by other
branches of TIS.

Asiasofts products
include:

Aware Information
Management Suite (IMS)A reliable, secured and easy-to-use
information management solution. The AwareIMS product suite includes document &
data capture, document management and computer output management software solutions.

Aware S3 PortalA platform used to integrate aware
capture and content manager, tailored for shared services and business process
outsourcing. This platform provides customers with an end-to-end document lifecycle
management solution.

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Principal
Markets

As
of December 31, 2007, we operated branch offices in the United States, the United Kingdom,
Germany China, Hong Kong, Singapore and Japan through subsidiaries. Our U.S. branch is
responsible for sales, marketing and support activities in the United States, Canada, and
Latin America.  In addition, we believe that there exist significant opportunities in
France, the Czech Republic, Spain, Italy, the Netherlands and Luxembourg, South Africa and
Australia. In France, Spain, Italy and the Benelux we have several local sales and
technical representatives. These representatives manage our sales, marketing and
operational activity in their locations, providing integration and implementation
services, as well as marketing support.

The
following table summarizes total revenues by category of activity and geographic market
for each of the last three completed fiscal years:

Product Revenues by Region
(U.S. Dollars in thousands)

|                           | 2005 | 2006 | 2007
|-------------------------- | ---- | ---- | ----
|
|
|
|
|Europe                     |      |      |     
|Far East (excluding Japan) |      |      |     
|Japan                      |      |      |     
|North and South America    |      |      |     
|Africa                     |      |      |     
|Israel                     |      |      |     
|                           |      |      |     
|Total                      |      |      |     
|                           |      |      |     

Service Revenues by Region
(U.S. Dollars in thousands)

|                           | 2005 | 2006 | 2007
|-------------------------- | ---- | ---- | ----
|
|
|
|
|Europe                     |      |      |     
|Far East (excluding Japan) |      |      |     
|Japan                      |      |      |     
|North and South America    |      |      |     
|Israel                     |      |      |     
|Africa                     |      |      |     
|                           |      |      |     
|Total                      |      |      |     
|                           |      |      |     

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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. Nevertheless, in Japan, fiscal years generally end on
March 31, thus activity in the Japanese market reduces the seasonality of our business.
See the section of Item 5 herein entitled Seasonality for additional detail.

Marketing
Strategy

Over
the past few years, we have embraced a strong enterprise solution strategy that builds
upon the foundation of intelligent capture and exchange technologies and perfectly fits
the strength of eFLOW, eFLOW is an end-to-end platform that
presents a broad set of information capture solutions and technologies, It serves as a
single gateway for information that enters the enterprise. eFLOW captures,
classifies, processes, validates and delivers information to ERP systems, content
management applications, workflow solutions and CRM systems.

Global
and local value-added resellers, distributors and systems integrators find our enterprise
solution strategy attractive as it usually completes their own solutions. Cooperation with
such partners free us from having to invest resources in providing support and services to
the end-user. Our partners perform these functions. This strategy is based on our belief
that value-added resellers, distributors, systems integrators and Original Equipment
Manufacturers (OEMs) generally have better access to end-users in their respective markets
than we do. By engaging value-added resellers, 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.

However,
working through channels instead of engaging in direct sales to customers limits our share
in each transactions revenues and may damage our control over our order stream.
Therefore, in territories where we enjoy a strong presence and maintain a local branch
office, and where the market potential is high, we choose to work directly with the
customers. We provide consulting, implementation and support services directly to the
customers and thus we enjoy a closer relationship with the customer and larger share of
the deals revenues. We are endeavoring to continue this trend in the coming years.

In
line with this view, TIS made two acquisitions during 2007: In April 2007, TIS acquired
100% of Capture Projects Ltd. for $4,600,000. CPL is a leading provider of document
management solutions in the United Kingdom. This acquisition increased TISs presence
in UK as well as in the European market in general, doubling the size of our operations in
the European market. This acquisition provides TIS with exposure to new markets while
extending its offerings to both new and existing customers.

In
July 2007, TIS acquired 51% of Asiasoft Global Pte. Ltd., for $2,700,000.
Asiasoft is a leading developer and distributor of document capture, content management
and shared services software throughout China, Singapore, Hong Kong and Malaysia. This
acquisition provides TIS with a comprehensive and established infrastructure in the
region. It positions TIS as one of the strongest players in the region by extending its
solution sales offering, thereby providing a complete imaging platform. TIS also obtained
the option to purchase the remaining 49% of Asiasoft, for a purchase price of up to
approximately $1,500,000, within 18 months following the initial acquisition.

These
two acquisitions add more capabilities and expand TIS portfolio, as well as bring
the Company a step closer to becoming one of the document capture market leaders in Europe
and in the Far East. Along with a restructuring process we engaged in at the end of 2007,
to increase business efficiency, focus and financial profitability, the Companys
management believes it has laid renewed foundations for future growth. At the end of 2007,
the company was engaged in stabilizing the business. Once this task is completed, at the
beginning of 2009, the Companys management intends, once again, actively look for
merger and acquisition opportunities through which we plan to penetrate the largest market
worldwide, the U.S market.

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Currently,
in approximately 40 countries worldwide where we do not sell directly to customers, we
sell through a network of value-added resellers, distributors and systems integrators. The
system integrators are managed via our sales and marketing force located in our sales
centers in Europe, the United States, Asia Pacific and China and in our headquarters in
Israel. We have implemented a program to align ourselves with major complementary
strategic level partners who can help us reach new target customers and market segments.
These agreements call for the strategic partner and us to plan and coordinate marketing
and sales activities in their respective territories.

In
March 2007, we announced an extended worldwide technology and sales alliance with ARX
(Algorithmic Research), a leading global provider of standards-based electronic signatures
(digital signatures) and data security solutions. Through this partnership, our joint
customers can expedite data capture processes, improve internal controls and enhance
compliance with regulations. ARXs CoSign is a non-forgeable, simple-to-use,
standards-based electronic-signature solution that is tightly integrated with our
eFLOW. CoSign provides organizations with a solution that enables users to
electronically sign documents, records, files, forms, and other electronic transactions.
The combination of these complimentary technologies offers a compelling solution for any
financial, commercial and governmental organization wishing to comply with the growing
number of compliance reports required by federal and state government regulatory
organizations.

In
March 2007 we also announced the partnership agreement with J&B Software, Inc., a
premier provider of enterprise-wide payment system solutions and integration services.
Through the agreement, J&B Software Inc. will provide eFLOW, TISs
flagship document capture solution, to its large client base in the transaction processing
and financial services industries. J&B Software will also develop specific
applications to the healthcare claims market. This integration is highly advantageous to
numerous industries, including government, financial, insurance, and health care. It
provides customers with a flexible, streamlined set of solutions for capturing and
managing transactions information while reducing their related costs. It represents an
excellent opportunity for TIS to reach a wider audience with its robust enterprise input
management solution. In September 2007, we announced three new government, transportation
and media projects in the USA.

In
August 2007, we announced that Elision Limited selected TIS as its strategic partner for
the accounts payable processing and digital mailroom markets. UK-based Elision limited,
part of the Elision group, creates solutions for organizations migrating from paper-based
to electronic systems providing service spanning business and technology consultancy,
systems integration and managed service delivery.

In
December 2007, we announced an extended European wide strategic alliance for the accounts
payable or AP market with Contempus, the leading supplier of software solutions and
expertise in Enterprise Information Management. The partnership with Contempus strengthens
TISs offering in the AP market. Through this partnership, TIS has the ability
to offer customers an end-to-end solution independent of their ERP system, allowing us to
take our work with SAP and Oracle in to other market areas.  Contempus has a strong
presence in the European marketplace.This partnership began in the UK, and we expect it to
roll out across Europe in 2008.

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. We 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. We have not obtained any patents and we cannot assure you that we will file
for or 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 U.S. law.

We
believe that our technology has been developed independently and does not infringe on the
proprietary rights of others. However, we cannot assure you that the technology does not
and will not 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 under 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.

ReadSoft,
one of our competitors, filed a patent application entitled Method and Arrangement
for Automatic Data Acquisition of Forms. The patent was granted on August 13, 2003
(EP 0976092). Although the patent was not enforced against us, we became aware of the
patent and, in May 2004, filed a Notice of Opposition with the European Patent Office
requesting that the patent be revoked in its entirety. After a number of written
exchanges, the dispute was heard on March 8, 2007 in a proceeding at the European Patent
Office in Germany. At the end of the oral proceeding, Readsofts patent was revoked
in its entirety. Readsoft has appealed this decision and has petitioned for the patent to
be reinstated. Although we do not believe that any of our products would infringe upon
this patent, if ReadSoft were to prevail on its appeal, and it subsequently was decided
that we infringed the patent, there could be a material adverse effect on our business,
prospects and financial condition.

In
addition, we license components of our software systems and technology from third parties
in reliance on such parties representations as to ownership of the licensed
intellectual property. If our licensors are found not to own or have rights to sublicense
such rights to us and we are unable to replace the licensed technology with a comparable
substitute, there could be a material adverse effect on our business prospects and
financial results. Even if we were to replace licensed technology with available
alternatives, it could take time to identify the best replacement and integrate it into
our software. The delay and uncertainty could negatively impact our financial results.

Yehezkel
Yeshurun, our former Chief Scientist, and currently a member of our board of directors,
was, at the time of his employment with us, 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 Prof. Yeshuruns
employment by us and has not asserted any claim that intellectual property developed by
Prof. Yeshurun on our behalf belongs to the University, the University has not
acknowledged our rights to any intellectual property developed by Prof. Yeshurun. 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 the eFLOW name in connection with our
marketing activities. We either hold or intend to apply for trademark registration of our
significant solution and module names three of which namely EFLOW, Top Image Systems and
TIS were filed in August 2007, although we cannot assure you that such applications will
be successful. Although we have not sought to market our products using our trade name
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
trade name TIS to market our products.

NMS
Imaging Inc., a  company headquartered in  Maryland, filed a trademark application
for the registration of the name eFlow which has been used by the Company for
approximately 7 years, for a product similar to the Companys on June 8, 2007.
Although the trademark was not enforced against us, we became aware of the application
and, in the course of August, 2007, filed a trademark application in the United States
Patent and Trademark Office, for the registration of the name EFLOW for
use in connection with computer software applications namely software applications that
processes and integrates data from various sources and/or of different types. In
such application TIS claims to have been using the mark in commerce since 1999 in the
United States. Concurrently, the Company has filed trademark applications for the names
Top Image Systems and TIS.

Competition

The
market for data capture systems in general, and for automatic form processing systems in
particular, is very fragmented and 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.

Our
products compete with those developed and marketed by numerous well-established companies
including Captiva Software, Mitek, Banctec, Dicom, Microsystems Technology, Datacap, SER,
and ReadSoft, as well as with manual data entry systems.

During
the past few years, several mergers and acquisitions have taken place between our
competitors and companies with related and complementary technology, dramatically changing
our marketplace.  They include:

| |  | In
January 2008, Captaris Inc., a US based provider of automated document-centric processes
software products, announced the acquisition of the Constance based software house Océ Document
Technologies (ODT). The new company in Constance will be named Captaris Document
Technologies GmbH.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | Also
in 2008, Oracle acquired Captovation, a US based provider of document capture solutions.
With the addition of Captovation, Oracle expects to extend its comprehensive and
integrated solution for Enterprise Content Management with transactional content
processing.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
December 2007, EMC signed a definitive agreement to acquire publicly-held, Carlsbad,
CA-based Document Sciences Corporation, a supplier of document output management (DOM)
software. This cash-based acquisition was completed in March 2008.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
November 2007, I.R.I.S. (Image Recognition Systems) acquired Morningstar Systems, a Dutch
company with affiliates based in Maastricht and offices in Amsterdam. Morningstar Systems
specialized in context management and enterprise content management (ECM) solutions.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | At
the end of November 2007, I.R.I.S. announced another acquisition of Docutec AG, a German
Leader in invoice recognition and document Classification. Docutecs team is
composed of 30 people and has a strong network of partners including WMD, Easy, Banctec,
Unisys, ect.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
October 2007, Xerox Corporation acquired Advectis, Inc., a US based provider of a
web-based solution that electronically manages the process to underwrite, audit,
collaborate, deliver and archive mortgage loan documents.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
November 2006, Oracle acquired Stellent, a global provider of enterprise content
management (ECM) software solutions. Earlier that year, Stellent acquired Bitform, a
provider of content cleansing technologies, and Sealed Media, a provider of enterprise
digital rights management solutions addressing content security and compliance risk.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
October 2006, ReadSoft acquired Ebydos AG, a German SAP specialist. The acquisition
strengthened ReadSofts position in the electronic invoice processing products for
the SAP business system. With 45 employees, the acquired units in Germany, Poland and the
United States reported sales of approximately 4,400,000 Euros in 2005. A large part of
Ebydos sales come directly from the cooperation with ReadSoft. Ebydos has shown
good profit and the acquisition is expected to increase ReadSofts earnings per
share already this year.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Also
in October 2006, Bottomline Technologies, a provider of collaborative payment and invoice
automation solutions to corporations, financial institutions and banks around the world,
acquired Formscape, an Output Management Vendor. Earlier that year, Bottomline
Technologies acquired Tranmit, a provider of web-based purchase-to-pay automation
solutions.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
August 2006, IBM acquired       FileNet, an ECM vendor.
| | - | ----------------------------------------------------------

| |  | Also
in August 2006, Open Text acquired Hummingbird. This merger between two large, global
providers of ECM software formed the largest independent provider of ECM solutions in the
world.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
July 2006, Xerox acquired Amici LLC, a provider of litigation services line of electronic
discovery and records management services.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| |  | In
June 2006, EMC acquired Proactivity, a provider of Content & BPM.
| | - | --------------------------------------------------------------------

| |  | Also
in June 2006, Iron Mountain acquired Digiguard, thus adding data protection services to
its portfolio.
| | - | -----------------------------------------------------------------------------------------------------------

| |  | In
March 2006, DICOM GROUP acquired LCI, the German provider of advanced learning systems
for business automation, image classification, forms processing, and document analysis.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | In
January 2006, Pitney Bowes acquired Emtex Ltd., a provider of document production of
multi-vendor & multi-site print operations.
| | - | -----------------------------------------------------------------------------------------------------------------------------------

| |  | Also
in January 2006, Tower Software acquired Rapid Web Solutions, a provider of web content
management software.
| | - | -----------------------------------------------------------------------------------------------------------------

In
addition, we often compete with major systems suppliers such as IBM, Siemens and Unisys.
In these cases, the major systems suppliers offer one of our competitors solutions
as part of an integrated solution. There are also numerous other companies that have
developed or may develop technologies or products that may be functionally similar to some
or all of those we offer. 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
lifespan. 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, we compete with
more than one company supplying similar solutions. In Japan, where these competitors are
less active, we hold a more prominent position in the market.

Customers

Our
end-user customers consist of governmental entities and mid and large-sized
enterprises.

During
2007, we further strengthened our position as a technology provider for semi-structured
applications, including supplier invoices, purchase orders, checks and remittances,
different financial applications, health claims and freight bills. Our solutions support
customers by standardizing their invoice circulation, review and approval, as well as by
creating a uniform approach to facing future business needs. We created and installed
systems for complicated semi-structured applications which included automating the capture
and process of information from hundreds of different invoices and other accounts payable,
or AP, documents. Many of our customers choose to automate not only the capture part of
the system but the entire process, by implementing also our eFLOW Ability, the
integrated module into SAP systems for automated parking, approval and posting of invoices
and any other document within SAP systems. eFLOW Ability improves invoice
processing, reduces the time it takes for an invoice to be approved for payment and
eliminates double payments, lost invoices and other human mistakes along the way.

Our
new customers included, among others: automobile market leaders Honda and Suzuki
International Europe GmbH which selected eFLOW Invoice Reader and eFLOW
Ability to streamline their entire invoice process; Agfa Materials and Agfa Healthcare
which implemented eFLOW Ability to process all incoming supplier invoices; Hormel
Foods, a US-based multinational manufacturer and marketer of branded consumer meat and
food products, that implemented eFLOW to streamline its entire invoice process;
Network Rail, UKs rail network, that chose eFLOW toautomate and improve the
efficiency of their AP process and streamline the information into its Oracle system; and
Diageo, a leading premium drinks business, which chosen eFLOW Invoice Reader and
eFLOW Abilityto process its invoices and streamline the information into its SAP
system.

We
especially strengthened our presence in Germany, and focused on flexible, standard
solutions for automated mailrooms as well as invoice and purchase orders processing, often
in SAP-based environment. During 2007, we won more than 20 new projects in Germany
including: SITA Deutschland GmbH, one of the leading private waste management enterprises
in Germany and a subsidiary of the French energy-, water-, and waste-management company
Enterprise SUEZ; WAZ Media Group, one of the most significant European media groups. The
HCI Group that creates closed-end funds in shipping, real estate, private equity fund of
funds, and the secondary life insurance market, as well as asset creation plans; SCHOTT, a
technology-driven international group that manufactures and supplies household appliance
industry, pharmaceutical packaging, optics and opto-electronics, information technology,
consumer electronics, lighting, automotive engineering, and solar energy; EnBW Energie
Baden-Württemberg AG, the third largest energy company in Germany; Gruenenthal, a
global leading research, development, and production pharmaceutical company; and The LAPP
Group is an international manufacturer and market leader of branded articles in the area
of cable technology.

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Through
cooperation with other technology providers such as J&B Software, we were able to
offer customers extended advanced intelligent document capture and recognition solutions
and services. Such partnerships were proven to be successful, and in 2007 we won together
three clients in the government, transportation and media industry market segments. In
these projects, TIS and J&B utilize various technologies and products based on the
eFLOW platform, including Freedom for efficient semi-structured document
processing and Smart for robust document classification systems in addition to
J&Bs core processing technologies. The implemented solutions include classifying
and extracting data from government application forms, connecting to lockbox and
processing account receivable documents, and processing invoices and remittance skirts
with a list of invoices to balance against accounting systems and update payments.

Smart,
our automatic classification module, provides the ability to automatically sort the
incoming information, classify all documents, recognize and extract the data from
documents, apply the organizations business rules, validate the data, and then
seamlessly deliver this data to the organizations back-end enterprise systems.
Therefore, many large organizations, especially in the B2C market where there are large
customer bases and extensive communications between consumer and supplier, have selected
Smart. Among the customers that selected this solution during 2007 are: BKK
Essanelle, a well-known German health insurance company, and the third to choose
eFLOW automated mailroom solution in the German healthcare market, IRSN, the French
Institute for Radiological Protection and Nuclear Safety, Iberderola, a Spanish-based
world leading private energy group, and an Asian Pacific -based Examination Authority that
uses Kodak Business Process Services with TIS technology

One
of eFLOWs main technological strong points is the fact that one platform
includes a variety of solutions and modules that can be used separately but which may also
be used as an integrated, comprehensive solution. Over the past years, we have noticed
that growing numbers of customers choose to enjoy the possibilities this kind of a
solution brings, and to purchase an advanced complete digital business information process
solution to reduce the costs of incoming information processing and distribution across
the organization and to improve productivity and efficiency while decreasing the
turnaround time of incoming information availability for ongoing operations.

Warranty
and Service

We
generally negotiate our warranty obligations with respect to our products on a
case-by-case basis.

We
may be exposed to potential product liability claims by our customers and users of our
products. Currently, we hold a worldwide product liability insurance policy that provides
coverage limited to $6,000,000 in aggregate for the policy period ending on September 30,
2008. 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 15-18% per
annum of the applicable license fees for maintenance. Our technical team also provides
support to value-added resellers, distributors and systems integrators to assist in the
integration of our products.

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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.

# Governmental Regulation

The
government of Israel encourages research and development projects oriented towards
products for export through its Office of the Chief Scientist Office, or OCS, pursuant to
the Law for the Encouragement of Industrial Research and Development, 1984, or 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! and
eFLOW 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. Our total outstanding
obligation in respect of royalty-bearing government participation received or accrued, net
of royalties paid or accrued, amounted to $69,000 as of December 31, 2007.

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 our research and development costs.

Recent
amendments to the Research Law provide for greater flexibility with regard to the place of
manufacturing of products funded with development grants and give the authorities larger
discretion than in the past based on the value-added to the products. A plan may 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, anyone 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 herein entitled Law for the Encouragement of Capital
Investments, 1959.

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.

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# Organizational Structure

We
currently have nine operating 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 TIS. 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. e-Mobilis is currently undergoing voluntary winding- up proceedings under the
Israeli law, in the District Court in Tel Aviv. The Company believes a liquidation order
of e-Mobilis will be received within the coming year. In 2004, we modified our corporate
structure in Europe, and established a new wholly owned subsidiary in the United Kingdom,
Top Image Systems UK Limited, which owns a subsidiary in Germany, TIS Deutschland GmbH.
The activity and assets of our then-existing European branches were transferred to the new
entities. In August, 2004 we established Top Image Systems Japan Ltd. in order to
strengthen our increased presence in Japan. On April 11, 2007 we acquired all the
outstanding shares of CPL, a UK company.

On July 9, 2007 we acquired 51% of
the outstanding shares of Asiasoft and also received the right to purchase the remaining
49% of Asiasoft shares.

Asiasoft is a holding company of a
group of subsidiaries, ACME Solution Ltd. is a wholly owned Hong Kong registered
subsidiary which, primarily provides software development and customization services.
Asiasoft (S) Pte Ltd (AS), which was established in Singapore in 1986. AS is a
system integrator in document workflow and imaging. Asiasoft Shanghai Co. Ltd was
incorporated in 2000 in China, and its principal activity is outsourcing software
services. Asiasoft Solution Guangzhou Ltd. a wholly owned Chinese subsidiary (AS
GZ) was incorporated in January 2007. AS GZ is engaged in software development and
integration services in Guangzhou region of China.

# 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 $16,000, approximately 110 square meters of which is
sub-leased by us starting January 2008 for a monthly rent of $3,000. The lease expires in
2012, and such expiration will accordingly cause the sub-lease or any extension thereof to
expire as well. Our subsidiary in Germany leases approximately 241 square meters of office
space in Cologne, Germany for a monthly sum of $10,000 which will expire in August 2008
and our UK subsidiaries leases approximately 170 square meters of office space in London
for the amount of $12,500 per month which will expire in 2008, and 90 square meters of
office space in Leeds for the amount of $10,000 per month which will expire in 2011.We
also lease approximately 250 square meters of office space in Tokyo, Japan for
approximately $15,000 per month pursuant to a lease expiring in 2008. Our subsidiaries in
Asia had leases at: Singapore, 440 square meters for $18,000, lease will expire in 2009;
Hong-Kong, 158 square meters for $4,000, lease will expire in 2008; Shanghai, 480 square
meters for $5,700, lease will expire in 2010; and Guangzhou where we lease various spaces
totaling 367 square meters for $3,000 expiring in different dates between 2008-2010.

|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 herein.

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General

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

Our
sales to end-users, resellers, value-added resellers, 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 customers do not provide them with the right to return the purchased
products or solutions. Payment with respect to such sales is generally due within a
specified period following receipt of an invoice. The period varies, but is up to 150 days
for end-users and up to 120 days for resellers, distributors and system integrators. We
are not party to any extended payment arrangements.

As
a result of our strategy of pursuing strategic alliances with value-added resellers,
distributors and system integrators, a substantial portion of our revenues is derived from
such alliances. During the years ended December 31, 2005, 2006 and 2007, revenues deriving
from value-added resellers, distributors and system integrators accounted for
approximately 46%, 44% and 36%, respectively, of our revenues.

Historically,
we have recognized a majority of our revenues from product sales. During the years ended
December 31, 2005, 2006 and 2007, product revenues accounted for approximately 59%, 60%
and 50%, respectively, of revenues, while service revenues accounted for approximately
41%, 40% and 50%, respectively, of revenues. In 2007, sales of eFLOW
accounted for 59% of our product sales and for approximately 30% of our revenue.

Sale
Cycle

Our
sales cycle for eFLOW ranges 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.

Geographical
Considerations

The
following table summarizes total revenues by geographic market for each of the last three
completed fiscal years.

Revenues by Region (U.S. Dollars in
thousands)

|                           | 2005 | 2006 | 2007
|-------------------------- | ---- | ---- | ----
|
|
|
|
|Europe                     |      |      |     
|Far East (excluding Japan) |      |      |     
|Japan                      |      |      |     
|North and South America    |      |      |     
|Africa                     |      |      |     
|Israel                     |      |      |     
|                           |      |      |     
|                           |      |     
|Total                      |      |      |     
|                           |      |      |     
|                           |      |      |     

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As
a result of the fluctuation in revenues 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

Our
consolidated financial statements have been prepared in accordance with generally accepted
accounting principles in the United States, or U.S. GAAP. 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 periodically evaluate our estimates,
including those relating to the allowance for doubtful accounts, contingencies and
litigation. 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

The
Company derives its revenues mainly from sales of products and services. Product revenues
include mainly sales of software and to a lesser extent of related hardware. Revenues from
services include maintenance and technical support, consulting and training

We
accounts for software sales in accordance with Statement of Position No. 97-2,
Software Revenue Recognition (SOP No. 97-2), as amended by
Statement of Position 98-9, Modifications of SOP 97-2, Software Revenue Recognition
with Respect to Certain Transactions. SOP No. 97-2 generally requires revenues
earned from software arrangements involving multiple elements to be allocated to each
element based on the relative fair values of the elements determined by the vendors
specific objective evidence (VSOE) of fair value. Revenues are allocated under
the residual method when VSOE of fair value exists for all undelivered
elements and VSOE of fair value does not exist for all of the delivered elements, and when
all SOP No. 97-2 criteria for revenue recognition are met.

Revenue
from license fees is recognized when persuasive evidence of an agreement exists, delivery
of the product has occurred, the fee is fixed or determinable, and collectibility is
probable.

Maintenance
and support revenue is deferred and recognized on a straight-line basis over the term of
the maintenance and support agreement. The VSOE of fair value of the undelivered elements
(maintenance, support and services) included in multiple element arrangements is
determined based on the price charged for the undelivered element when sold separately or
renewed.

Revenues
from hardware sales, whether included in software arrangements or when sold separately,
are recognized in accordance with SAB 104 Revenue Recognition. Because the
software is not essential to the functionality of the hardware, the hardware is not
considered software-related and, therefore, is excluded from the scope of SOP 97-2, and is
recognized according to SAB 104 when persuasive evidence of an arrangement exist, delivery
has occurred, the vendors fee is fixed or determinable, no further obligation exists
and collectability is reasonably assured. The Company records revenue from the sales of
third party hardware gross of cost of sales, in accordance with Emerging Issues Task Force
(EITF) 99-19, Reporting Revenue Gross as a Principal versus Net as an
Agent.

Arrangements
that include consulting/professional services are evaluated to determine whether those
services are essential to the functionality of other elements of the arrangement. When
consulting services are not considered essential, the revenue allocable to the consulting
services is recognized as the services are performed.

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If
services are considered essential to the functionality of other elements of the
arrangement, revenues from software licenses that require significant customization,
integration and installation are recognized using contract accounting based on Statement
of Position No.81-1 Accounting for performance of certain construction type and
certain production type contract , on the percentage of completion method, in
accordance with the Input Method, provided that the revenues are fixed or can
be reasonably estimated, collection is probable, costs related to performing the work are
determinable or can be reasonably determined, there is no substantial uncertainty
regarding our ability to complete the contract and to meet the contractual terms. The
percentage of completion is determined based on the ratio of actual cost to total
estimated cost. As for contracts in which a loss is anticipated, a provision is recorded
for the full amount of the expected loss, in the period in which such losses are first
determined. As of December 31, 2007, no such estimated losses were identified.

Deferred
revenues represent mainly unearned amounts received under technical support and
maintenance arrangements that are paid by customers and not yet recognized as revenues.

Trade
Receivables and allowance for doubtful accounts.

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

The
balance sheet allowance for doubtful debts for all the periods through December 31, 2007
is determined as a specific amount for those accounts the collection of which is
uncertain. We regularly review the allowance by considering factors such as historical
experience, credit quality, age of the accounts receivable balances, and current economic
conditions that may affect a customers ability to pay. If a major customers
creditworthiness deteriorates, or if actual defaults are higher than our historical
experience, or if other circumstances arise, our estimates of the recoverability of
amounts due to us could be overstated, and additional allowances could be required, which
could have an adverse impact on our results of operations.

Goodwill

Goodwill
is measured as the excess of the cost of an acquired company over the sum of the amounts
assigned to tangible and identifiable intangible assets acquired less liabilities assumed.
Goodwill is not amortized, but rather reviewed for impairment at least annually in
accordance with the provisions of SFAS No. 142. The goodwill impairment test under SFAS
No. 142 involves a two-step approach. Under the first step, the Company determines the
fair value of each reporting unit to which goodwill has been assigned. The reporting units
of the Company for purposes of the impairment test are the Companys two operating
units, the Asiasoft and the rest of the group (all companies in the group
except for AsiaSoft), as these are the components of the business for which discrete
financial information is available and management regularly reviews the operating results
of those components. The Company then compares the fair value of each reporting unit to
its carrying value, including goodwill. The Company estimates the fair value of each
reporting unit by estimating the present value of the reporting units future cash
flows. If the fair value exceeds the carrying value, no impairment loss is recognized. If
the carrying value exceeds the fair value, the goodwill of the reporting unit is
considered potentially impaired and the second step is completed in order to measure the
impairment loss. Under the second step goodwill is reduced to its implied fair value
through an adjustment to the goodwill balance, resulting in an impairment charge. The
Company has elected to perform its analysis of goodwill assigned to asiasoft and the
rest of the group during the second and the fourth quarters of the year,
respectively. During 2005, 2006 and 2007, no impairment losses were identified.

Other intangible assets

The
Companys long-lived assets are reviewed for impairment in accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS No. 144) whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the assets. If such assets are
considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets. As of
December 31, 2006 and 2007, no impairment indicators have been identified.

Convertible
Debentures

In
accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, the convertible debt holders conversion right
provision and the linkage of the convertible notes U.S. Dollar with a floor on the NIS/
U.S. Dollar exchange rate (i.e. if the exchange rate will be lower than the rate at
issuance date the liability will be the NIS amount at the issuance date) (collectively,
the debt features) contained in the terms governing the convertible notes are not clearly
and closely related to the characteristics of the notes. Accordingly, the features qualify
as embedded derivative instruments at issuance and, because they do not qualify for any
scope exception within SFAS 133, they are required by SFAS 133 to be accounted for
separately from the debt instrument and recorded as derivative instrument liabilities.

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The
discount on the convertible debentures is amortized to interest expenses from the
commitment date to the stated maturity date using the interest method.

Cost
incurred in respect of issuance expenses of debentures is deferred and amortized as a
component of interest expense over the contractual life of the debenture using the
effective interest method.

The
Company reviews the terms of convertible debt and equity instruments issued to determine
whether there are embedded derivative instruments, including embedded conversion options,
that are required to be bifurcated and accounted for separately as a derivative financial
instrument. In circumstances where the convertible instrument contains more than one
embedded derivative instrument, including the conversion option, that is required to be
bifurcated, the bifurcated derivative instruments are accounted for as a single, compound
derivative instrument.

The
Company adopted SFAS No. 159 as of the beginning of 2008 and elected to apply the fair
value option to convertible debentures. The primary reasons for electing the fair value
option were simplification and cost-benefit considerations as well as expansion of use of
fair value measurement consistent with the FASBs long-term measurement objectives
for accounting for financial instruments. As a result of adopting SFAS No. 159, a net
unrealized gain of approximately $820,000, will be recorded as adjustment to the
accumulated deficit on January 1, 2008.

Loss
Contingencies

We
are subject to the possibility of various loss contingencies arising in the ordinary
course of business. We consider the likelihood of loss or impairment of an asset or the
incurrence of a liability, as well as our ability to reasonably estimate the amount of
loss in determining loss contingencies. An estimated loss contingency is accrued when it
is probable that an asset has been impaired or a liability has been incurred and the
amount of loss can be reasonably estimated. We regularly evaluate current information
available to us to determine whether such accruals should be adjusted and whether new
accruals are required.

Income
Tax

In
July 2006, the FASB issued FASB Interpretation 48, Accounting for Income Tax
Uncertainties (FIN 48). FIN 48 defines the threshold for recognizing the
benefits of tax return positions in the financial statements as
more-likely-than-not to be sustained by the taxing authority. The recently
issued literature also provides guidance on derecognition, measurement and classification
of income tax uncertainties, along with any related interest and penalties. FIN 48 also
includes guidance concerning accounting for income tax uncertainties in interim periods
and increases the level of disclosures associated with any recorded income tax
uncertainties. FIN 48 is effective for fiscal years beginning after December 15, 2006. The
differences between the amounts recognized in the statements of financial position prior
to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as
a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The
Company adopted the provisions of FIN 48 as of January 1, 2007. As of January 1, 2007
there was no material difference between the provisions of SFAS 109 and FIN 48 therefore
no adjustment was recorded to the accumulated deficit.

Stock-based
compensation

On
January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment (SFAS 123(R)) which requires the
measurement and recognition of compensation expense based on estimated fair values for all
share-based payment awards made to employees and directors. SFAS 123(R) supersedes
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), for periods beginning in fiscal 2006. In March 2005,
the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB
107) relating to SFAS 123(R). We have applied the provisions of SAB 107 in its
adoption of SFAS 123(R).

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SFAS
123(R) requires companies to estimate the fair value of equity-based payment awards on the
date of grant using an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as an expense over the requisite service periods
in our consolidated income statement. Prior to the adoption of SFAS 123(R), the our
accounted for equity-based awards to employees and directors using the intrinsic value
method in accordance with APB 25 as allowed under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS
123).

We
adopted SFAS 123(R) using the modified prospective transition method, which requires the
application of the accounting standard starting from January 1, 2006, the first day of the
Companys fiscal year 2006. Under that transition method, compensation cost
recognized in the year ended December 31, 2006, includes compensation cost for all
share-based payments granted subsequent to January 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of Statement 123(R). Results for prior
periods have not been restated.

We
recognize compensation expenses for the value of its awards, which have graded vesting
based on the straight line method over the requisite service period of each of the awards,
net of estimated forfeitures. Estimated forfeitures are based on actual historical
pre-vesting forfeitures.

Prior
to January 1, 2006, we applied the intrinsic value method of accounting for stock options
as prescribed by APB 25, whereby compensation expense is equal to the excess, if any, of
the quoted market price of the stock over the exercise price at the grant date of the
award.

We
estimate the fair value of stock options granted using the Monte-Carlo option-pricing
model. The option-pricing model requires a number of assumptions, of which the most
significant are, expected stock price volatility, suboptimal exercise multiple and the
expected option term. Expected volatility was calculated based upon actual historical
stock price movements over the most recent periods ending on the grant date, equal to the
contractual term of the option. The Company has historically not paid dividends and has no
foreseeable plans to issue dividends. The risk-free interest rate is based on the yield
from U.S. Treasury zero-coupon bonds with an equivalent term.

Recently
Enacted Accounting Pronouncements

In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value Measurements (Statement No. 157)
which defines fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. Statement No. 157 applies to other
accounting pronouncements that require or permit fair value measurements and, accordingly,
does not require any new fair value measurements. Statement No. 157 is effective for
fiscal years beginning after November 15, 2007 for financial assets and liabilities,
as well as for any other assets and liabilities that are carried at fair value on a
recurring basis, and should be applied prospectively. The adoption of the provisions of
Statement No. 157 related to financial assets and liabilities and other assets and
liabilities that are carried at fair value on a recurring basis is not anticipated to
materially impact the companys consolidated financial position and results of
operations. Subsequently, the FASB provided for a one-year deferral of the provisions of
Statement No. 157 for non-financial assets and liabilities that are recognized or
disclosed at fair value in the consolidated financial statements on a non-recurring basis.
The company is currently evaluating the impact of adopting the provisions of Statement No.
157 for non-financial assets and liabilities that are recognized or disclosed on a
non-recurring basis.

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 permits
companies to choose to measure certain financial instruments and certain other items at
fair value. SFAS No. 159 requires that unrealized gains and losses on items for which the
fair value option has been elected be reported in earnings. SFAS No. 159 is effective for
financial statements issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years, although earlier adoption is permitted. The Company
adopted SFAS No. 159 as of the beginning of 2008 and elected to apply the fair value
option to convertible debentures. The primary reasons for electing the fair value option
were simplification and cost-benefit considerations as well as expansion of use of fair
value measurement consistent with the FASBs long-term measurement objectives for
accounting for financial instruments. As a result of adopting SFAS No. 159, a net
unrealized gain of approximately $ 820,000 will be recorded as adjustment to the
accumulated deficit on January 1, 2008.

In
December 2007, the FASB issued SFAS No. 141 (Revised), Business Combinations
(SFAS 141 (Revised)). SFAS 141 (Revised) replaces SFAS 141 Business
Combination and establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The
statement also provides guidance for recognizing and measuring the goodwill acquired in
the business combination and determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the business
combination. The guidance will become effective for the fiscal year beginning after
December 15, 2008. No impact is expected at the adoption date, since the standard will be
applied prospectively- for future Business Combinations.

In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated
Financial Statements (SFAS 160). SFAS 160 amends Accounting Research
Bulletin 51, Consolidated Financial Statements, to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 also changes the way the consolidated income
statement is presented by requiring consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the noncontrolling interest. It
also requires disclosure, on the face of the consolidated statement of income, of the
amounts of consolidated net income attributable to the parent and to the noncontrolling
interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated and requires expanded disclosures in the consolidated
financial statements that clearly identify and distinguish between the interests of the
parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is
effective for fiscal periods, and interim periods within those fiscal years, beginning on
or after December 15, 2008. The adoption of SFAS 160 is not expected to have material
effect on the Companys consolidated financial statements.

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Results
of Operations

Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006

Revenues.
          Total revenues for the year ended
December 31, 2007 amounted to $23,445,000 compared to $20,224,000 for the year ended
December 31, 2006, an increase of 16%. Product sales decreased by $443,000 or  4%,
from $12,144,000 in 2006 to $11,701,000 in 2007, mainly because of a longer sales cycle
and the smaller size of deals the decrease was partially offset by revenues generated by
recently acquired subsidiary Asiasoft. Service revenues increased by $3,664,000, or
approximately 45%, from $8,080,000 in the year ended December 31, 2006 to $11,744,000 in
the year ended December 31, 2007. The increase is mostly attributable to higher
maintenance revenue as a result of a recently acquired subsidiary, CPL.

Cost
of Revenues. Cost
of revenues increased by $5,616,000, or 73%, from $7,648,000 in the year ended December
31, 2006 to $13,264,000 in the year ended December 31, 2007. The increase is a result of
an increase in revenues and expenses to third party providers mainly at Asiasoft.

Research
and Development. During 2007, we continued to focus and efforts on enhancing our
software recognition and core capabilities. Research and development expenses in the year
ended December 31, 2007 amounted to $2,497,000 compared to $1,792,000 for the year ended
December 31, 2006 mainly due to an increase in headcount and influence of NIS/Dollar exchange
rate.

Selling,
General and Administrative Expenses. Selling, general and administrative expenses in
the year ended December 31, 2007 amounted to $15,048,000 compared to $10,263,000 for the
year ended December 31, 2006. This increase of $4,785,000, or 47%, is mainly
attributable to the expansion of our sales force and establishing roots for major sales
centers in several locations worldwide in addition to expected growth in expenses as
result of our Asiasoft and CPL acquisitions.

Restructuring
charges. Restructuring and severance charges
expenses in the year ended December 31, 2007 amounted to $849,000 and are attributable
mainly to reduction of headcount termination benefits.

Net
Financing Income (expense). Financing income for the year ended December 31, 2007
amounted to $1,957,000 , compared to financing expense of $325,000 for the year
ended December 31, 2006. The move from financing expense to income was primarily due to
the change in fair value of the embedded derivative of convertible debenture.

Net
income (loss). As a result of the foregoing, our net loss for the year ended December
31, 2007 was $6,348,000, compared to a net income of $801,000 in year ended December 31,
2006.

Year
Ended December 31, 2006 Compared to Year Ended December 31, 2005

Revenues.
          Total revenues for the year ended December 31, 2006 amounted to $20,224,000
          compared to $ 16,820,000 for the year ended December 31, 2005, an increase
          of 20%. Product sales increased by $2,256,000 or 23%,
from $9,888,000 in 2005 to $12,144,000 in 2006, mainly because of an increase in our sales
in Japan and success in our AP workflow projects, mainly in Europe. Service revenues
increased by $1,148,000, or approximately 17%, from $6,932,000 in the year ended December
31, 2005 to $8,080,000 in the year ended December 31, 2006. The increase is mostly
attributable to our increase in AP workflow services in Europe, mainly in the SAP
environment.

Cost
of Revenues. Cost of revenues increased by $885,000, or 13%, from $6,763,000 in the
year ended December 31, 2005 to $7,648,000 in the year ended December 31, 2006. The
increase is a result of growth in expenses to third party service providers.

Research
and Development. During 2006, we continued to focus efforts in enhancing our software
recognition and core capabilities. Research and development expenses in the year ended
December 31, 2006 amounted to $1,792,000 compared to $1,312,000 for the year ended
December 31, 2005.

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Selling,
General and Administrative Expenses. Selling, general and administrative expenses in
the year ended December 31, 2006 amounted to $10,263,000 compared to $8,866,000 for the
year ended December 31, 2005. This increase of $1,397,000, or 16%, is mainly
attributable to the expansion our sales force and establishing roots for major sales
centers in several locations worldwide.

Financing
Income, net. Financing income for the year ended December 31, 2006 amounted to
$325,000 , compared to financing expense of $146,000 for the year ended December 31,
2005. The move from financing expense was primarily due to an increase of exchange
currencies gain in 2006, which is a product of the strengthening of the Euro and British
Pound against the U.S. Dollar. Net expenses from forward facilities transactions in
2006 was $61,000.

Net
income (loss). As a result of the foregoing, our net income for the year ended
December 31, 2006 was $801,000, compared to a net loss of $461,000 in year ended December
31, 2005.

Impact
of Currency Fluctuation and Inflation

We
maintain operations and generate revenues in a number of countries. The results of
operations and the financial position of our local operations are generally reported in
the relevant local currencies and then translated into U.S. dollars at the applicable
exchange rates for inclusion in our consolidated financial statements, exposing us to
currency translation risk. In addition, we are exposed to currency transaction risk
because some of our expenses are incurred in a different currency from the currency in
which our revenues are received. Our most significant currency exposures are to the Euro,
New Israeli Shekel, UK Pound, Singapore dollars, Hong Kong dollars, Chinese Yuan,
Australian dollars and Japanese yen. In periods when the U.S. dollar strengthens against
these other currencies, our reported results of operations may be adversely affected.

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% and 3.4% in 2006
and 2007, 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 U.S. dollar. For
example, during the years 2006 and 2007, the appreciation of the NIS against the dollar,
which amounted to 8.21% and 8.97% accordingly, exceeded the inflation rate for the same
periods.

From
time to time we purchase forward exchange contracts to reduce currency transaction risk.
However, these purchases will not eliminate translation risk or all currency risk.

Political
and Economic Conditions in Israel Affecting our Business

Because
our principal offices and research and development 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, and
especially since Hamas, an Islamic movement responsible for many attacks against Israelis,
has led government of the Palestinian Authority. 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 2000, 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.

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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 our 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 our ability to conduct trade in
the international market.

Liquidity
and Capital Resources

As
of December 31, 2007, our cash, cash equivalents, bank deposits and marketable securities
were $13,206,000, compared to $21,792,000 as of December 31, 2006.

Net
cash used in operating activities for the year ended December 31, 2007 was $3,671,000 as
compared to $439,000 provided by operating activities in the corresponding period in 2006.
This increase was attributable primarily to loss we incurred at 2007. Our trade
receivables increased to $8,287,000 at December 31, 2007 from $7,642,000 at December 31,
2006. This increase reflects our increased sales in 2007 as well as additions of CPL and
Asiasoft. These acquisitions, together with stronger collections and higher sales in 2007
than in previous years, reduced our days of sales outstanding. While the effect of
increasing sales on our cash flows will continue if we succeed in further sales growth, we
believe that the cash flows from operations and other resources will be sufficient to
support such growth. We expect trade receivables to continue to increase as our sales grow
and to represent a significant portion of our working capital for the foreseeable future.

Net cash provided by investing
activities for the year ended December 31, 2007 was $4,515,000 as compared to $14,151,000
used in investing activities in the corresponding period in 2006. In 2007, net cash
provided investing activities consisted primarily of redemption and maturity of marketable
securities, which were partially offset by payment for the acquisition of CPL and
Asiasoft. In 2006, net cash used in investing activities consisted primarily of investment
in marketable securities and short term deposit.

- 32 -

---

---

Net
cash provided by financing activities was 1,117,000 and 11,707,000 in 2007 and 2006,
respectively. In 2007, net cash provided from financing activities consisted of proceeds
from the increase in short term bank loan. In 2006, net cash provided from financing
activities consisted proceeds from the issuance of  issuance of convertible debentures.

For
the year ended December 31, 2007, the aggregate amount of our capital expenditures was
$434,000. These expenditures were principally for the purchases of computer hardware and
software and facilities improvements.

As
of December 31, 2006, our cash, cash equivalents, bank deposits and marketable securities
were $21,792,000, compared to $10,005,000 as of December 31, 2005.

Net
cash provided by operating activities for the year ended December 31, 2006 was $439,000 as
compared to $421,000 used in operating activities in the corresponding period in 2005.
This increase was attributable primarily to the increase in our sales and the results of
improvement in our collection efforts. Our trade receivables increased to $7,642,000 at
December 31, 2006 from $6,802,000 at December 31, 2005. This increase reflects our
increased sales in 2006. In addition, stronger collections in 2006 than in previous years
reduced our days of sales outstanding. For the year ended December 31, 2006, the aggregate
amount of our capital expenditures was $252,000. These expenditures were principally for
the purchases of computer hardware and software and facilities improvements. In December
2006 through the issuance of convertible debentures, we raised net proceeds of
$13,510,000. Subsequently on December 31, 2006, we reduced our short term bank loan to
$339,000.

At December 31, 2007, we had
$2,700,000 of auction rate preferred securities. Subsequent to December 31, 2007, we sold
$1,650,000 of the auction rate preferred securities we held at December 31, 2007. These
securities have auction rate characteristics. The Dutch auction process resets the
applicable interest rates at prescribed calendar intervals and is intended to provide
liquidity to the holders of auction rate securities by matching buyers and sellers in a
market context, enabling the holders to gain immediate liquidity by selling such
securities at par, or rolling over their investment. If there is an imbalance between
buyers and sellers, there is a risk of a failed auction. Starting February 2008, auctions
relating to those types of auction rate securities we hold failed. Further, over the past
few months, there had been an unprecedented number of auctions failures for other types of
auction rate securities. An auction failure is not a default. As of December 31, 2007, our
investments in auction rate preferred securities were carried at par value. We do not
currently intend to liquidate these investments at below par value or prior to a reset
date. However, systemic failure of future auction rate securities particularly for
auctions of securities similar to those held by us may result in an extended period of
illiquidity and may lead to a substantial impairment of our investments or the realization
of significant future losses at the point of liquidation. We will assess the fair value of
these securities at the end of each quarter to determine whether an impairment charge may
be required. As market conditions continue to evolve we may take an impairment charge in
the future, which may be a meaningful portion of the value of such securities. Based on
our ability to access our cash and cash equivalents, expected operating cash flows, and
our other sources of cash, we do not anticipate that the current lack of liquidity on
these investments will affect our ability to continue to operate our business in the
ordinary course, however we can provide no assurance as to when these investments will
again become liquid or as to whether we may ultimately have to recognize an impairment
charge with respect to these investments.

Convertible
debentures

On
December 27, 2006, we completed a public offering of approximately 61,900,000 NIS
(approximately $14,800,000) aggregate principal amount of convertible debentures on the
Tel Aviv Stock Exchange. The public offering was comprised of 112,500 convertible
debentures of 528 NIS (approximately $124) par value each. The convertible debentures are
linked to the US Dollar with a floor on the NIS/ U.S. Dollar exchange rate (i.e. if the
exchange rate will be lower than the rate at issuance date the liability will be the NIS
amount at the issuance date) and will bear interest at the annual rate of six-month LIBOR
minus 0.3%. The interest is payable semi-annually commencing on June 30, 2007, and the
principal is repayable in four annual installments commencing on December 31, 2009. After
taking into account a concurrent private placement to the underwriter of 500,000 NIS
aggregate principal amount of convertible debentures and an original issue discount of 4%
on all the convertible debentures, the gross proceeds to TIS were 59,870,000 NIS
(approximately $14,800,000 million).

The
debentures may be converted at the election of the holder into our ordinary shares at the
conversion price of 20.30 NIS (approximately $5.2) per share. We also have the right to
force conversion on or after October 1, 2009 if our share fair market value (as defined in
the debenture documents) reaches 25.50 NIS (approximately $6.6) in the last 30 trading
days in TASE on or after October 1, 2009. This offering was made in Israel to residents of
Israel only. The convertible debentures offered were not and will not be registered under
the U.S. Securities Act of 1933, as amended.

In
2007, 500,000 NIS of convertible debentures were converted into 24,631 shares of NIS 0.04
par value .The total equity issued as a result of the conversion is $124,000.

On
March 12, 2008 Board of Directors has approved the payment of up to $2,500,000 to
repurchase outstanding Series A convertible debentures that the Company issued in
December, 2006 on the Tel Aviv Stock Exchange. These repurchases may be in open market
transactions, privately negotiated transactions or a combination of the two.

- 33 -

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---

Lines
of Credit

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 $2,300,000 and 75% of
certain eligible trade receivables. As of December 31, 2007, we have approximately
$1,633,000 of outstanding credit in NIS. The revolving line of credit in NIS bears
interest at a rate of Prime (as of December 31, 2007, the prime rate was 5.75%). As of
December 31, 2007, we have approximately $336,000 of outstanding credit in Singapore
dollars. The revolving line of credit in Singapore dollars bears interest at a rate of
Prime Lending Rate (PLR)+1.5% (as of December 31, 2007, the PLR was 3%). As of
December 31, 2007, we have approximately $22,000 of outstanding credit in GBP. The
revolving line of credit in GBP bears interest at a rate of Libor+2.75% (as of December
31, 2007, the Libor was 5.835%). Any indebtedness under this credit line is payable on
demand and secured by a floating charge on our assets. Our ability to issue securities is
restricted. In the event that we default under the line of credit, the bank could declare
our indebtedness immediately due and payable and, if we are 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.

# Research and
Development, Patents and Licenses, etc.

The
main focus of our research and development in 2007 was enhancing eFLOW 4.0 by releasing
eFLOW 4.1, and the design and development of the new eFLOW version,
eFLOW4.5, which will be released during the third quarter of 2008.

eFLOW 4.1, which was released
in July 2007, includes:

| |  | The
latest version of our recognition engines.
| | - | ----------------------------------------------

| |  | Enhancements
of Smart Designer (including auto-rotation and image enhancements).
| | - | --------------------------------------------------------------------------------

| |  | A
new version of the PIXTRAN module, which includes better compatibility with scanner
drivers.
| | - | ----------------------------------------------------------------------------------------------

| |  | A
localized Chinese version, including integration of new recognition engines.
| | - | ------------------------------------------------------------------------------



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---

eFLOW 4.5 will include the following
features:

Web Based Completion. A
zero-footprint module (no ActiveX) that will allow users to index their documents from any
browser-based environment.

| |  | Collection
organizer, a new station to manipulate classification results, forms and pages. This
station is especially important in mailroom scenarios.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | Unified
Completion (Freedom + Integra), that will allow for the completion of
               information, no matter whether the source is structured, semi-structured
or                unstructured.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Unified
portals, to handle the input to eFLOW from various sources using a                unified
and manageable approach.
| | -- | --------------------------------------------------------------------------------------------------------------------------

| | 3. | Focus
of different aspects related to recognition and manipulation of Chinese
               documents.
| | -- | -------------------------------------------------------------------------------------------------------

Trends

In
general, globalization increases the need for document capture in multiple languages. The
proliferation of low-cost scanners enables additional data capture as well as lowers cost,
driving higher ROI for capture solutions. Information overload reduces the effectiveness
of manual processes. We expect the date capture industry to continue to move toward
consolidation. We are addressing these trends by solidifying our relationships with our
existing partners and seeking to become the preferred data capture solution provider for
many large integrated system providers.

We
expect that automated mailroom classification will become a central part of the document
management market. Over 90% of all corporate data is unstructured, representing a
significant opportunity to leverage capture solutions. We are addressing this trend by
strengthening and further developing our unstructured technology.

In
semi structured technology, we expect the market to further develop towards becoming a
commodity. We expect continued pressure on companies to speed and automate transaction
processes while imaging is becoming a core requirement and improved sophistication in OCR
and pattern recognition enables dramatic reductions in processing costs. We expect
business process outsourcing with respect to documents solutions to increase due to its
cost efficiency and improved quality while compliance with industry and regulatory
requirements to further drive the need to automate capture.

We
are addressing this trend by strengthening our predefined applications, such as Invoice
Reader.

We
anticipate that growth will continue in the data capture market. Industry experts estimate
the worldwide end user capture software market at $1.3 billion in 2006 and expect CAGR of
16.4% from 2005 to 2010.

Off-Balance Sheet Arrangements

We
are not a party to any material off-balance sheet arrangements.

Tabular
disclosure of contractual obligations

The
following is a summary of our significant contractual obligations as of December 31, 2007:

|                           | Payment due by period ($)
|-------------------------- | -------------------------
|
|
|
|
|
|Operating Lease Obligation |                          
|Convertible debenture      |                          
|Accrued severance pay      |                          

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---

---

Our
contractual obligations and commitments at December 31, 2007 principally include
obligations associated with our outstanding indebtedness, future minimum operating lease
obligations, a right to use a third party software (see below) and contractual and legal
obligations to employees and officers severance expense. Such obligations are
detailed in Notes 11 to the consolidated financial statements for the year ended December
31, 2007 as well as the section entitled Compensation herein. We expect to
finance these contractual commitments from cash on hand and cash generated from
operations.

As
for our short term loan, please see discussion under Line of Credit in
Liquidity and Capital Resources above.

|ITEM 6. |  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|------- |  | ------------------------------------------

# Directors and Senior
Management

The
following table sets forth the identity of our directors, and senior management. The
mailing address for each of the individuals below is c/o Top Image Systems Ltd. at our
address set forth herein.

|Name                | Age | Title                                     
|------------------- | --- | ------------------------------------------
|
|
|
|
|Izhak Nakar         | 55  | Chairman of the Board                     
|Ido Schechter       | 47  | Chief Executive Officer and Director      
|Arie Rand           | 48  | Chief Financial Officer                   
|Oded Leiba          | 37  | UK General Manager                        
|Ofir Shalev         | 36  | Vice President of Research and Development
|Asael (Asi) Karfiol | 44  | Director                                  
|Aliza Sharon        | 53  | Director                                  
|Elie Housman        | 70  | Director                                  
|William M. Landuyt  | 52  | Director                                  
|Yehezkel Yeshurun   | 57  | Director                                  
|                    |     |                                           

Izhak
Nakar founded TIS and served as its Chief Executive Officer from inception until
December 2001. He has been a director of ours 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
Forces. 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.

Ido
Schechter has been the CEO of TIS since January 2002 and has been a director since
December 2004. From January 2001 until he became CEO, Dr. Schechter was Vice President of
TIS ASP(2), an initiative of TIS to offer data collection services via
the Internet, using the eFLOW platform solution. Prior to that Dr. Schechter had
been the TIS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
ours, which operated 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.

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Arie
Rand joined TIS as its Chief Financial Officer in April 2001 from Tescom, a high tech
company with 600 employees and several subsidiaries worldwide, where he served as Chief
Financial Officer from September 1996 through March 2001. 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 UK General manager, and has held that position since May 2001. From May 1999
to May 2001, Mr. Leiba was our 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 our 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
Shalev has served as Vice President of Research and Development since October 2002.
Prior to his promotion to Vice President of Research and Development, Mr. Shalev served as
our 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 Platform. 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.

Aliza
Sharon was elected to serve as an external director of TIS at the shareholders
meeting in December 2007. Mrs. Sharon is a Managing Partner and Owner of a Tel Aviv firm
of Certified Public Accountants. The firm was established in 1993, today employs 20
professionals, and is involved in audits, consultation, management and internal audits of
Israels largest companies and institutions. Mrs. Sharon also serves as a member of
the board of directors of Israel Aircraft Industries Ltd, University of Haifa and Azorim
Investments and Building Construction Ltd., and has held a license to practice as a
Certified Public Accountant since 1987 and earned a Bachelor of Arts in Economics from
University of Haifa, in 1979. Previously, Mrs. Sharon served as Chief Executive Officer
and Financial Manager of a large building organization, and as an accountant at a large
Tel Aviv firm of Certified Public Accountants.

Asi
Karfiol was elected to serve as an external director of TIS at the shareholders
meeting in December 2007. Mr. Karfiol served in various positions in the field of Venture
Capital From 2001 through 2007. Mr. Karfiol is serving as General Partner at Hyperion
Israel Venture Partners. From 1995 through 2001 Mr. Karfiol held various Vice President
positions at Ascend Venture Capital, an Israeli Venture Capital Fund, and at ITI, an
American-Israeli Investment Company. Prior to that, Mr. Karfiol served as Marketing
Manager for the Keter Plastics Group and as General Manager of a strategic international
marketing consulting firm for leading Israeli corporations. Mr. Karfiol holds a BSc (summa
cum laude) in Electrical Engineering and an MBA (magna cum laude) from Tel Aviv
University.

Elie
Housman has been a director of TIS since May 2000. Mr. Housman joined InkSure in
February 2002 as Chairman. Mr. Housman was a principal at and consultant to 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 $250,000,000 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 as
a director of Jazz Photo, Inc., and Bartech Systems International, Inc., which are both
privately held companies in the United States.

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---

William
M. Landuyt, has been a director of TIS since March 2, 2004. Mr. Landuyt is a Senior
Partner at Charterhouse Group, Inc., having joined the New York City-based private equity
firm in December 2003. He served as Chairman of the Board and Chief Executive Officer of
Millennium Chemicals Inc. from its demerger from Hanson Plc (Hanson) in
October 1996 until July 2003. He had served as the President of that company from June
1997 until that date. Mr. Landuyt was Director, President and Chief Executive Officer of
Hanson Industries (which managed the United States operations of Hanson until the
demerger) from June 1995 until the demerger, a Director of Hanson from 1992 until
September 29, 1996, Finance Director of Hanson from 1992 to May 1995, and Vice President
and Chief Financial Officer of Hanson Industries from 1988 to 1992. He joined Hanson
Industries in 1983. He was a director of Bethlehem Steel Corporation from April 1997 until
October 2003.

Yehezkel
Yeshurun has been a director of the Company since December 2004. He brings to Top
Image Systems Board of Directors over 25 years of technical and management
experience. He is a faculty member in the School of Computer Science at Tel Aviv
University, and his research areas are Computer Vision, Pattern Recognition and
Computational Neuroscience. He authored more than 80 scientific publications and served on
numerous international program committees. Professor Yeshurun has co-founded several
technology companies including us and TapGuard (provider of QoS solutions over the
internet, acquired by Elron Software (NASDAQ: ELRN)), and is the Chairman of the Board of
ForeScout Technology (Internet Security startup). Among other positions, he served as the
chairman of the Department of Computer Science at Tel Aviv University, chairman of the
Israeli National Committee for IT, a member of the board of the Israeli chapter of W3C, a
board member of the US-Israel Science and Technology Commission and a member of the board
of governors of the International Association for Pattern Recognition. Professor Yeshurun
holds a Ph.D. in Mathematics from Tel Aviv University and held visiting positions at New
York University, McGill University and the University of Paris.

There
are no familial relationships between any of the persons named above. Elie Housman was
initially appointed to the Board seat by Charter pursuant to the terms of the investment
by Charter in us and a voting agreement with Mr. Nakar. For further details, see the
sections entitled Major Shareholders and  Related Party
Transactions in this report. Mr. Housman left the employ of Charterhouse in 2001.

# Compensation

For
the year ended December 31, 2007, the compensation paid, and value of benefits in kind
granted, to Ido Schechter, our Chief Executive Officer, was $422,000, which was composed
of a base salary and bonus of $332,000, and $90,000 paid to provide for automobile
allowance, pension, retirement, severance, vacation or similar benefits. The compensation
paid to all other persons, as a group, who were, on December 31, 2007, directors or
members of our administrative, supervisory or management bodies during that time was
$1,148,000. In addition, in 2007, members of that group, together with our Chief Executive
Officer, were granted an aggregate of options to purchase 306,600 ordinary shares under
our Employee Share Option Plan 2003 with an average exercise price of $3.57 per share. The
compensation paid to all persons other than our Chief Executive Officer include (i)
$60,000 reimbursement of directors expenses, (ii) $204,000 which has been accrued to
provide pension, retirement, severance, vacation or similar benefits, and allowance for
automobiles made available to our officers, and does not include other expenses (including
business travel, and professional and business association dues and expenses) reimbursed
to officers and (iii) $160,000 for business development services rendered by Chairman of
the Board.

On
December 20, 2007, our shareholders approved the grant to several members of the board of
an option to purchase ordinary shares in the total of 160,200 at an exercise price of
$ 3.84 and in the total of 50,000 at an exercise price of $ 2.20 both subject to
a vesting term of 2 years.

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# Board Practices

Board
of Directors

All
directors (other than external 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
December 2007) and until their successors are duly elected and qualified at the relevant
annual meeting. The external directors may be elected for additional three-year periods as
more fully detailed under the title External Directors. At our
shareholders meeting held on December 20, 2007, the shareholders approved a payment to the
members of the Audit Committee, Compensation Committee and the board of directors, in the
amount per director of 15,750 NIS per annum. In addition each of the above directors
receives an amount of 3,000 NIS for each Board and/or Audit committee or Compensation
Committee meeting attended. Mr. Izhak Nakar receives compensation for his service as a
member of the board of directors, in the amount of 19,841 NIS per annum and 993 NIS for
each Board and/or committee meeting attended. Mr. Yehezkel Yeshurun is entitled to
compensation in the amount of 19,841 NIS per year for his service as a member of the Board
of Directors and 993 NIS for each Board and/or committee meeting attended. We reimburse
all of the directors for reasonable travel expenses incurred in connection with their
activities on our behalf.

In
addition to the above, based on the resolution of the shareholders in a meeting held on
December 18, 2003 as further clarified in the shareholders extraordinary meeting held on
August 24, 2004, and as confirmed again in the General Shareholders Meeting held on
November 15, 2005, relating to our establishment of TISJ, Mr. Nakar became entitled to
receive a one time payment of $100,000 and, in addition, an annual fee of $100,000 as
consideration for consulting services to be provided one week per month for our operation
in Japan, which was paid to Mr. Nakar in 2005 and 2006. Further, our shareholders have
resolved, in a meeting held on December 20, 2007, that in respect of Mr. Nakars
assistance to TIS in connection with M&A Transactions, Mr. Nakar shall be entitled to
a success bonus of no less than $100,000 and no more than $250,000 for each M&A
Transaction, the exact amount of which to be determined by the compensation committee. The
shareholders have also resolved in that meeting, to adopt the compensation
committees recommendation approved by the audit committee and the board of
directors, that Mr. Nakar shall be entitled to a success bonus of $100,000 with respect to
the CPL transaction and $200,000 with respect to the Asiasoft transaction as detailed
above under Organizational Structure. In addition, Mr. Nakar was paid a
fee of $1,200, plus reimbursement of any expenses, for every business day invested by him
in consideration for his active involvement with any other business throughout 2007.
During 2007, we recorded an expense of $160,000 for Mr. Nakars services.

# Independent Directors

The
rules of the NASDAQ Stock Market require that a majority of our directors be
independent as defined in Rule 4200(a)(15) thereof. The board of directors has
determined that Aliza Sharon, William Landuyt, Elie Housman, Yehezkel Yeshurun, and Asael
Karfiol are each independent directors for purposes of the NASDAQ rules.

Israeli
law requires that a public company, such as TIS, have at least two external directors. The
two external directors of the Company are Aliza Sharon and Asael Karfiol. As of January
2006, the Israeli Companies Law -1999 requires as a general principle that at least one
statutory external director have financial and accounting expertise, and that the other
statutory external director have professional competence, as determined by the board of
directors. The Companies Law also requires a companys board of directors to
determine the minimal number of members of the board of directors to possess financial and
accounting expertise, based, among other things, on the type of company, its size, the
volume and complexity of its activities and the number of directors. The Companys
board has resolved that the minimal number of directors to possess financial and
accounting expertise on the Companys board shall be two. Under the Companies
Regulations (Qualifications of Director Having Financial and Accounting Expertise and of
Director Having Professional Competence)  2005, a director having financial and
accounting expertise is a person who, due to his or her education, experience and talents
is highly skilled in respect of, and understands, business and accounting matters and
financial reports, in a manner that enables him or her to deeply understand the
companys financial statements and to arouse discussion in respect of the manner in
which the financial data is presented. The board of directors has determined that Aliza
Sharon and Elie Housman both possess financial and accounting expertise as required by the
above mentioned regulations. Under the regulations, a director having professional
competence is a person who has an academic degree in either economics, business
administration, accounting, law or public administration or an academic degree in an area
relevant to the companys business, or has at least five years experience in a senior
position in the business management of a corporation with a substantial scope of business,
in a senior position in the public service or in the field of the companys business.
The board of directors has determined that Mr. Karfiol possesses professional competence
as required by the above mentioned regulations.

- 39 -

---

---

Audit
Committee

The
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. Our audit committee is governed by
an audit committee charter, which is an exhibit to our registration statement on Form F-1
which became effective on March 1, 2005.

We
are also required by the rules of the NASDAQ Stock Market to establish an audit committee,
all of whose members are independent within the meaning of such rules, and to adopt an
audit committee charter. Our two external directors, Aliza Sharon and Asael Karfiol ,
serve on the audit committee of the board of directors, along with Elie Housman. The board
of directors has determined that Aliza Sharon is an audit committee financial expert.

Compensation
Committee

In
August 2004, the board of directors authorized the establishment of a Compensation
Committee. The current members of the Committee are William M. Landuyt, Asi Karfiol and
Yehezkel Yeshurun. At the time of establishing the Committee, the board of directors also
adopted a Compensation Committee Charter to govern the operation of the Committee.
Notwithstanding the provisions of the Compensation Committee Charter, the board of
directors resolved to require the Committee to submit its recommendations to the board of
directors, which shall be solely authorized to approve the recommendations of the
Compensation Committee.

# Employees

We employed the
following employees as of December 31, 2006 and 2007:

|Company Name                | No of Employees as of December 31,
|--------------------------- | ----------------------------------
|
|
|
|
|TIS Israel                  |                                   
|TIS Germany                 |                                   
|TIS Japan                   |                                   
|TIS USA                     |                                   
|TIS UK, including CPL       |                                   
|Asiasoft (S) pte.           |                                   
|ACME Solution               |                                   
|Asiasoft Shanghai           |                                   
|Asiasoft Solution Guangzhou |                                   
|                            |                                   
|Total                       |                                   

*)
          only TIS UK

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.

- 40 -

---

---

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 on 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
principle for interpretation is that the provision which is more favorable to the employee
will prevail. Under the new expansion order of the collective bargaining agreement between
the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of
Economic Organizations of 30.12.07, the Company may be obligated to contribute funds to a
pension fund in favor of certain employees which are not already covered by allocation to
a Managers Insurance as detailed above, or to any other Beneficiary Pension
Arrangement as set forth in such expansion order. The Company is currently making
arrangements to comply with the above expansion order.

# Share Ownership

Board
of Directors, Senior Management and Certain Employees

Mr.
          Izhak Nakar currently holds in his name 59,174 ordinary shares. These shares
          represent 0.7% (0.4% 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 3.1% (1.9% on a fully diluted basis) of our outstanding share
          capital. None of the ordinary shares discussed in this section have different
          voting rights than those of other outstanding ordinary shares.

Charter
owns 1,701,400 ordinary shares representing 19.1% (12.4% on a fully diluted basis) of our
outstanding share capital.

Stock
Options

In
order to attract, retain and motivate employees (including officers) who perform services
for or on behalf of us, we maintain three Employee Share Option Plans, one established in
1996 (ESOP 1996), the second in 2000 (ESOP 2000) and the third in
2003 (ESOP 2003). Upon adoption of ESOP 2003, all shares previously available
for grant under ESOP 1996 and ESOP 2000 that were not the subject of outstanding options
were transferred to such new plan (see below) and are subject to the terms of the new
plan. We have filed registration statements on Form S-8 covering our Employee Share Option
Plans.

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 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 1996. 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. ESOP 1996 authorized 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 December 31, 2007, options to
purchase 90,625 ordinary shares were outstanding under the plan at exercise price of $2.85
per share.

- 41 -

---

---

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.

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 that becomes disabled or dies, only in these cases,
the vested options may be exercised for a period of one year.

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 herein. Except as required by
Section 102, the terms of ESOP 2000 are substantially the same as those of ESOP 1996.

A
total of 240,000 of authorized but unissued shares were reserved for issuance upon the
exercise of options granted pursuant to ESOP 2000 and, as of December 31, 2007, options to
purchase an aggregate of 105,500 shares were outstanding. All options are exercisable and
have exercise prices between $0.99 and $4.125 per share.

Employee
Share Option Plan (2003)

An
additional share option plan was approved by the board of directors on May 13, 2003 and by
our shareholders at our annual meeting on December 18, 2003. The terms of ESOP 2003 are
substantially the same as those of ESOP 2000. All the shares reserved for grant under ESOP
2000 and ESOP 1996 that were not granted or that were not the subject of outstanding
options under those plans were transferred to the new plan. Further, all options under
such old plans that expire prior to their exercise according to the conditions detailed
therein will be transferred into the new plan. We filed the necessary documents with the
Israeli tax authorities for the approval of the new option plan on June 4, 2003. Such
approval provides the grantees the eligibility for certain benefits under Section 102 of
the Israeli Income Tax Ordinance (New Version) 1961 and the rules promulgated thereunder
as revised by the Israeli tax reform.

During
2004, the board of directors and the shareholders of the Company approved the issuance of
options to purchase an additional 650,000 ordinary shares pursuant to ESOP 2003.

- 42 -

---

---

On
December 27, 2006, the shareholders of the Company approved the grant of an option to
purchase 125,000 ordinary shares to several members of the board, at an exercise price of
$ 3.84 and vesting term of 2 years.

On
December 20, 2007, the shareholders approved the grant to several members of the board of
an option to purchase ordinary shares in the total of 160,200 at an exercise price of
$ 3.84 and in the total of 50,000 at an exercise price of $ 2.20 both subject to
a vesting term of 2 years.

As
of December 31, 2007 options to purchase 182,551 ordinary shares were available for future
grant.

On
December 30, 2005, we decided to accelerate the vesting of 304,830 of our unvested share
options previously awarded to employees and officers (other than executive officers) of
the Company to purchase the Companys shares pursuant to ESOP 1996, ESOP 2000 or ESOP
2003, such that, as of December 31, 2005, these outstanding options to purchase any of the
Companys ordinary shares were fully vested.

As
a result of the acceleration, we recorded in 2005 additional compensation expenses of
$44,000, included in general and administrative expenses.

Our
decision to accelerate the vesting of those options and to grant fully vested options, was
based primarily on the issuance of SFAS No. 123(R), which requires the Company to treat
all unvested stock options as compensation expense, effective January 1, 2006. The
accelerated vesting of those options will enable the Company to avoid recognizing
stock-based compensation expense associated with these options in future periods.
Additional purposes for the fully vested grant and for the acceleration were to make the
options more attractive to recipients and to avoid discrimination between groups of option
holders, respectively.

On
December 20, 2007, the Company decided to accelerate the vesting of 310,950 of its
unvested stock options previously awarded to employees and officers of the Company, to
purchase the Companys shares pursuant to one of the Companys Stock Option
Plans, such that, as of December 31, 2007, these outstanding options to purchase any of
the Companys Ordinary shares, were fully vested.

As
a result of the acceleration, in accordance with SFAS No. 123R, the Company recorded
additional compensation expenses of $ 498,000.

Non-Plan
Options

We
have reserved 115,000 ordinary shares for issuance upon the exercise of outstanding
non-plan share options all of which have been granted by the Company to certain executive
officers and key employees.

As
of December 31, 2007, no non-plan options are outstanding.

|ITEM 7. |  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|------- |  | -------------------------------------------------

As
of December 31, 2007, Charter held 1,701,400 ordinary shares, or 19.1% (12.4% on a fully
diluted basis) of our outstanding share capital. At that time, Izhak Nakar held in his
name 59,174 ordinary shares, or 0.7% (0.4% 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 3.1% (2% 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 composed of seven
members out of whom 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, one person nominated by
Charter, William Landuyt, serves on the Board.

- 43 -

---

---

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 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. Charter and Mr.
Nakar requested the registration of the resale of the ordinary shares held by them or
their affiliates. We registered the resale of those shares in our registration statement
on Form F-1 which became effective on March 1, 2005.

Twenty
record holders of ordinary shares have declared postal addresses in the United States.
These twenty record holders hold, between them, 93.34% of our outstanding share capital.
These numbers are not representative of the number of beneficial holders of our shares nor
is it representative of where such beneficial holders reside since many of these ordinary
shares were held of record by brokers or other nominees (including one U.S. nominee
company, CEDE & Co., which held approximately 72.1% of our outstanding ordinary shares
as of said date). There are no arrangements known to us that may at a subsequent date
result in a change in control of us.

|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.

| |                              | 2007 | 2006 | 2005
| | ---------------------------- | ---- | ---- | ----
|
|
|
|
| | Export Revenues              |      |      |     
| | Export Revenues              |      |      |     
| | Total Revenues               |      |      |     
| | Percentage of Total Revenues |      |      |     
| |                              |      |     
| | Breakdown of Revenues        |      |     
| | Product Revenues             |      |      |     
| | Service Revenues             |      |      |     
| |                              |      |      |     

Legal
Proceedings

The
Company has no outstanding legal proceedings.

Dividend
Policy

To
date, we have not paid any dividends 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, our capital requirements and financial condition and other relevant
factors. We do not anticipate declaring or paying any dividend in the foreseeable future.

- 44 -

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|ITEM 9. |  | LISTING
|------- |  | -------

# A. Offer and Listing
Details.

Effective
November 1996, our ordinary shares have been quoted on the NASDAQ Capital Market, under
the symbol TISAF. Effective April 29, 1999, the symbol for the ordinary shares
was changed to TISA on the NASDAQ Capital Market.

The
following table sets forth, for the periods indicated, the high and low closing prices of
our ordinary shares, as reported on the NASDAQ Capital Market.

# 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       |  | NASDAQ
Capital Market
|----------------- |  | ---------------------
|
|
|
|
|December 31, 2007 |  |                      
|                  |  |                      
|                  |  |                      
|December 31, 2006 |  |                      
|                  |  |                      
|                  |  |                      
|December 31, 2005 |  |                      
|                  |  |                      
|                  |  |                      
|December 31, 2004 |  |                      
|                  |  |                      
|                  |  |                      
|December 31, 2003 |  |                      
|                  |  |                      
|                  |  |                      

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

|Quarter Ending     |  | NASDAQ
Capital Market
|------------------ |  | ---------------------
|
|
|
|
|December 31, 2007  |  |                      
|                   |  |                      
|                   |  |                      
|September 30, 2007 |  |                      
|                   |  |                      
|                   |  |                      
|June 30, 2007      |  |                      
|                   |  |                      
|                   |  |                      
|March 31, 2007     |  |                      
|                   |  |                      
|                   |  |                      
|December 31, 2006  |  |                      
|                   |  |                      
|                   |  |                      
|September 30, 2006 |  |                      
|                   |  |                      
|                   |  |                      
|June 30, 2006      |  |                      
|                   |  |                      
|                   |  |                      
|March 31, 2006     |  |                      
|                   |  |                      
|                   |  |                      

- 45 -

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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      |  | NASDAQ
Capital Market
|----------------- |  | ---------------------
|
|
|
|
|March 31, 2008    |  |                      
|                  |  |                      
|                  |  |                      
|February 29, 2008 |  |                      
|                  |  |                      
|                  |  |                      
|January 31, 2008  |  |                      
|                  |  |                      
|                  |  |                      
|December 31, 2007 |  |                      
|                  |  |                      
|                  |  |                      
|November 30, 2007 |  |                      
|                  |  |                      
|                  |  |                      
|October 31, 2007  |  |                      
|                  |  |                      
|                  |  |                      

Our
ordinary shares have been dual-listed for trading on the Tel Aviv Stock Exchange since
December 3, 2006. Since the date of listing, there has been only limited and sporadic
trading activity.

Markets

Effective
November 1996, our ordinary shares were quoted on the Nasdaq Capital 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 Capital Market. The ordinary shares are not publicly
traded outside the United States.

In
March of 2005, our board of directors determined that we derived no material benefit from
continued listing on the Boston Stock Exchange, as there had been no trading activity in
our ordinary shares on that exchange since November 1999, and authorized and directed
management to commence voluntary delisting procedures. The Securities and Exchange
Commission subsequently approved our application to delist, and our voluntary delisting
became effective in March 2005.

Our
ordinary shares were dual-listed on the Tel Aviv Stock Exchange on December 3, 2006, in
addition to being listed on the NASDAQ Stock Market. Effective January 1, 2007, the Tel
Aviv Stock Exchange included our shares in the Tel Aviv Tel-Tech index, which tracks the
performance of the top Israeli technology companies by market cap.

- 46 -

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---

On
December 27, 2006, we completed a public offering of approximately 61,900,000 NIS
(approximately $14,700,000) aggregate principal amount of convertible debentures on the
Tel Aviv Stock Exchange. The public offering was composed of 112,500 convertible
debentures of NIS 528 (approximately $124) par value each. The convertible debentures are
linked to the US Dollar with a floor on the NIS/ U.S. Dollar exchange rate (i.e. if the
exchange rate will be lower than the rate at issuance date the liability will be the NIS
amount at the issuance date) and will bear interest at the annual rate of six-month LIBOR
minus 0.3%. The interest is payable semi-annually commencing on June 30, 2007, and the
principal is repayable in four annual installments commencing on December 31, 2009. After
taking into account a concurrent private placement to the underwriter of 500,000 NIS
aggregate principal amount of convertible debentures and an original issue discount of 4%
on all the convertible debentures, the gross proceeds to TIS were NIS 59,870,000
(approximately $14,100,000).

The
debentures may be converted at the election of the holder into our ordinary shares at the
conversion price of 20.30 NIS (approximately $5.7). We also have the right to force
conversion on or after October 1, 2009 if our share fair market value (as defined in the
debenture documents) reaches 25.50 NIS (approximately $6.6). This offering was made in
Israel to residents of Israel only. The convertible debentures offered were not and will
not be registered under the U.S. Securities Act of 1933, as amended.

In
2007, 500,000 NIS of convertible debentures were converted into 24,631 shares of NIS 0.04
par value. The total equity issued as a result of the conversion is $ 124,000.

On
March 12, 2008 Board of Directors has approved the payment of up to $2,500,000 to
repurchase outstanding Series A convertible debentures that the Company issued in
December, 2006 on the Tel Aviv Stock Exchange. These repurchases may be in open market
transactions, privately negotiated transactions or a combination of the two.

|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. In our December 18, 2003 shareholders meeting, we adopted new Articles of
Association to provide for changes in the Companies Law.

Directors
and other Office Holders

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. 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.

- 47 -

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---

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 our
Articles of Association 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 such transaction is an extraordinary transaction or if we intend to provide
an undertaking to indemnify, exempt or insure an office holder, with regard to their
duties, then, in addition to any approval required by the board of directors or by the
Articles of Association, it also must be approved by the audit committee prior to the
approval 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.

Arrangements
regarding the compensation of directors of a public company (whether regarding in their
capacity as directors or regarding the provision of other services) require audit
committee, board of directors and shareholder approval.

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. All of the external directors must be members of
the Audit Committee. An external director must be an individual resident of Israel, who is
qualified to serve as a director. However, companies such as ours whose shares have been
offered to the public outside of Israel may appoint external directors who are not
residents of Israel according to special allowances provided in Companies Regulations
(Allowances for Companies with Securities Listed on an Exchange Outside Israel) 
2000. 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. A director of one company may not be appointed as an external
director in another, if at the same time, a director of the other company serves as an
external director of the first. Other limitations exist with regard to various types of
memberships and positions, whose holders may not serve as external directors. 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.

- 48 -

---

---

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 (extendable for
an additional three years term) and, with regard to companies whose securities are listed
on recognized foreign exchanges, such as TIS, may be extended for additional three-year
terms, subject to the approval of the Audit Committee and the Board, presented to the
general meeting, that such directors expertise and special contribution to the
operation of the Board warrant that his appointment for an additional period is in the
best interests of the company, as provided in Companies Regulations (Allowances for
Companies with Securities Listed on an Exchange Outside Israel)  2000. The approval
of the general meeting shall require that the majority of votes include one-third of the
non-controlling shareholders present at the meeting, or alternatively, that the total of
opposing votes does not exceed 1% of the voting rights (and in the event that all Board
members are of one gender, one of the external directors should be of the other), in
accordance with the provisions of the Companies Law. 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.

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 or for
any other service.

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 now prohibits incumbent directors from acting as alternate
directors and a single person from acting as an alternate director for more than one
incumbent director.

The
term of appointment of an alternate 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 an alternate 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 above), nor an affiliate, nor 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.

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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. In our last shareholders meeting, on December 20,
2007, we appointed Kost Forrer Gabbay and Kasierer, a member firm of Ernst & Young
Global and certified public accountants in Israel, as our certified public accountant for
auditing services.

Indemnification
of Directors and Officers

At
the shareholders meeting on December 18, 2003, the Company adopted new Articles of
Association which allow for insurance and indemnification for office holders for future
liabilities. At the same meeting, the shareholders approved indemnification of the
officers and directors of the Company according to an indemnification letter. At a
shareholders meeting held on November 15, 2005, following statutory amendment of 2005, the
shareholders approved the indemnification letter currently in place with regard to the
Companys directors and officers in the form attached hereto.

Under
the Israeli Companies Law, a company may indemnify an office holder against any monetary
liability incurred in his or her capacity as an office holder whether imposed on him or
her or incurred by him or her in favor of another person pursuant to a judgment, a
settlement or an arbitrators award approved by court. A company also can indemnify
an office holder against reasonable litigation expenses including attorneys fees,
incurred, whether or not paid by him or her in his or her capacity as an office holder, in
proceedings instituted against him or her by the company, on its behalf or by a
third-party, in connection with criminal proceedings in which the office holder was
acquitted, or as a result of a conviction for a crime that does not require proof of
criminal intent, or in which an indictment was not brought against the office holder.

In
addition, a company may indemnify an office holder against reasonable legal fees,
including attorneys fees, incurred, whether or not paid by him, by him or her in
consequence of an investigation or proceeding instituted against him or her by an
authority that is authorized to conduct such investigation or proceeding, and that was
resolved without an indictment against him or her and without imposing on him or her
financial obligation as an alternative of a criminal proceeding, or that was resolved
without filing an indictment against him or her but with the imposition on him or her of
a financial obligation as an alternative to a criminal proceeding in respect of an
offense that does not require the proof of criminal intent.

A
company may indemnify an office holder in respect of these liabilities either in advance
of an event or following an event. If a company undertakes to indemnify an office holder
in advance of an event, the indemnification, other than litigation expenses, must be
limited to foreseeable events in light of the companys actual activities when the
company undertook such indemnification, and reasonable amounts or standards, as
determined by the board of directors.

A
company may obtain insurance for an office holder against liabilities incurred in his or
her capacity as an office holder. These liabilities include a breach of duty of care to
the company or a third-party, including a breach arising out of negligent conduct of the
office holder, a breach of duty of loyalty and any monetary liability imposed on the
office holder in favor of a third-party. A company may also exculpate an office holder
from a breach of duty of care in advance of that breach. Our articles of association
provide for exculpation both in advance or retroactively, to the extent permitted under
Israeli law. A company may not exculpate an office holder from a breach of duty of loyalty
towards the company or from a breach of duty of care concerning dividend distribution or a
purchase of the companys shares by the company or other entities controlled by the
company.

Under
the Israeli Companies Law, a company may indemnify or insure an office holder against a
breach of duty of loyalty only to the extent that the office holder acted in good faith
and had reasonable grounds to assume that the action would not prejudice the company. In
addition, a company may not indemnify, insure or exculpate an office holder against a
breach of duty of care if committed intentionally or recklessly (excluding mere
negligence), or committed with the intent to derive an unlawful personal gain, or against
a fine or forfeit levied against the office holder in connection with a criminal offense.

Currently,
we hold an insurance policy for our office holders that provides coverage limited to
$15,000,000 in aggregate for the policy period ending on December 31, 2008.

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Rights,
Preferences, Restrictions of Shares

We
currently utilize one type of share, this being ordinary shares. Subject to Israeli law,
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 dividends.

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.

According
to our Articles, any resolution on the change of the Companys share capital by way
of the creation of new shares, or cancellation of unissued registered shares, with
preferred or qualified rights is deemed a change of our Articles of Association and as
such requires the vote of a majority of 75% of the shareholders participating in the
general meeting. If at any time our share capital is divided into different classes of
shares, we may change the rights of shareholders by way of a resolution of the general
meeting, subject to the consent of the shareholders of the class whose rights are being
impaired by the proposed change.

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 or vote by proxy 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 or vote by proxy at extraordinary general meetings.

Our
board of directors may convene an extraordinary general meeting when and as it sees 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.

The
determining date as to share ownership for purposes of attending and voting at a general
meeting is statutorily shall be as set forth in the decision to convene a general meeting
but not earlier than 21 day before the scheduled general meeting date and not later than 4
days prior to such scheduled meeting date; Notwithstanding the foregoing, Israeli
companies such as ours whose shares have been listed for trade both on the Tel Aviv
Exchange and recognized foreign stock exchange, which issue proxy statements to their
shareholders in conformity with the law of the country where such foreign exchange is
located, are entitled to vary such determining date to not earlier than 21 day before the
scheduled general meeting date and not later than 4 days prior to such scheduled meeting
date, and are entitled to certain allowances as to issuing proxy statements to
shareholders outside Israel, in accordance with the Companies Regulations (Allowances for
Companies with Securities Listed on an Exchange Outside Israel)  2000.

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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 other than as required by law that would have an
effect of delaying, deferring or preventing a change in control of us. An Israeli company
whose securities are listed on the Tel Aviv Exchange and on a recognized foreign exchange,
such as our, enjoys certain allowances with regard to a special purchase offer having
consideration to the requirements of the law of the country where such foreign exchange is
located.

Provisions
Relating to Major Shareholders

We
are 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 25% 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. For the purposes of this definition, the law deems two or more shareholders
who hold voting rights in the company and each of which has a personal interest in the
approval of a transaction being brought to the company for approval, as jointly holding
such shares. See the section entitled Directors-General in this 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 the other shareholders and to 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;
| | - | ------------------------------------------------------

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| |  | 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.

In
a recent amendment to the Companies Law, it has been specified that in the event that a
controlling shareholder breaches his duty of fairness then such breach shall be considered
as a breach of contract, mutatis mutandis, while taking into account the special position
of such controlling shareholder within the company.

# Material 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 excepting the agreements relating to
the investment of Charter and the related arrangements with Mr. Nakar in respect of the
CPL transaction and Asiasoft transaction . See the sections entitled Major
Shareholders and Related Party Transactions and Compensation
in the section entitled Directors, Senior Management and Employees in this
report.

# 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.

Generally,
Israeli companies are subject to corporate Tax on their taxable income. On
July 25, 2005, the Knesset (Israeli Parliament) approved the Law of the Amendment of the
Income Tax Ordinance (No. 147), 2005, which prescribes, among others, a gradual decrease
in the corporate tax rate in Israel to the following tax rates: in 2005  34%, in
2006  31%, in 2007  29%, in 2008  27%, in 2009  26% and in 2010
and thereafter  25%.

As
of December 31, 2007, we had operating loss carryforwards for tax purposes in the amount
of $5,532,000. The amount of our carryforward operating losses will be offset against
taxable future income for an indefinite period.

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As
of December 31, 2007 the foreign subsidiaries had operating loss carryforwards for tax
purposes in the amount of $ 11,160,000. A portion of such losses expires over a period
from 2008 through 2020, and some of them can be carried forward indefinitely.

Singapore
tax

As a result of change of control at
Asiasoft Singapore the carryforward losses are subject to the approval of the Internal
Revenue Authority of Singapore (IRAS). Based on the facts and circumstances,
the Company believes that the tax loss carryforwards of AsiaSoft Singapore can be
substantiated without any restrictions over the utilization of these tax losses against
future taxable profits. In February 2008, Asiasoft Singapore filed with IRAS a request for
waiver which demonstrates the nature of the change in the share capital of AS Sin.

Law
for the Encouragement of Capital Investments, 1959

General

The
Law for the Encouragement of Capital Investments, 1959, or 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 tax benefits 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 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. 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). As of December 31, 2005, we
are qualified as a Foreign Investors Company.

For
a company with foreign investment of:

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

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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 to ten-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 benefit period
discussed above. Please note that the years limitation does not apply to the
exemption period. In the event, however, that the company  qualifies as a Foreign
Investors Company, there is no such time limitation. 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
(10%-25%). The tax rate on dividends distributed by the Company to foreign residents may
be reduced according to the tax rate of the tax treaty between Israel and the country in
which such individuals reside.

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.

On
April 1, 2005, an amendment to the Investment Law came into effect (the
Amendment) significantly changed the provisions of the Investment Law. The
Amendment limits the scope of enterprises which may be approved by the Investment Center
by setting criteria for the approval of a facility as an Approved Enterprise, such as
provisions generally requiring that at least 25% of the Approved Enterprises income
be derived from export. Additionally, the Amendment enacted major changes in the manner in
which tax benefits are awarded under the Investment Law so that companies no longer
require Investment Center approval in order to qualify for tax benefits.

However,
the Investment Law provides that terms and benefits included in any certificate of
approval already granted will remain subject to the provisions of the law as they were on
the date of such approval. Therefore, our existing Approved Enterprise will generally not
be subject to the provisions of the Amendment. As a result of the amendment, tax-exempt
income generated under the provisions of the new law will subject the Company to taxes
upon distribution or liquidation and the Company may be required to record deferred tax
liability with respect to such tax-exempt income. As of December 31, 2007, the Company did
not generate income under the provision of the new law

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.

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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 an
annual 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.

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 and Dollar Regulations

Under
the Income Tax (Inflationary Adjustments) Law, 1985 (the Israeli law), results
for tax purposes in Israel are measured in real terms, in accordance with the changes in
the Israeli Consumer Price Index (Israeli CPI). Accordingly, until 2002,
results for tax purposes were measured in terms of earnings in NIS after certain
adjustments for increases in the Israeli CPI. Commencing in taxable year 2003, the Company
has elected to measure its taxable income and file its tax return under the Israeli Income
Tax Regulations (Principles Regarding the Management of Books of Account of Foreign
Invested Companies and Certain Partnerships and the Determination of Their Taxable
Income), 1986. Such an elective obligates the Company for three years. Accordingly,
commencing taxable year 2003, results for tax purposes are measured in terms of earnings
in dollars.

In
February 2008, the Knesset (Israeli parliament) passed an amendment to the
Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law
starting in 2008 and thereafter. Starting in 2008, the results for tax purposes will be
measured in nominal values, excluding certain adjustments for changes in the Consumer
Price Index carried out in the period up to December 31, 2007. The amended law includes,
among other things, the elimination of the inflationary additions and deductions and the
additional deduction for depreciation starting 2008.

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

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.

Prior
to the tax reform (came into effect in January 1, 2003), 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 Capital
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.

Israeli
law generally imposes a capital gains tax on the sale of capital assets located in Israel,
including shares in Israeli resident companies, unless a specific exemption is available
or unless a treaty between Israel and the country of the non-resident provides otherwise.
An individual is subject to a 20% tax rate on real capital gains derived from the sale of
shares, as long as the individual has not demanded a deduction of interest and linkage
differences in connection with the purchase and holding of the securities; and as long as
the individual is not a substantial shareholder of the company issuing the shares, which
is generally a shareholder with 10% or more of the right to profits, the right to nominate
a director and voting rights. A substantial shareholder (or a shareholder who has demanded
a deduction of interest and linkage differences) will be subject to tax at a rate of 25%
on real capital gains derived from the sale of shares issued by the company. The
determination of whether the individual is a substantial shareholder will be made on the
date that the securities are sold. In addition, the individual will be deemed to be a
substantial shareholder if at any time during the twelve months preceding this date he or
she had been a substantial shareholder. The foregoing tax rates, however, will not apply
to dealers in securities.

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Corporations
are subject to corporate tax rates in respect of capital gains from the sale of shares in
Israeli publicly traded companies. As described above in General Corporate Tax
Structure, recent changes in the law reduced the corporate tax rate from 31% in 2006
to 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010. Between 2006 and 2009, however,
corporations whose taxable income was not determined immediately before the 2006 Tax
Reform was published, pursuant to part B of the Israeli Income Tax Law (Inflationary
Adjustments), 1985, or pursuant to the Income Tax Regulations (Rules on Bookkeeping by
Foreign Invested Companies and Certain Partnership and Determination of their Chargeable
Income), 1984, or the Dollar Regulations, will generally be taxed at a rate of 25% on
their capital gains from the sale of their shares.

Non-Israeli
residents 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. 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. Other tax treaties provide
different withholding tax rates.

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:

| |  | citizen
or resident of the United States;
| | - | -----------------------------------------

| |  | 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
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 57 -

---

---

| |  | 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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-market 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.

- 58 -

---

---

A
non-corporate U.S. Holder that meets certain eligibility requirements may qualify for a
15% or lower rate of U.S. federal income taxation on dividends paid in taxable years
beginning before January 1, 2009 if the Company is a qualified foreign
corporation for U.S. federal income tax purposes. The Company generally will be
treated as a qualified foreign corporation if (i) the Company is eligible for
benefits under the income tax treaty between the United States and Israel (the
Treaty), or (ii) the ordinary shares are listed on an established securities
market in the United States. Because the Company should be eligible for benefits under the
Treaty, the Company should currently be treated as a qualified foreign corporation, and
the Company generally expects to be a qualified foreign corporation during all taxable
years before 2009. However, no assurance can be given that a change in circumstances will
not affect the Companys treatment as a qualified foreign corporation for U.S.
federal income tax purposes in any taxable year. In addition, a non-corporation U.S.
Holder will not be eligible for the reduced rate (a) if such U.S. Holder has not held the
ordinary shares for at least 61 days of the 120-day period beginning on the date which is
60 days before the ex-dividend rate, (b) to the extent the U.S. Holder is under an
obligation to make related payments on substantially similar or related property, or (c)
with respect to any portion of a dividend that is taken into account by the U.S. Holder as
investment income under Section 163(d)(4)(B) of the Code. Any days during which the U.S.
Holder has diminished its risk of loss with respect to the ordinary shares (for example,
by holding an option to sell the ordinary shares), are not counted towards meeting the
61-day holding period. Non-corporate U.S. Holders should consult their own tax advisors
concerning whether dividends received by them qualify for the reduced rate of tax.

U.S.
          Holders will include in their gross income any dividend paid in NIS in an
amount           equal to the U.S. dollar value of the NIS received, calculated by
reference to           the exchange rate in effect on the date the dividends are
received, regardless           of whether the dividend payments are actually converted
into U.S. dollars. U.S.           Holders will have a tax basis in any NIS distributed by
the Company equal to the           U.S. dollar value of the NIS on the date of receipt.
Generally, any gain or loss           resulting from exchange rate fluctuations during
the period from the date the           U.S. Holder includes the dividend payment in
income to the date the payment is           converted into U.S. dollars will be treated
as ordinary income or loss and will           be U.S. source income or loss for U.S.
foreign tax credit purposes.

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.

- 59 -

---

---

Tax
Consequences if the Company is a Passive Foreign Investment Company

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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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. 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.

- 60 -

---

---

The
Company believes that it was not a PFIC in 2007. 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 28% on proceeds paid from the
disposition of           ordinary shares unless the U.S. Holder provides IRS Form W-9 or
otherwise           establishes an exemption.

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

We
are subject to the informational requirements of the Securities Exchange Act of 1934, as
amended, applicable to foreign private issuers and fulfill the obligations with respect to
such requirements by filing reports with the Securities and Exchange Commission. You may
read and copy any document we file with the Securities and Exchange Commission without
charge at the Securities and Exchange Commissions public reference room at 100 F
Street, N.E., Washington, D.C. 20549. Certain of our SEC filings are also available to the
public at the SECs website at http://www.sec.gov.  Copies of such
material may be obtained by mail from the Public Reference Branch of the Securities and
Exchange Commission at such address, at prescribed rates. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the public reference
room. In addition, all corporate documents are available for review at our headquarters, 2
Habarzel Street, Ramat Hahayal, Tel Aviv 69710, Israel.

- 61 -

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---

As
a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing
the furnishing and content of proxy statements, and our officers, directors and principal
shareholders are exempt from the reporting and short-swing profit recovery
provisions contained in Section 16 of the Exchange Act.  In addition, we are not
required under the Exchange Act to file periodic reports and financial statements with the
Securities and Exchange Commission as frequently or as promptly as United States companies
whose securities are registered under the Exchange Act. However, we generally publicly
announce our quarterly and year-end results periodically, and file certain periodic
information with the Securities and Exchange Commission under cover of Form 6-K.

|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 .We do not engage
in trading market-risk instruments or purchase hedging or other than trading
instruments that are likely to expose us to market risk, whether interest rate, commodity
price or equity price risk. We have not purchased options or entered into swaps or forward
or futures contracts and do not use derivative financial instruments for speculative
trading purposes.

We
maintain operations and generate revenues in a number of countries. The results of
operations and the financial position of our local operations are generally reported in
the relevant local currencies and then translated into U.S. dollars at the applicable
exchange rates for inclusion in our consolidated financial statements, exposing us to
currency translation risk.

In
addition, we are exposed to currency transaction risk because some of our expenses are
incurred in a different currency from the currency in which our revenues are received. Our
most significant currency exposures are to the Euro, New Israeli Shekel, UK Pound,
Singapore dollars, Hong Kong dollars, Chinese Yuan, Australian dollars and Japanese Yen.
In periods when the U.S. dollar strengthens against these other currencies, our reported
results of operations may be adversely affected. Although from time to time we purchase
forward exchange contracts to reduce currency transaction risk, these purchases will not
eliminate translation risk or all currency risk.

# PART II

|ITEM 12. |  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|-------- |  | ------------------------------------------------------

Not applicable.

|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
|-------- |  | -----------------------

(a)       
          Our management evaluated, with the participation of our Chief Executive Officer
          and Chief Financial Officer, the effectiveness of our disclosure controls and
          procedures as of December 31, 2007. Based on this evaluation, our Chief
          Executive Officer and Chief Financial Officer concluded that our disclosure
          controls and procedures as of such date were effective to provide reasonable
          assurance that information required to be disclosed by us in the reports we file
          or submit under the Securities Exchange Act of 1934, as amended, (i) is
          recorded, processed, summarized and reported within the time periods specified
          in SEC rules and forms, and (ii) is accumulated and communicated to our
          management, including our Chief Executive Officer and Chief Financial Officer,
          as appropriate to allow timely decisions regarding required disclosure.

(b)       
          Report of Management on Internal Control Over Financial Reporting.

- 62 -

---

---

Management
of the Company is responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).
Management assessed the effectiveness of internal control over financial reporting as of
December 31, 2007 based on the criteria in Internal Control- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).

Based
on that assessment, management has concluded that our internal control over financial
reporting was effective as of December 31, 2007 based on those criteria.

Due
to its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements, and can only provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

(c)       
          Not applicable.

(d)       
          There has been no change in our internal control over financial reporting that
          occurred during the fiscal year ended December 31, 2007, that has materially
          affected, or is reasonably likely to materially affect, our internal control
          over financial reporting.

|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT
|--------- | --------------------------------

The
Board of Directors has determined that -Aliza Sharon, a member of our audit committee, is
an audit committee financial expert and is independent pursuant to the rules of the NASDAQ
Stock Market. See her biography in Item 6.

|ITEM 16B. | CODE OF ETHICS
|--------- | --------------

We
have in place a Code of Business Conduct and Ethics that applies to all directors,
officers and employees. This code, as applied to TIS principal financial officers
(i.e. our principal executive officer, principal financial officer, principal accounting
officer or controller or persons performing similar functions), is our code of
ethics within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the
rules promulgated thereunder. This code is also our code of conduct within the
meaning of Nasdaq Rule 4350(n). The full text of the Code of Business Conduct and Ethics
is available at our Internet website at http://www.topimagesystems.com.

|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|--------- | --------------------------------------

# Audit Fees

During
2003, the Board of Directors appointed Kost Forer Gabbay and Kasierer, an independent
registered accounting firm (a member of Ernst & Young Global) (EY) to
audit our financial statements for the fiscal year ended December 31, 2003 succeeding
Somekh Chaikin (a member firm of KPMG International) (KPMG). Our
subsidiary,Asiasofts being audited by KPMG Singapore.

The
aggregate fees billed by EY for professional services rendered for the audit of our annual
financial statements included in this Annual Report and other services in connection with
statutory and regulatory filings or engagements for the fiscal year ended December 31,
2007 and 2006 were $120,000 and $136,000, respectively.

# Tax Fees

For
the fiscal years ended December 31, 2007 and 2006 the aggregate fees billed for tax
compliance, tax advice and tax planning by EY were $30,000 and $24,000, respectively.

- 63 -

---

---

# Non-Audit services

For
the fiscal years ended December 31, 2007 and 2006 the aggregate fees billed by EY for
other non-audit professional services, other than those services listed above, were
$35,000 and $12,000, respectively. Such services were comprised of accounting and other
consultation.

Before
EY is engaged by our subsidiaries or us to render any auditing or permitted non-audit
related service, the engagement must be:

| |  | approved
by our audit committee; or
| | - | -----------------------------------

| |  | entered
into pursuant to pre-approval policies and procedures established by the audit committee,
provided the policies and procedures are detailed as to the particular service, the audit
committee is informed of each service, and such policies and procedures do not include
delegation of the audit committees responsibilities to management.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
certain instances, we are not required to obtain pre-approval.

The
audit committee has considered the nature and amount of the fees billed by KPMG and EY,
and believes that the provision of the services for activities unrelated to the audit is
compatible with maintaining KPMGs and Ernst & Youngs independence.

|ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS OF AUDIT COMMITTEES
|--------- | ---------------------------------------------------------

Not applicable.

|ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|--------- | ----------------------------------------------------------------------

Not applicable.

# PART III

|ITEM 17. | FINANCIAL STATEMENTS
|-------- | --------------------

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

|ITEM 18. | FINANCIAL STATEMENTS
|-------- | --------------------

See pages F-1 through F-36.

|ITEM 19. |  | EXHIBITS
|-------- |  | --------

|Number | Description
|------ | -----------
|       |            

|1.1 |  | Amended
and restated Articles of Association of the Company dated October 27, 2003
                     (incorporated by reference to exhibit 1.1 to the Company's annual
report on Form 20-F for the                      year ended December 31, 2003).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|1.2 |  | 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 Warrant issuable in connection with the Securities Purchase Agreement between the
                     Company and the Purchasers named therein, dated as of June 10, 2004
(incorporated by reference                      to exhibit 99.2 to the Company's current
report on Form 6-K filed June 10, 2004).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 64 -

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|Number | Description
|------ | -----------
|       |            

|4.1 |  | Top
Image Systems Ltd.  Employee Share Option Plan (2000) (incorporated by reference to
exhibit                      4.1 to the Company registration statement on Form S-8 filed
on December 19, 2002).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | 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))
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | 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)).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | 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)).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.5 |  | 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)).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.6 |  | 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).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.7 |  | Value-Added
Reseller Agreement for ODT Document Technologies' Products between the Company and
                     Oce 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).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.8 |  | Securities
Purchase Agreement between the Company and the Purchasers named therein, dated as of
                     June 10, 2004 (incorporated by reference to exhibit 99.3 to the
Company's current report on                      Form 6-K filed June 10, 2004).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.9 |  | Top
Image Systems Ltd.  Israeli Share Option Plan (2003) (incorporated by reference to
exhibit                      4.48 to the Company's annual report on Form 20-F for the
year ended December 31, 2003).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.10 |  | Business
Transfer Agreement between the Company and Toyo Ink Mfg.  Co., Ltd., dated as of
                     August, 2004 (incorporated by reference to exhibit 4.28 to the
Company's annual report on Form                      20-F for the year ended December 31,
2004).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.11 |  | Terms
and  Conditions  of  Convertible  Debentures  Issued  December 27, 2006  (incorporated
 by                      reference  to  exhibit  4.11 to the  Company's  annual  report
on Form  20-F for the year  ended                      December 31, 2006).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.12 |  | Form
of Director and Officer Indemnification Agreement (incorporated by reference to exhibit
                     4.12 to the Company's annual report on Form 20-F for the year ended
December 31, 2006).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.13 |  | Sale and Purchase of Capture
Projects Limited, between Top Image Systems UK Ltd , Top Image Systems Ltd ,Roger Stoker
and Edward Stoker , dated as of April, 2007
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.14 |  | Stock and Purchase of Asiasoft
Global Pte. Ltd., between Asiasoft Global Pte. Ltd., Toh Kian Hong and PC Holding Pte,
Ltd., dated as of July, 2007.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

- 65 -

---

---

|Number | Description
|------ | -----------
|       |            

|4.15 |  | Sale and Purchase of Asiasoft
Solutions (GZ) Limited, between Tai Kin Chung and Asiasoft Global Pte.Ltd, dated as of
July, 2007.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------

|4.16 |  | Sale and Purchase of ordinary
shares in the capital of Asiasoft Solutions (HK) Limited, between Tai Chung and Asiasoft
Pte. Ltd., dated as of July, 2007.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|4.17 |  | Sale and Purchase of
Shanghai Asiasoft Ltd., between Shanghai Aixun Software Co.,Ltd. and Asiasoft  System
(China) Limited, dated as of July, 2007.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

|8 |  | List
of Subsidiaries.
|- |  | ---------------------

|12.1 |  | Certification
of the Chief Executive Officer pursuant to 15 U.S.C.  Section 7241, as adopted
                     pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12.2 |  | Certification
of the Chief Financial Officer pursuant to 15 U.S.C.  Section 7241, as adopted
                     pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13.1 |  | 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.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13.2 |  | 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.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15.1 |  | Consent
of Kost Forer Gabbay & Kasierer- member of Ernst & Young Global.
|---- |  | ------------------------------------------------------------------------

|15.2 |  | Audit
Committee Charter (incorporated by reference to exhibit 14.3 to Company's annual report
                     on Form 20-F for the year ended December 31, 2003).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15.3 |  | Report
of KPMG with respect to the Consolidated Balance Sheet of Asiasoft Global Pte. Ltd. as
                     of December 31, 2007, and Consent of KPMG
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

- 66 -

---

---

# 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: /s/ Ido Schechter
Ido SchechterChief Executive Officer
| |  | ----------------------------------------------------------------------------------------------

Date:  April 8, 2008



---

---

# TOP IMAGE SYSTEMS LTD.
AND ITS SUBSIDIARIES

# CONSOLIDATED FINANCIAL STATEMENTS

# AS OF DECEMBER 31, 2007

# U.S. DOLLARS IN
THOUSANDS

# INDEX

|                                                        | Page      
|------------------------------------------------------- | ----------
|
|
|
|
|Report of Independent Registered Public Accounting Firm | F-2       
|Consolidated Balance Sheets                             | F-3 - F-4 
|Consolidated Statements of Operations                   | F-5       
|Statements of Changes in Shareholders' Equity           | F-6       
|Consolidated Statements of Cash Flows                   | F-7 - F-8 
|Notes to Consolidated Financial Statements              | F-9 - F-41



---

---

| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel
Tel:  972 (3)6232525
Fax:  972 (3)5622555
www.ey.com/il

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Board of
Directors and Shareholders of

# TOP IMAGE SYSTEMS LTD.

We have audited the accompanying
consolidated balance sheets of Top Image Systems Ltd. (the Company) and its
subsidiaries as of December 31, 2006 and 2007, and the related consolidated statements of
operations, changes in shareholders equity and cash flows for each of the three
years in the period ended December 31, 2007. These financial statements are the
responsibility of Companys management. Our responsibility is to express an opinion
on these financial statements based on our audits. We did not audit the financial
statements of 51% owned subsidiary, Asiasoft Global Pte. Ltd., which statements reflect
total assets of 11% as of December 31, 2007, and total revenues of 22% for the period from
July 1, 2007 through December 31, 2007 of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for this subsidiary, is based
solely on the report of the other auditors.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of the Companys
internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits and
the report of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits
and 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 and its subsidiaries as of December 31, 2006 and 2007, and the related
consolidated results of their operations and their cash flows for each of the three years
in the period ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles.

As
discussed in Note 2n to the consolidated financial statements, in 2006, the Company
adopted Statement Financial Accounting Standard Board No. 123(R), Share Based
Payment.

|                 |                                 
|---------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|April 3, 2008    | A Member of Ernst & Young Global



---

---



# Report of Independent
Registered Public Accounting Firm

The Board of Directors
and Shareholders 
Asiasoft Global Pte. Ltd.

We have audited the accompanying
consolidated balance sheet of Asiasoft Global Pte. Ltd. (the Company) and its
subsidiaries as of December 31, 2007, and the related consolidated statements of
operations, changes in shareholders equity, and cash flows for the six months then
ended. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our
audit.

We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). 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
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, as well as assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries at December 31, 2007,
and the consolidated results of their operations and the changes in Shareholders
equity and cash flows for the six months then ended, in conformity with U.S. generally
accepted accounting principles.

KPMG

April 1, 2008 
Singapore

F - 2

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES
|-------------------------------------------
|                                           
|CONSOLIDATED BALANCE SHEETS                
|                                           
|U.S. dollars in thousands                  

|                                                                             | December 31,
|---------------------------------------------------------------------------- | ------------
|
|
|
|
|ASSETS                                                                       |             
|                                                                             |             
|CURRENT ASSETS:                                                              |             
|Cash and cash equivalents                                                    |             
|Short term deposits                                                          |             
|Marketable securities (Note 3)                                               |             
|Trade receivables (net of allowance for doubtful accounts of $  436 and $790 |             
|at December 31, 2006  and  2007, respectively)                               |             
|Other accounts receivable and prepaid expenses (Note 4)                      |             
|                                                                             |             
|                                                                             |             
|Total current assets                                                         |             
|                                                                             |             
|                                                                             |             
|LONG-TERM ASSETS:                                                            |             
|Severance pay fund                                                           |             
|Long-term deposits and long-term asset                                       |             
|Property and equipment, net (Note 5)                                         |             
|Investment in affiliates                                                     |             
|Intangible assets and deferred finance costs, net (Note 6)                   |             
|Goodwill (Note 7)                                                            |             
|                                                                             |             
|                                                                             |             
|Total long-term assets                                                       |             
|                                                                             |             
|                                                                             |             
|Total assets                                                                 |             
|                                                                             |             

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

F - 3

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|CONSOLIDATED BALANCE SHEETS                                
|                                                           
|U.S. dollars in thousands (except share and per share data)

|                                                                            | December 31,
|--------------------------------------------------------------------------- | ------------
|
|
|
|
|LIABILITIES AND SHAREHOLDERS' EQUITY                                        |             
|                                                                            |             
|CURRENT LIABILITIES:                                                        |             
|Short-term bank loans (Note 8)                                              |             
|Trade payables                                                              |             
|Deferred revenues                                                           |             
|Accrued expenses and other accounts payable (Note 9)                        |             
|                                                                            |             
|                                                                            |             
|Total current liabilities                                                   |             
|                                                                            |             
|                                                                            |             
|LONG-TERM LIABILITIES                                                       |             
|                                                                            |             
|Convertible debentures (Note 10)                                            |             
|Embedded derivative of convertible debentures  (Note 10)                    |             
|Accrued severance pay                                                       |             
|                                                                            |             
|                                                                            |             
|Total long-term liabilities                                                 |             
|                                                                            |             
|                                                                            |             
|COMMITMENTS, CONTINGENCIES AND CHARGES (Note 11)                            |             
|                                                                            |             
|SHAREHOLDERS' EQUITY (Note 13):                                             |             
|Share capital:                                                              |             
|Ordinary shares of NIS 0.04 par value -                                     |             
|Authorized: 125,000,000 shares at December 31, 2006 and 2007; Issued and    |             
|outstanding: 8,845,241 and 8,909,138  shares at December 31, 2006 and 2007, |             
|respectively                                                                |             
|Additional paid-in capital                                                  |             
|Accumulated other comprehensive income                                      |             
|Accumulated deficit                                                         |             
|                                                                            |             
|                                                                            |             
|Total shareholders' equity                                                  |             
|                                                                            |             
|                                                                            |             
|Total liabilities and shareholders' equity                                  |             
|                                                                            |             

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

F - 4

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|CONSOLIDATED STATEMENTS OF OPERATIONS                      
|                                                           
|U.S. dollars in thousands (except share and per share data)

|                                                          | Year ended December 31,
|--------------------------------------------------------- | -----------------------
|
|
|
|
|Revenues (Note 14):                                       |                        
|Products                                                  |                        
|Services                                                  |                        
|                                                          |                        
|                                                          |                        
|Total revenues                                            |                        
|                                                          |                        
|                                                          |                        
|Cost of revenues:                                         |                        
|Products                                                  |                        
|Services                                                  |                        
|                                                          |                        
|                                                          |                        
|Total cost of revenues                                    |                        
|                                                          |                        
|                                                          |                        
|Gross profit                                              |                        
|                                                          |                        
|                                                          |                        
|Operating costs and expenses:                             |                        
|Research and development, net                             |                        
|Selling and marketing                                     |                        
|General and administrative                                |                        
|Restructuring charges  (Note 17)                          |                        
|Liquidated damages related to September 2004 investment   |                        
|                                                          |                        
|                                                          |                        
|Total operating costs and expenses                        |                        
|                                                          |                        
|                                                          |                        
|Operating income (loss)                                   |                        
|Financial income (expenses), net (Note 16)                |                        
|Other income, net                                         |                        
|                                                          |                        
|                                                          |                        
|Income (loss) before taxes on income                      |                        
|                                                          |                        
|Taxes on income                                           |                        
|                                                          |                        
|                                                          |                        
|Income (loss) after taxes on income                       |                        
|                                                          |                        
|Equity in profits of affiliated companies                 |                        
|                                                          |                        
|                                                          |                        
|Net income (loss)                                         |                        
|                                                          |                        
|                                                          |                        
|Basic and diluted net earnings (loss) per share (Note 15) |                        
|                                                          |                        

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

F - 5

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES  
|---------------------------------------------
|                                             
|STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
|                                             
|U.S. dollars in thousands                    

|                                  | Common stock | Additional
paid-in
capital | Accumulated
other
comprehensive
income
(loss) | Accumulated
deficit | Comprehensive
income
(loss) | Total
|--------------------------------- | ------------ | -------------------------- | --------------------------------------------- | ------------------- | --------------------------- | -----
|
|
|
|
|Balance at January 1, 2005        |              |                            |                                               | 8,753,991           |                             | $    
|Net unrealized gains on           |              |                           
|available-for-sale securities     |              |                            |                                               | -                   |                             |      
|Net loss                          |              |                            |                                               | -                   |                             |      
|                                  |              |                            |                                               |                     |                             |      
|                                  |              |                           
|Comprehensive loss                |              |                            |                                               |                     |                             |      
|                                  |              |                            |                                               |                     |                             |      
|                                  |              |                           
|Issuance expenses                 |              |                            |                                               | -                   |                             |      
|                                  |              |                           
|Exercise of stock options         |              |                            |                                               | 23,375              |                             |      
|Employee stock-based              |              |                           
|compensation related to           |              |                           
|acceleration of vesting           |              |                            |                                               |                     |                             |      
|                                  |              |                            |                                               |                     |                             |      
|                                  |              |                           
|Balance at December 31, 2005      |              |                            |                                               | 8,777,366           |                             |      
|                                  |              |                           
|Net income                        |              |                            |                                               | -                   |                             |      
|                                  |              |                            |                                               |                     |                             |      
|                                  |              |                           
|Comprehensive income              |              |                            |                                               | -                   |                             |      
|                                  |              |                            |                                               |                     |                             |      
|                                  |              |                           
|Exercise of stock options         |              |                            |                                               | 67,875              |                             |      
|                                  |              |                           
|Employee stock based compensation |              |                            |                                               | -                   |                             |      
|                                  |              |                            |                                               |                     |                             |      
|                                  |              |                           
|Balance at December 31, 2006      |              |                            |                                               | 8,845,241           |                             |      
|                                  |              |                           
|Net unrealized gain on foreign    |              |                           
|currency translation adjustment   |              |                            |                                               | -                   |                             |      
|                                  |              |                           
|Net loss                          |              |                            |                                               | -                   |                             |      
|                                  |              |                            |                                               |                     |                             |      
|                                  |              |                           
|Comprehensive loss                |              |                            |                                               |                     |                             |      
|                                  |              |                            |                                               |                     |                             |      
|                                  |              |                           
|Exercise of stock options         |              |                            |                                               | 39,266              |                             |      
|                                  |              |                           
|Conversion of convertible         |              |                           
|debentures into shares            |              |                            |                                               | 24,631              |                             |      
|                                  |              |                           
|Employee stock-based              |              |                           
|compensation                      |              |                            |                                               | -                   |                             |      
|                                  |              |                            |                                               |                     |                             |      
|                                  |              |                           
|Balance at December 31, 2007      |              |                            |                                               | 8,909,138           |                             | $    
|                                  |              |                            |                                               |                     |                             |      

|*) | Represents
an amount lower than $ 1.
|-- | ------------------------------------

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

F - 6

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES
|-------------------------------------------
|                                           
|CONSOLIDATED STATEMENTS OF CASH FLOWS      
|                                           
|U.S. dollars in thousands                  

|                                                                   | Year ended December 31,
|------------------------------------------------------------------ | -----------------------
|
|
|
|
|Cash flows from operating activities:                              |                        
|Net income (loss)                                                  |                        
|Adjustments to reconcile net income (loss) to net cash             |                        
|provided by (used in) operating activities:                        |                        
|Non-cash stock-based compensation expenses                         |                        
|Interest on short-term bank loans                                  |                        
|Depreciation and amortization                                      |                        
|Amortization of deferred issuance costs                            |                        
|Accrued severance pay, net                                         |                        
|Equity in profit of affiliated companies                           |                        
|Gain from marketable securities, net                               |                        
|Interest and accretion of discount on convertible debentures       |                        
|Decrease (increase) in trade receivables, net                      |                        
|Decrease in fair value of embedded derivative of                   |                        
|convertible debenture                                              |                        
|Increase (decrease) in other accounts receivable and               |                        
|prepaid expenses                                                   |                        
|Increase (decrease) in trade payables                              |                        
|Increase  in deferred revenues                                     |                        
|Increase (decrease) in accrued expenses and other accounts payable |                        
|                                                                   |                        
|                                                                   |                        
|Net cash provided by (used in) operating activities                |                        
|                                                                   |                        
|                                                                   |                        
|Cash flows from investing activities:                              |                        
|Acquisition of business activity (a)                               |                        
|Payment of accrued expenses on account of acquisition              |                        
|Purchase of property and equipment                                 |                        
|Proceeds from sale of marketable securities                        |                        
|Decrease (increase) in short term deposits                         |                        
|Purchase of marketable securities                                  |                        
|Decrease (increase) in long-term deposits                          |                        
|                                                                   |                        
|                                                                   |                        
|Net cash provided by (used in) investing activities                |                        
|                                                                   |                        
|                                                                   |                        
|Cash flows from financing activities:                              |                        
|Proceeds from exercise of stock options                            |                        
|Increase (decrease) in short-term bank loans, net                  |                        
|Proceeds from issuance of convertible debentures, net              |                        
|Payment of accrued issuance expenses                               |                        
|                                                                   |                        
|                                                                   |                        
|Net cash provided by financing activities                          |                        
|                                                                   |                        
|                                                                   |                        
|Increase (decrease) in cash and cash equivalents                   |                        
|Cash and cash equivalents at the beginning of the year             |                        
|                                                                   |                        
|                                                                   |                        
|Cash and cash equivalents at the end of the year                   |                        
|                                                                   |                        

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

F - 7

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES
|-------------------------------------------
|                                           
|CONSOLIDATED STATEMENTS OF CASH FLOWS      
|                                           
|U.S. dollars in thousands                  

|                                                                         | Year ended December 31,
|------------------------------------------------------------------------ | -----------------------
|
|
|
|
|Supplemental disclosure of cash flows activities:                        |                        
|                                                                         |                        
|Cash paid during the year for:                                           |                        
|                                                                         |                        
|Tax                                                                      |                        
|                                                                         |                        
|Interest                                                                 |                        
|                                                                         |                        
|                                                                         |                        
|Non-cash activities:                                                     |                        
|                                                                         |                        
|Accrued issuance expenses of convertible debenture                       |                        
|                                                                         |                        
|                                                                         |                        
|(a)             Acquisition of business activity (note 1d):              |                        
|                                                                         |                        
|Net fair value of assets acquired and liabilities                        |                        
|assumed at the acquisition date:                                         |                        
|                                                                         |                        
|Working capital (excluding cash and cash equivalents)                    |                        
|Property and equipment                                                   |                        
|Identifiable intangible assets                                           |                        
|Goodwill                                                                 |                        
|                                                                         |                        
|                                                                         |                        
|                                                                         |                        
|Accrued expenses on account of acquisition                               |                        
|                                                                         |                        
|                                                                         |                        
|                                                                         |                        
|                                                                         |                        
|                                                                         |                        
|Acquisition of business activity (note 1e):                              |                        
|                                                                         |                        
|Net fair value of assets acquired and liabilities                        |                        
|assumed at the acquisition date:                                         |                        
|                                                                         |                        
|Working capital (excluding cash and cash equivalents)                    |                        
|Property and equipment                                                   |                        
|Investment in affiliated company                                         |                        
|Identifiable intangible assets                                           |                        
|Goodwill                                                                 |                        
|                                                                         |                        
|                                                                         |                        
|                                                                         |                        
|Purchase of option to purchase the minority interest in subsidiary       |                        
|Accrued expenses on account of acquisition and acquisition costs payable |                        
|                                                                         |                        
|                                                                         |                        
|                                                                         |                        
|                                                                         |                        

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

F - 8

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 1: |  | GENERAL
|------- | - | -------

| | a. | Business
and organization:
| | -- | --------------------------

| | Top
Image Systems Ltd. (TIS or the Company) is engaged in the
development and marketing of a variety of information recognition systems and
technologies and automated document capture solutions for the efficient flow of
information within and between organizations. The Companys software minimizes the
need for manual data entry by automatically capturing, reading, understanding,
identifying, processing, classifying and routing the information contained in documents,
increasing data capture accuracy and the rate of information processing. The Companys
shares are traded on the National Association of Securities Dealers Quotation (NASDAQ)
in the United States and on the Tel-Aviv Stock Exchange (TASE).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
for information regarding the principal customers of the Company, see Note 13b.
| | ----------------------------------------------------------------------------------

| | b. | The
Companys marketing and sales activities are conducted through its
          subsidiaries in the U.S., U.K, Germany, Japan and Asia.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------

| | c. | In
August 2004, the Company signed a definitive agreement with Toyo Ink Mfg.           Co.
Ltd. (Toyo) which was, until then, the Companys           distributor
in Japan, to acquire through its newly established Japanese           subsidiary (TISJ),
certain assets comprising the Toyos           business of distributing the Companys
products in Japan. The consideration           for the acquisition amounted to $  1,965
(including $  465 in           transaction costs). The Company acquired TISJ in
order to extend its business           presence in the Japan.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following are the identifiable intangible assets acquired and the respective periods over
which the assets will be amortized on a straight-line basis:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| |                    | Amount | Amortization
period
(in years)
| | ------------------ | ------ | ------------------------------
|
|
|
|
| | Technology         |        |                               
| | Customer relations |        |                               
| | Goodwill           |        |                               
| |                    |        |                               
| |                    |        |                               
| |                    |        |                               
| |                    |        |                               

| | See
Note 6 for expected amortization expenses.
| | ----------------------------------------------

F - 9

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 1: | - | GENERAL (Cont.)
|------- | - | ---------------

| | d. | On April 11, 2007 the Company acquired all the outstanding shares of Capture
          Projects Ltd. (CPL), a provider of document management solutions in
          the UK, for a consideration of $ 4,605, and potential performance 
          based consideration. The company acquired CPL in order to extend its business in
          the UK. The purchase price also included approximately $ 1,240 of
          acquisition related direct costs.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total purchase price was comprised as follows:
| | --------------------------------------------------

| |                           | 
| | ------------------------- | 
|
|
|
|
| | Cash paid to sellers      | 
| | Acquisition related costs | 
| |                           | 
| |                           | 
| | Total purchase price      | 
| |                           | 

| | The
acquisition was accounted for under the purchase method of accounting, in accordance with
SFAS No. 141, and accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on their estimated fair values at the date of
acquisition and results of CPLs operations have been included in the consolidated
financial statements commencing April 1, 2007. The effect on statement of operation of
the Company for the period ended December 31, 2007 had the acquisition of CPL been
effected on April 11, 2007, is immaterial. The excess of the purchase price over the
estimated fair value of the identifiable net assets acquired has been recorded as
goodwill.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has allocated the net purchase  price of the  acquisition  to CPL's assets as of
                     April 1, 2007, as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------

| |                                        | 
| | -------------------------------------- | 
|
|
|
|
| | Cash, cash equivalents and receivables | 
| | Liabilities assumed                    | 
| | Property and equipment, net            | 
| | Customer relations                     | 
| | Brand name and domain name             | 
| | Goodwill                               | 
| |                                        | 
| |                                        | 
| | Total purchase price                   | 
| |                                        | 

| | See
Note 6 for expected amortization expenses.
| | ----------------------------------------------

| | Amortization
of acquired intangible assets is calculated using the following estimated useful lives:
| | ----------------------------------------------------------------------------------------------------

| |                            | Amount | Amortization
period
(in years)
| | -------------------------- | ------ | ------------------------------
|
|
|
|
| | Customer relations         |        |                               
| | Brand name and Domain name |        |                               
| |                            |        |                               
| |                            |        |                               
| |                            |        |                               
| |                            |        |                               

F - 10

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 1: |  | GENERAL (Cont.)
|------- | - | ---------------

| | Goodwill
of $ 4,836 represents the excess of the purchase price over the fair market value of the
net tangible and intangible assets acquired. Goodwill will not be amortized and is tested
for impairment at least annually.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | On July 9, 2007 the Company acquired 51% of the outstanding shares of Asiasoft
          Global Pte. Ltd. (ASG) for a total consideration of approximately
          $ 1,788, out of which, $ 352 to be paid on or before December 31, 2007
          and $ 245 upon the conclusion of a 12 months period commencing on July 9,
          2007. The Company also received the right to purchase the remaining 49% of ASG
          shares for a consideration of $ 1,490. The option to purchase the minority
          interest in ASG is for 18 months period commencing on July 9, 2007. ASG is a
          holding company of a group of subsidiaries and affiliated companies in
          Singapore, Hong Kong, China and Malaysia, which all are information technology
          solutions providers by way of distribution and integration services, which focus
          on areas such as shared services solutions, information management solutions,
          access infrastructure, security solutions, business intelligence and enterprise
          resource planning. The Company acquired ASG in order to extend its business in
          Asia, mainly using ASGs subsidiaries in China to penetrate TIS
          product into the Chinese market. The purchase price also included approximately
          $ 915 of acquisition related costs.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total purchase price was comprised as follows:
| | --------------------------------------------------

| |                                                         | 
| | ------------------------------------------------------- | 
|
|
|
|
| | Cash paid to sellers                                    | 
| | Acquisition related costs                               | 
| | Purchase of option to purchase the minority interest in | 
| | subsidiary                                              | 
| |                                                         | 
| |                                                         | 
| | Net purchase consideration                              | 

| | The
acquisition was accounted for under the purchase method of accounting, in accordance with
SFAS No. 141, and accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on their estimated fair values at the date of
acquisition and results of ASGs operations have been included in the consolidated
financial statements commencing July 1, 2007. The effect on statement of operations and
cash flow of the Company for the period ended December 31, 2007 had the acquisition of
ASG been effected on July 9, 2007, is immaterial. The excess of the purchase price over
the estimated fair value of the identifiable net assets acquired has been recorded as
goodwill.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company
has allocated the net purchase price of the acquisition to ASGs assets as of June
30, 2007, as follows:
| | --------------------------------------------------------------------------------------------------------------------

| |                                        | 
| | -------------------------------------- | 
|
|
|
|
| | Cash, cash equivalents and receivables | 
| | Liabilities assumed                    | 
| | Property and equipment, net            | 
| | Investment in affiliated company       | 
| | Customer relations                     | 
| | Goodwill                               | 
| |                                        | 
| |                                        | 
| | Total purchase price                   | 
| |                                        | 

| | See
Note 6 for expected amortization expenses.
| | ----------------------------------------------

F - 11

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 1: |  | GENERAL (Cont.)
|------- | - | ---------------

| | Amortization
of acquired intangible assets is calculated using the following estimated useful lives:
| | ----------------------------------------------------------------------------------------------------

| |                    | Amount | Amortization
period
(in years)
| | ------------------ | ------ | ------------------------------
|
|
|
|
| | Customer relations |        |                               
| |                    |        |                               
| |                    |        |                               
| |                    |        |                               
| |                    |        |                               

| | Goodwill
of $  2,312 represents the excess of the purchase price over the fair market value
of the net tangible and intangible assets acquired. Goodwill will not be amortized and is
tested for impairment at least annually.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The following table presents
unaudited pro forma results of operations giving effect to the acquisition of ASG and CPL
as if the acquisitions had been consummated at the beginning of each year. The unaudited
pro forma results of operations are not necessarily indicative of what would have occurred
had the acquisition been made as of the beginning of each period or of the results that
may occur in the future. Net income for each period presented includes amortization of
intangible assets related to the acquisition of $ 72 and $ 262 for 2006 and for 2007,
respectively. The unaudited pro forma information is as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                  | Year Ended December 31,
| | -------------------------------- | -----------------------
|
|
|
| | Revenues                         |                        
| |                                  |                        
| |                                  |                        
| | Net loss                         |                        
| |                                  |                        
| |                                  |                        
| | Basic and diluted loss per share |                        
| |                                  |                        

F - 12

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES
|------- | - | -------------------------------

| | The
consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the U.S. (U.S. GAAP), applied on a
consistent basis, as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | Use
of estimates:
| | -- | -----------------

| | The
preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ
from those estimates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Principles
of consolidation:
| | -- | ----------------------------

| | The
consolidated financial statements include the accounts of the Company and its subsidiaries (the Group). Intercompany balances and transactions
including profit from intercompany sales not yet realized outside the Group, have been
eliminated upon consolidation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Financial
statements in United States dollars:
| | -- | ----------------------------------------------

| | A
majority of the revenues of the Company and certain of its subsidiaries are generated in
U.S. dollars (dollar). In addition, a substantial portion of the Companys
costs is incurred in dollars. The majority of the Companys financing is in dollars.
The Companys management believes that the dollar is the currency of the primary
economic environment in which the Company and its subsidiaries operate. Thus, the
functional and reporting currency of the Company and certain of its subsidiaries are the
dollar.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accordingly,
monetary accounts maintained in currencies other than the dollar are remeasured into
dollars in accordance with SFAS No. 52, Foreign Currency Translation(SFAS
No. 52). All transaction gains and losses of the remeasurement of monetary balance
sheet items are reflected in the statements of operations as financial income or
expenses, as appropriate.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
those subsidiaries whose functional currency has been determined to be their local
currency, assets and liabilities are translated at year-end exchange rates and statement
of operations items are translated at average exchange rates prevailing during the year.
Related translation adjustments are recorded as a separate component of accumulated other
comprehensive income in shareholders equity.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Cash
equivalents:
| | -- | -----------------

| | Cash
equivalents are short-term highly liquid investments that are readily convertible to cash
with original maturities of three months or less, at the date acquired.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Short-term
deposits:
| | -- | --------------------

| | Short-term
deposits include deposits with original maturities of more than three months and less
than one year which presented at cost, including accrued interest. The deposits are in
U.S. dollars and bear interest at an annual rate of 5.32% for the year ended December 31,
2007.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | f. | Marketable
securities:
| | -- | ----------------------

| | Marketable
securities consist of auction rate securities and commercial papers.
| | -------------------------------------------------------------------------------

| | The
Company accounts for investments in marketable securities in accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities (SFAS
No. 115). Management determines the appropriate classification of its
investments in marketable debt securities at the time of purchase and reevaluates such
determinations at each balance sheet date. Debt securities are classified as
available-for-sale and reported at fair value.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Unrealized
gains and losses are excluded from earnings and are reported as a component of
accumulated other comprehensive income in shareholders equity.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to the Staff Accounting Bulletin No. 59 (SAB 59), management is required to
evaluate each period whether the impairment of value for securities is other than
temporary. The Companys policy in evaluating the fair value of its investments in
marketable securities is based on the following factors: (i) whether there is a
significant impairment of value of the securities suspected to be other than temporary,
(ii) the ability to hold the security until recovery and (iii) the intention to hold the
security until recovery. If the Company determines that a decline in market value is
other than temporary, then a charge to earnings is recorded in financial income
(expenses), net in the accompanying consolidated statements of operations for all or a
portion of the unrealized loss, and a new cost basis in the investment is established.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Auction
rate securities and commercial papers are reported at fair value, which approximates cost
due to the interest rate reset feature of these securities. As such, no unrealized gains
or losses related to these securities were recognized during the years ended December 31,
2007, 2006 and 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
January 2008 the Company sold at par value $ 1,650 of its auction rates securities, which
amounted as of December 31, 2007 to $ 2,700. Starting February 2008, auctions relating to
those types of auction note securities, not sold by the Company, failed. The Company does
not currently intend to liquidate these investments at below par value or prior to a
reset date. However, the Company will assess the fair value of these securities at the
end of each quarter to determine whether an impairment charge is required.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Long-term
assets:
| | -- | -----------------

| | Consist
mainly long-term prepaid expenses for motor vehicle and rent leasing.
| | -----------------------------------------------------------------------------

| | h. | Property
and equipment, net:
| | -- | ----------------------------

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

| |                                    | Years                             
| | ---------------------------------- | ----------------------------------
|
|
|
|
| | Computers and peripheral equipment | 3                                 
| | Office furniture and equipment     | 7 - 17 (Mainly 17 years)          
| | Leasehold improvements             | Over the shorter of the lease term
| |                                    | or useful economic life           

F - 14

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | i. | Impairment
of long-lived assets:
| | -- | --------------------------------

| | The
Companys long-lived assets are reviewed for impairment in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS No. 144)
whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future undiscounted cash flows
expected to be generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. As of December 31, 2006 and 2007, no
impairment losses have been identified.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | j. | Goodwill:
| | -- | ---------

| | Goodwill is measured as the excess of
the cost of an acquired company over the sum of the amounts assigned to tangible and
identifiable intangible assets acquired less liabilities assumed. Goodwill is not
amortized, but rather reviewed for impairment at least annually in accordance with the
provisions of SFAS No. 142. The goodwill impairment test under SFAS No. 142 involves a
two-step approach. Under the first step, the Company determines the fair value of each
reporting unit to which goodwill has been assigned. The reporting units of the Company for
purposes of the impairment test are the Companys two operating units, the ASG and
the rest of the group (all companies in the group except for ASG), as these
are the components of the business for which discrete financial information is available
and management regularly reviews the operating results of those components. The Company
then compares the fair value of each reporting unit to its carrying value, including
goodwill. The Company estimates the fair value of each reporting unit by estimating the
present value of the reporting units future cash flows. If the fair value exceeds
the carrying value, no impairment loss is recognized. If the carrying value exceeds the
fair value, the goodwill of the reporting unit is considered potentially impaired and the
second step is completed in order to measure the impairment loss. Under the second step
goodwill is reduced to its implied fair value through an adjustment to the goodwill
balance, resulting in an impairment charge. The Company has elected to perform its
analysis of goodwill assigned to ASG and the rest of the group during the
second and the fourth quarters of the year, respectively. During 2005, 2006 and 2007, no
impairment losses were identified.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | k. | Intangible
assets:
| | -- | ------------------

| | Intangible assets are comprised of
acquired technology, customer relations, brand name and domain name and deferred finance
costs. Definite-lived intangible assets are amortized using the straight-line method over
their estimated useful life. Acquired technology, brand name and domain name are amortized
on a straight line basis over a period of 4 to 5 years. Customer relations are amortized
using accelerated amortization method over a period of 4 to 5 years. Finance costs
incurred in respect of issuance of debentures are deferred and amortized as a component of
interest expense over the contractual life of the debenture using the effective interest
method.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | l. | Convertible
debentures:
| | -- | -----------------------

| | The Company reviews the terms of
convertible debt and equity instruments issued to determine whether there are embedded
derivative instruments, including embedded conversion options that are required to be
bifurcated and accounted for separately as a derivative financial instrument. In
circumstances where the convertible instrument contains more than one embedded derivative
instrument, including the conversion option, that is required to be bifurcated, the
bifurcated derivative instruments are accounted for as a single, compound derivative
instrument.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | In accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended, the
convertible debt holders conversion right provision and the linkage of the
convertible notes U.S. Dollar with a floor on the NIS/ U.S. Dollar exchange rate (see also
note 10), collectively, the debt features, contained in the terms governing the
convertible notes are not clearly and closely related to the characteristics of the notes.
Accordingly, the features qualify as embedded derivative instruments at issuance and,
because they do not qualify for any scope exception within SFAS 133, they are required by
SFAS 133 to be accounted for separately from the debt instrument and recorded as
derivative instrument liabilities. The fair value assigned to the embedded derivative
instrument is marked to market in each reporting period and is included in long term
liabilities on the balance sheet. During 2007, the Company recorded financial income in
amount of $ 3,439 related to these debt features.  The Company adopted SFAS No. 159 as
of the beginning of 2008 and elected to apply the fair value option to convertible
debentures (see also Note 2.aa). As a result, a net unrealized gain of approximately
$ 820 will be recorded as adjustment to the accumulated deficit on January 1, 2008.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
discount on the convertible debentures is amortized to interest expenses from the
commitment date to the stated maturity date using the effective interest method.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cost
incurred in respect of issuance expenses of debentures is deferred and amortized as a
component of interest expense over the contractual life of the debenture using the
effective interest method.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | m. | Equity
method investments in affiliates:
| | -- | ----------------------------------------

| | The
Company holds, through ASG, investments in affiliated companies as follows:
| | -------------------------------------------------------------------------------

| | Asiasoft
(M) Sdn Bhd, in which ASG holds 30% equity interest, is a Malaysian registered company
which provides information system products and related services. Asiasoft Hong Kong Ltd (AS
HK), in which ASG holds 23.37% equity interest, is a Hong Kong registered
company which deals in computer software, peripherals and provides software services.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
investments in affiliated companies are accounted using the equity method.
| | ------------------------------------------------------------------------------

| | The
Companys investments in the affiliated companies are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an
investment may not be recoverable, in accordance with Accounting Principle Board Opinion
No. 18, The Equity Method of Accounting for Investments in Common Stock(APB
No. 18) and EITF 03-1,The meaning of other-than-temporary impairment and its
application to certain investments (EITF 03-1). As of December 31, 2007,
based on managements most recent analysis, no impairment losses have been
identified.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | n. | Revenue
recognition:
| | -- | --------------------

| | The Company derives its revenues
mainly from sales of products and services. Product revenues include mainly sales of
software and hardware products. Revenues from services include maintenance and technical
support, consulting and training
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company accounts for software sales in accordance with Statement of Position No. 97-2,
Software Revenue Recognition (SOP No. 97-2), as amended by
Statement of Position 98-9, Modifications of SOP 97-2, Software Revenue Recognition
with Respect to Certain Transactions. SOP No. 97-2 generally requires revenues
earned from software arrangements involving multiple elements to be allocated to each
element based on the relative fair values of the elements determined by the vendors
specific objective evidence (VSOE) of fair value. Revenues are allocated
under the residual method when VSOE of fair value exists for all undelivered
elements and VSOE of fair value does not exist for all of the delivered elements, and
when all SOP No. 97-2 criteria for revenue recognition are met.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue
from license fees is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable, and collectibility is probable.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Maintenance
and support revenue is deferred and recognized on a straight-line basis over the term of
the maintenance and support agreement. The VSOE of fair value of the undelivered elements
(maintenance and support and services) included in multiple element arrangements is
determined based on the price charged for the undelivered element when sold separately or
renewed.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
from hardware sales, whether included in software arrangements or when sold separately,
are recognized in accordance with SAB 104 Revenue Recognition. Because the
software is not essential to the functionality of the hardware, the hardware is not
considered software-related and, therefore, is excluded from the scope of SOP 97-2, and
is recognized according to SAB 104 when persuasive evidence of an arrangement exist,
delivery has occurred, the vendors fee is fixed or determinable, no further
obligation exists and collectability is reasonably assured. The Company records revenue from the
sales of third party hardware gross of cost of sales, in accordance with Emerging Issues
Task Force (EITF) 99-19, Reporting Revenue Gross as a Principal versus
Net as an Agent.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Arrangements
that include consulting/professional services are evaluated to determine whether those
services are essential to the functionality of other elements of the arrangement. When
consulting services are not considered essential, the revenue allocable to the consulting
services is recognized as the services are performed.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | If
services are considered essential to the functionality of other elements of the
arrangement, revenues from software licenses that require significant customization,
integration and installation are recognized using contract accounting based on Statement
of Position No.81-1 (SOP 81-1), on the percentage of completion method, in
accordance with the Input Method, provided that the revenues are fixed or can
be reasonably estimated, collection is probable, costs related to performing the work are
determinable or can be reasonably determined, there is no substantial uncertainty
regarding the ability of the Company to complete the contract and to meet the contractual
terms. The percentage of completion is determined based actual labor hours to total
estimated labor hours. As for contracts in which a loss is anticipated, a provision is
recorded for the full amount of the expected loss, in the period in which such losses are
first determined. As of December 31, 2007, no such estimated losses were identified.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
revenues represent unearned amounts received under technical support and maintenance
arrangements that are paid by customers and not yet recognized as revenues.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o. | Research
and development costs:
| | -- | -------------------------------

| | Research
and development costs, are charged to the statement of operations as incurred. Statement
of Financial Accounting Standard No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed (SFAS No. 86),
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Based
on the Companys product development process, technological feasibility is
established upon completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the products are ready for general
release were insignificant. Therefore, all research and development costs have been
expensed.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | p. | Royalty-bearing
grants:
| | -- | -----------------------

| | Royalty-bearing grants from the
Government of Israel for funding approved research and development projects are recognized
at the time the Company is entitled to such grants, on the basis of the costs incurred and
included as a reduction in research and development costs. No research and development
grants were received during the years 2002 through 2007.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During the six months ended December
31, 2007 the Company recognized $ 189 in grants from various agencies of the
Government of Singapore, which are included in operating cash flows. These grants provide
funding for a portion of ASG software development projects. The grants are disbursed in
connection with development activities carried out in Singapore, based on the amount of
expenditures incurred, achievement of program milestones and certification of the costs
incurred. The main condition attached to the grants is the completion of the project to
which the grant relates. Grants are only recognized once there is reasonable assurance
that the Company will comply with conditions attached to the grant and the grant will be
received. Such grants are recorded as a reduction of research and development costs since
when received it is not probable that the grants will be repaid.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | q. | Accounting
for stock-based compensation:
| | -- | ----------------------------------------

| | On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment (SFAS 123(R)) which requires
the measurement and recognition of compensation expense based on estimated fair values
for all share-based payment awards made to employees and directors. SFAS 123(R)
supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), for periods beginning in fiscal 2006. In
March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
(SAB 107) relating to SFAS 123(R). The Company has applied the provisions of
SAB 107 in its adoption of SFAS 123(R).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
123(R) requires companies to estimate the fair value of equity-based payment awards on
the date of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as an expense over the requisite
service periods in the Companys consolidated income statement. Prior to the
adoption of SFAS 123(R), the Company accounted for equity-based awards to employees and
directors using the intrinsic value method in accordance with APB 25 as allowed under
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation(SFAS 123).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard starting from January 1, 2006,
the first day of the Companys fiscal year 2006. Under that transition method,
compensation cost recognized in the years ended December 31, 2006 and 2007,
includes: (a) compensation cost for all share-based payments granted subsequent
to, but not yet vested as of January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123, and (b) compensation cost
for all share-based payments granted subsequent to January 1 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123(R).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recognizes compensation expenses for the value of its awards, which have graded
vesting based on the straight line method over the requisite service period of each of
the awards, net of estimated forfeitures. Estimated forfeitures are based on actual
historical pre-vesting forfeitures.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Prior
to January 1, 2006, the Company applied the intrinsic value method of accounting for
stock options as prescribed by APB 25, whereby compensation expense is equal to the
excess, if any, of the quoted market price of the stock over the exercise price at the
grant date of the award.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company estimates the fair value of stock options granted using the Monte-Carlo
option-pricing model. The Monte-Carlo Simulation for option pricing requires a number of
assumptions, of which the most significant are the suboptimal exercise factor and
expected stock price volatility. The suboptimal exercise factor is estimated using
historical option exercise information. The suboptimal exercise factor is the ratio by
which the stock price must increase over the exercise price before employees are expected
to exercise their stock options. The expected life of employee stock options is a derived
output of this assumption from the Monte-Carlo Simulation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Expected
volatility is based upon actual historical stock price movements over the most recent
periods. Expected volatility is calculated as of the grant dates for different periods,
since the Monte-Carlo Simulation is used for different expected volatilities for
different periods.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has historically not paid dividends and has no foreseeable plans to issue
dividends. The risk-free interest rate is based on the yield from U.S. Treasury
zero-coupon bonds with an equivalent term and calculated for different periods that are
in line with the expected volatility periods.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of the Companys stock options granted to employees and directors was
estimated at using the following assumptions:
| | ----------------------------------------------------------------------------------------------------------------------------------

| |                                          | Year ended December 31,
| | ---------------------------------------- | -----------------------
|
|
|
|
| | Dividend yield                           | 0%                     
| | Expected volatility                      | 33% - 85%              
| | Risk-free interest rate                  | 4.75%                  
| | Contractual term of up to                | 10 years               
| | Forfeiture rate - employees              | 20%                    
| | Forfeiture rate-  management             | 10%                    
| | Suboptimal exercise multiple- employees  | 1.85                   
| | Suboptimal exercise multiple- management | 2.17                   

| | The
pro-forma  table below reflects the Company's net stock based  compensation  expense,
 net                      loss and  basic  and  diluted  loss per share for the year
 ended  December  31 2005,  had the                      Company applied the fair value
recognition provisions of SFAS 123, as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                              | Year ended
December 31,
2005
| | ---------------------------------------------------------------------------- | ----------------------------
|
|
|
|
| | Net loss - as reported                                                       |                             
| | Deduct: stock-based compensation expense recognized under APB 25             |                             
| | Add: stock-based compensation expense determined under fair value method for |                             
| | all awards                                                                   |                             
| |                                                                              |                             
| |                                                                              |                             
| | Pro forma net loss:                                                          |                             
| |                                                                              |                             
| |                                                                              |                             
| | Net loss per share:                                                          |                             
| |                                                                              |                             
| | Basic and diluted net loss per share, as reported                            |                             
| |                                                                              |                             
| |                                                                              |                             
| | Pro forma basic and diluted net loss per share                               |                             
| |                                                                              |                             

| | For
purpose of pro-forma disclosures, stock-based compensation was estimated using a
Black-Scholes option pricing model and amortized over the vesting period using the
accelerated attribution method.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Pro-forma
compensation expense under SFAS 123, among other computational differences, does not
consider potential pre-vesting forfeitures. Because of these differences, the pro-forma
stock based compensation expense presented above for the prior year ended December 31,
2005 under SFAS 123 and the stock based compensation expense recognized during the year
ended December 31, 2006 and 2007 under SFAS 123(R) are not directly comparable.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the years ended December 31, 2006 and 2007, the Company recognized stock-based
compensation expense related to employee stock options in the amount of $ 243 and $ 883
respectively, as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                        | Year ended December 31,
| | -------------------------------------- | -----------------------
|
|
|
|
| | Cost of revenues                       |                        
| | Research and development, net          |                        
| | Selling and marketing                  |                        
| | General and administrative             |                        
| |                                        |                        
| |                                        |                        
| | Total Stock-based compensation expense |                        
| |                                        |                        

| | r. | Basic
and diluted net earnings (loss) per share:
| | -- | ------------------------------------------------

| | Basic
net earnings (loss) per share is computed based on the weighted average number of
Ordinary shares outstanding during each year. Diluted net earnings (loss) per share is
computed based on the weighted average number of Ordinary shares outstanding during each
year, plus the dilutive potential of Ordinary shares considered outstanding during the
year, in accordance with SFAS No. 128, Earnings Per Share (SFAS No. 128).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Part
of the outstanding stock options and warrants has been excluded from the calculation of
the diluted net earnings (loss) per share because such securities are anti-dilutive for
2005, 2006 and 2007. The weighted average number of shares related to the outstanding
options, warrants and convertible debentures excluded from the calculations of diluted
net earnings (loss) per share was, 1,819,003, 1,408,999 and 3,066,502 for the years ended
December 31, 2005, 2006 and 2007, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | s. | Income
taxes:
| | -- | -------------

| | The
Company and its subsidiaries account for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes (SFAS No. 109). This Statement
prescribes the use of the liability method whereby deferred tax assets and liability
account balances are determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The Company and its
subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets
to their estimated realizable value.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN
48), Accounting for Uncertainty in Income Taxes-An interpretation of FASB Statement
No. 109.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Interpretation clarifies the accounting for uncertainties in income taxes recognized in
an enterprises financial statements and prescribes a recognition threshold and
measurement attributes of income tax positions taken or expected to be taken on a tax
return. Under FIN 48, the impact of an uncertain tax position taken or expected to be
taken on an income tax return must be recognized in the financial statements at the
largest amount that is more-likely-than-not to be sustained upon audit by the relevant
taxing authority. An uncertain income tax position will not be recognized in the
financial statements unless it is more likely than not of being sustained. The Company
adopted the provisions of FIN 48 as of January 1, 2007. As of January 1, 2007 there was
no material difference between the provisions of SFAS 109 and FIN 48 therefore no
adjustment was recorded to the accumulated deficit.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
associated with uncertain income tax positions and penalties are classified as income tax
expenses. The Company has not recorded any material interest or penalties during any of
the years presented.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | t. | Concentrations
of credit risk:
| | -- | ------------------------------

| | Financial
instruments which potentially subject the Company and its subsidiaries to concentration
of credit risk consist principally of cash and cash equivalents, marketable securities
and trade receivables.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys cash and cash equivalents are invested primarily in deposits with major
banks worldwide, however, such cash and cash equivalents in the United States may be in
excess of insured limits and are not insured in other jurisdictions. Management believes
that the financial institutions that hold the Companys investments are financially
sound, and accordingly, minimal credit risk exists with respect to these investments.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys marketable securities include investments in auction rate securities
guaranteed by U.S. government. Management believes that those corporations and
governments are financially sound and that the portfolios are well-diversified, and
accordingly, minimal credit risk exists with respect to these marketable securities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Trade
receivables of the Company and its subsidiaries are derived from sales to customers
located primarily in the U.S., Europe, Japan, Far East and Israel. The Company performs
ongoing credit evaluations of its customers. An allowance for doubtful accounts is
determined with respect to those amounts that the Company has determined to be doubtful
of collection. For the years ended December 31, 2005, 2006 and 2007, the Company recorded
expenses for doubtful accounts in the amounts of $ 408, $ 436 and $ 872,
respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | u. | Derivative
instruments:
| | -- | -----------------------

| | Financial
Accounting Standards Board Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS No. 133), requires companies to recognize all of its
derivative instruments as either assets or liabilities in the statement of financial
position at fair value. The accounting for changes in the fair value (i.e., gains or
losses) of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on the type of hedging
relationship.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
of the Companys derivative instruments were not designated as hedging instruments
as such the gain or loss is recognized in financial income (expense) in current earnings
during the period of change.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | v. | Severance
pay:
| | -- | --------------

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

| | The
deposited funds include profits accumulated up to the balance sheet date. The deposited
funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israels
Severance Pay Law or labor agreements. The value of the deposited funds is based on the
cash surrendered value of these policies, and includes immaterial profits.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
expenses for the years ended December 31, 2005, 2006 and 2007 amounted to approximately $ 294,
$ 266 and $ 297, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | w. | Fair
value of financial instruments:
| | -- | ------------------------------------

| | The
following methods and assumptions were used by the Company and its subsidiaries in
estimating their fair value disclosures for financial instruments:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
carrying amounts of cash and cash equivalents, trade receivables and other accounts
receivable, short-term bank credit, trade payables and other accounts payable approximate
their fair value due to the short-term maturity of these instruments.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair values for marketable securities are based on quoted market prices and do not differ
from carrying amounts (see also Note 3).
| | --------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | The carrying amount of the
Companys long-term borrowing approximates its fair value. The fair value was
estimated using discounted cash flow analyses, except for the embedded derivative
instrument (see Note 2.l), based on the Companys incremental borrowing rates for
similar type of borrowing arrangements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | x. | Comprehensive
income
| | -- | --------------------

| | The
Company accounts for comprehensive income in accordance with SFAS No. 130, Reporting
Comprehensive Income. This statement establishes standards for the reporting and
display of comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income generally represents all changes in
shareholders equity during the period except those resulting from investments by,
or distributions to, shareholders. The Company determined that its items of comprehensive
income relate to foreign currency translation adjustments and unrealized gains and losses
on available for sale securities.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | y. | Advertising
expenses:
| | -- | ---------------------

| | Advertising
expenses are charged to selling and marketing expenses, as incurred. Advertising expenses
for the years ended December 31, 2005, 2006 and 2007 were $ 91, $ 189 and $ 580,
respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | z. | Reclassification:
| | -- | -----------------

| | Certain 2006 and 2005 figures have
been reclassified to conform to the 2007 presentation. The reclassification had no effect
on previously reported net income, shareholders equity or cash flows.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | aa. | Impact
of recently issued Accounting Standards:
| | --- | -----------------------------------------------

| | 1) | In September 2006, the FASB issued Statement of Financial Accounting
          Standards No. 157, Fair Value Measurements (Statement
          No. 157) which defines fair value, establishes a framework for
          measuring fair value, and expands disclosures about fair value measurements.
          Statement No. 157 applies to other accounting pronouncements that require
          or permit fair value measurements and, accordingly, does not require any new
          fair value measurements. Statement No. 157 is effective for fiscal years
          beginning after November 15, 2007 for financial assets and liabilities, as
          well as for any other assets and liabilities that are carried at fair value on a
          recurring basis, and should be applied prospectively. The adoption of the
          provisions of Statement No. 157 related to financial assets and liabilities
          and other assets and liabilities that are carried at fair value on a recurring
          basis is not anticipated to materially impact the companys consolidated
          financial position and results of operations. Subsequently, the FASB provided
          for a one-year deferral of the provisions of Statement No. 157 for
          non-financial assets and liabilities that are recognized or disclosed at fair
          value in the consolidated financial statements on a non-recurring basis. In
          February 2007, the FASB issued FASB STAFF POSITION FAS 157-2 (FSP FAS 157-2),
          which provided for a one-year deferral of the provisions of SFAS 157 for
          non-financial assets and liabilities that are recognized or disclosed at fair
          value in the consolidated financial statements on a non-recurring basis. The
          company is currently evaluating the impact of adopting the provisions of
          Statement No. 157 for non-financial assets and liabilities that are recognized
          or disclosed on a non-recurring basis.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | 2) | In February 2007, the FASB issued
SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 permits companies to choose to measure certain financial
instruments and certain other items at fair value. The Standard requires that unrealized
gains and losses on items for which the fair value option has been elected be reported in
earnings. SFAS 159 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years, although earlier
adoption is permitted. The Company adopted SFAS No. 159 as of the beginning of 2008 and
elected to apply the fair value option to convertible debentures. The primary reasons for
electing the fair value option were simplification and cost-benefit considerations as well
as expansion of use of fair value measurement consistent with the FASBs long-term
measurement objectives for accounting for financial instruments. As a result of adopting
SFAS No. 159, a net unrealized gain of approximately $ 820 will be recorded as
adjustment to the accumulated deficit on January 1, 2008.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | In December 2007, the FASB issued SFAS No. 141 (Revised), Business
          Combinations (SFAS 141 (Revised)). SFAS 141 (Revised) replaces
          SFAS 141 Business Combination and establishes principles and
          requirements for how the acquirer of a business recognizes and measures in its
          financial statements the identifiable assets acquired, the liabilities assumed,
          and any noncontrolling interest in the acquiree. The statement also provides
          guidance for recognizing and measuring the goodwill acquired in the business
          combination and determines what information to disclose to enable users of the
          financial statements to evaluate the nature and financial effects of the
          business combination. The guidance will become effective for the fiscal year
          beginning after December 15, 2008. No impact is expected at the adoption date,
          since the standard will be applied prospectively- for future business
          combinations.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated
Financial Statements (SFAS 160). SFAS 160 amends Accounting Research
Bulletin 51, Consolidated Financial Statements, to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 also changes the way the consolidated income
statement is presented by requiring consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the noncontrolling interest. It
also requires disclosure, on the face of the consolidated statement of income, of the
amounts of consolidated net income attributable to the parent and to the noncontrolling
interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated and requires expanded disclosures in the consolidated
financial statements that clearly identify and distinguish between the interests of the
parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is
effective for fiscal periods, and interim periods within those fiscal years, beginning on
or after December 15, 2008. The adoption of SFAS 160 is not expected to have material
effect on the Companys consolidated financial statements.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 3: |  | MARKETABLE SECURITIES
|------- | - | ---------------------

| | As of December 31, 2007 the Company
invests in marketable securities, with contractual maturities of approximately 25 years,
which are classified as available-for-sale. The contractual cash flows of these
investments are either guaranteed by the U.S. government or an agency of the U.S.
government or were issued by highly rated corporations and other governments. The
securities were recorded as of December 31, 2007 at amortized cost that equals to their
market value.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 4: |  | OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|------- | - | ----------------------------------------------

| |                        | December 31,
| | ---------------------- | ------------
|
|
|
|
| | Government authorities |             
| | Employees              |             
| | Prepaid expenses       |             
| | Rent deposits          |             
| | Deferred charges       |             
| | Others                 |             
| |                        |             
| |                        |             
| |                        |             
| |                        |             

F - 26

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 5: |  | PROPERTY AND EQUIPMENT
|------- | - | ----------------------

| |                                    | December 31,
| | ---------------------------------- | ------------
|
|
|
|
| | Cost:                              |             
| | Computers and peripheral equipment |             
| | Furniture and office equipment     |             
| | Leasehold improvements             |             
| |                                    |             
| |                                    |             
| |                                    |             
| |                                    |             
| | Accumulated depreciation:          |             
| | Computers and peripheral equipment |             
| | Furniture and office equipment     |             
| | Leasehold improvement              |             
| |                                    |             
| |                                    |             
| |                                    |             
| |                                    |             
| |                                    |             
| | Depreciated cost                   |             
| |                                    |             

| | Depreciation
expense amounted to $ 205 and $ 241 and $ 402 for the years ended December 31,
2005, 2006 and 2007, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------

| | As
to charges, see Note 10c(1).
| | -------------------------------

|NOTE 6: |  | INTANGIBLE ASSETS AND DEFERRED FINANCE COSTS, NET
|------- | - | -------------------------------------------------

| | Other
intangible assets arose from the acquisition of the business from Toyo in August 2004,
CPL in April 2007 and ASG in July 2007 (see Notes 1c, 1d, 1e), and of convertible
debentures deferred finance costs.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | Identifiable
intangible assets:
| | -- | -------------------------------

| |                              | December 31,
| | ---------------------------- | ------------
|
|
|
|
| | Original amount:             |             
| | Customer relations           |             
| | Brand name and Domain name   |             
| | Acquired technology          |             
| |                              |             
| |                              |             
| |                              |             
| |                              |             
| | Accumulated amortization:    |             
| | Customer relations           |             
| | Brand name and Domain name   |             
| | Acquired technology          |             
| |                              |             
| |                              |             
| |                              |             
| |                              |             
| |                              |             
| | Amortized cost               |             
| | Deferred issuance costs, net |             
| |                              |             
| |                              |             
| |                              |             
| |                              |             

F - 27

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 6: |  | OTHER INTANGIBLE ASSETS AND DEFERRED FINANCE COSTS, NET (Cont.)
|------- | - | ---------------------------------------------------------------

| | b. | Amortization
expenses amounted to $ 319, $ 300 and $ 657 for the           years ended
December 31, 2005, 2006 and 2007, respectively.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------

| | Issuance
costs allocated to the convertible debenture, in the amount of $ 1,036, were
recorded as deferred finance costs and were amortized to interest expenses from the
commitment date to the stated redemption date using the effective interest method (see
Note 10).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Estimated
amortization expenses of intangible assets for the year ended:
| | -- | ------------------------------------------------------------------------

| | December 31, | Other intangible
assets
| | ------------ | -----------------------
|
|
|
|
| | 2008         |                        
| | 2009         |                        
| | 2010         |                        
| | 2011         |                        
| | 2012         |                        

|NOTE 7: |  | GOODWILL
|------- | - | --------

| | The
changes in the carrying amount of goodwill for the year ended December 31, 2007 is as
follows:
| | --------------------------------------------------------------------------------------------------

| |                                                                             | 
| | --------------------------------------------------------------------------- | 
|
|
|
|
| | Balance as of January 1, 2007                                               | 
| | Goodwill acquired during the year 2007 (see Notes 1.d and 1.e)              | 
| | Tax benefit related to operating loss carryforwards at the acquisition date | 
| | Foreign currency translation adjustments                                    | 
| |                                                                             | 
| |                                                                             | 
| | Balance as of December 31, 2007                                             | 
| |                                                                             | 

F - 28

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 8: |  | SHORT-TERM BANK LOANS
|------- | - | ---------------------

| | a. | Composition:
| | -- | ------------

| |                           | Interest rate | December 31,
| | ------------------------- | ------------- | ------------
|
|
|
|
| | Short-term bank loans:    |               |             
| | In NIS (1)                |               |             
| |                           |               |             
| | Short-term bank credit:   |               |             
| | In U.S. dollars (2)       |               |             
| | In Singapore  dollars (3) |               |             
| | In GBP (4)                |               |             
| |                           |               |             
| |                           |               |             
| |                           |               |             
| |                           |               |             
| |                           |               |             
| |                           |               |             
| |                           |               |             

| | (1) | As
of December 31, 2007, the prime rate is 5.75%.
| | --- | -------------------------------------------------

| | (2) | As
of December 31, 2006, the Libor rate is 5.36%.
| | --- | -------------------------------------------------

| | (3) | As
of December 31, 2007, the PLR (Prime Lending Rate) rate is 3%.
| | --- | -----------------------------------------------------------------

| | (4) | As
of December 31, 2007, the Libor rate is 5.835%.
| | --- | --------------------------------------------------

| | The
Company has a revolving line of credit with banks for total borrowings of up to $ 2,300,
based on 75% of its trade receivables. The line of credit is secured by a charge (see Note 11c(2)).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Interest
expenses amounted to $ 100, $ 121 and $ 122 for the           years ended
2005, 2006 and  2007, respectively.
| | -- | ----------------------------------------------------------------------------------------------------------------------

|NOTE 9: |  | ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE
|------- | - | -------------------------------------------

| |                                    | December 31,
| | ---------------------------------- | ------------
|
|
|
|
| | Employees and payroll accruals     |             
| | Government authorities             |             
| | Provision for accrued vacation pay |             
| | Acquisition costs payable          |             
| | Accrued expenses                   |             
| | Other                              |             
| |                                    |             
| |                                    |             
| |                                    |             
| |                                    |             

F - 29

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 10: |  | CONVERTIBLE DEBENTURES
|-------- | - | ----------------------

| | In December 2006, the Company issued
an aggregate amount of $ 14,780 convertible debentures in a discount of 4% by way of
public offering in the Tel Aviv Stock Exchange. The Convertible debenture terms include an
offering of 112,500 units of 528 New Israeli Shekel par value each, linked to U.S. Dollar
with a floor on the NIS/ U.S. Dollar exchange rate (i.e. if the exchange rate will be
lower than the rate at issuance date the liability will be the NIS amount at the issuance
date) and carry an annual interest rate of 6 months Libor minus 0.3%. The debentures
principal is repaid in 4 annual installments commencing on December 31, 2009 and the
interest is payable semi-annually commencing on June 30, 2007.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
debentures may be converted into Ordinary shares of the Company in a ratio of 20.3 NIS
par values for each Ordinary share (subject to adjustments). The Company has the right to
force the conversion on the debentures holders, when and if its share fair market value
shall reach 25.5 New Israeli Shekels (NIS) in the last 30 trading in TASE on
or after October 1, 2009.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In 2007, 500 NIS par value
convertible debentures were converted into 24,631 shares of NIS 0.04 par value. The total
equity issued as a result of the conversion is $ 124.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | See
also note 2.l for the Company's accounting policy.
| | ------------------------------------------------------

|NOTE 11: |  | COMMITMENTS, CONTINGENCIES AND CHARGES
|-------- | - | --------------------------------------

| | a. | Legal
proceedings:
| | -- | ------------------

| | Lawsuits have been filed against the
Company in the ordinary course of business in insignificant amounts. The Company intends
to defend itself vigorously against those lawsuits. Management, based on the advice of its
legal counsels cannot predict the outcome of the lawsuits nor can they make any estimate
of the amount of damages; therefore, no provision has been made for the lawsuits.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | 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%-3.5% of revenues from sale of its FormOut! Software, up to a
maximum of 150% of the amount of participation           received, linked to the dollar,
plus interest at the LIBOR rate.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys total outstanding obligation in respect of royalty-bearing government
participation received or accrued, net of royalties paid or accrued, amounted to $ 69
as of December 31, 2007.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | The
Company has entered into operating lease agreements for the lease of motor
          vehicles. The leasing deposits are presented in the long-term deposits. Each
          lease is for a period of three years with monthly payments linked to the
Israeli           CPI. As of December 31, 2007, commitments are as follows:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |       | 
| | ----- | 
|
|
|
|
| | 2008  | 
| | 2009  | 
| | 2010  | 
| |       | 
| |       | 
| | Total | 
| |       | 

F - 30

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 11: |  | COMMITMENTS, CONTINGENCIES AND CHARGES (Cont.)
|-------- | - | ----------------------------------------------

| | 3. | The
Companys facilities, its subsidiaries facilities are leased           under
operating lease agreements, which expire on various dates, the latest of           which
is in 2012.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Future
minimum lease commitments under non-cancelable operating leases are as follows:
| | --------------------------------------------------------------------------------------

| |       | 
| | ----- | 
|
|
|
|
| | 2008  | 
| | 2009  | 
| | 2010  | 
| | 2011  | 
| | 2012  | 
| |       | 
| |       | 
| | Total | 
| |       | 

| | 4. | In
2004, the Company renewed an engagement under which it has the right to use
          third-party software during fiscal years 2005, 2006 and 2007. Pursuant to the
          agreement, the Company agreed to pay an annual license fee equal to the greater
          of $ 300 and 2.75% of related sales. The amount is due in four quarterly
          payments for each year. During the years 2005, 2006 and 2007, the Company paid
          annual fees of $ 300, which were recorded as part of cost of revenues.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Charges:
| | -- | --------

| | 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 charge is unlimited in amount and           it may not be
further pledged or transferred without the prior consent of the           beneficiaries.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | To
secure revolving credit facilities from a bank, the Company recorded a           floating
charge on its plant, assets and rights in favor of this bank.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Guarantees:
| | -- | -----------

| | 1. | Part
of the company secured its lease agreement by bank guarantee in the amount
               of $ 56.
| | -- | -------------------------------------------------------------------------------------------------------

| | 2. | The
Company has obtained other guarantees in amount of $ 920 from bank in
               Israel in favor of its subsidiaries overdraft.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 12: |  | TAXES ON INCOME
|-------- | - | ---------------

| | a. | Israeli
income taxes:
| | -- | ---------------------

| | 1. | The
Law for the Encouragement of Capital Investments, 1959 (the           Law):
| | -- | ---------------------------------------------------------------------------------

| | According
to the Law, the companies are entitled to various tax benefits by virtue of the Approved
Enterprise status granted to part of their enterprises, as defined by this Law.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has been granted Approved Enterprise status under the above Law. The
Company has a program with three expansions, according to the Alternative Benefits
Track. The main benefit arising from such status is the reduction in tax rates on
income derived from Approved Enterprises. Consequently, the Company is
entitled to a two-year tax exemption and five to eight years of tax at a reduced rate of
10%-25%, based on the percentage of foreign investment in the Company. Since the Company
has had no taxable income, the benefits have not yet commenced for any of the programs.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
period of tax benefits, for each program as detailed above, is subject to limit of 12
years from the completion of the investment or commencement of production, or 14 years
from receipt of the approval, whichever is earlier. Please note that the yearslimitation
does not apply to the exemption period.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company received approvals for the first program and three of its expansions during the
years 1990, 1991, 1999 and 2000, of which the first two programs have already expired.
The period of benefits for the second and third expansion has not yet commenced.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
entitlement to the above benefits is conditional upon the Companys fulfilling the
conditions stipulated by the above Law, regulations published thereunder and the letters
of approval for the specific investments in approved enterprises. In the
event of failure to comply with these conditions, the benefits may be canceled and the
Company may be required to refund the amount of the benefits, in whole or in part,
including linkage to the CPI and interest. As of December 31, 2007, management believes
that the Company is meeting all of the aforementioned conditions.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If these retained tax-exempt profits
attributable to the Approved Enterprise are distributed in a manner other than
in the complete liquidation of the Company they would be taxed at the corporate tax rate
applicable to such profits as if the Company had not elected the alternative benefits
track, currently between 10%-25% for an Approved Enterprise. As of December
31, 2007, the accumulated deficit of the Company does not include tax-exempt profits
earned by the Companys Approved Enterprise.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
from sources other than the Approved Enterprise during the benefit period
will be subject to tax at the regular corporate tax rate.
| | --------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | On
April 1, 2005, an amendment to the Investment Law came into effect (the Amendment)
and has significantly changed the provisions of the Investment Law. The Amendment limits
the scope of enterprises which may be approved by the Investment Center by setting
criteria for the approval of a facility as a Privileged Enterprise, such as
provisions generally requiring that at least 25% of the Privileged Enterprises income
will be derived from export. Additionally, the Amendment enacted major changes in the
manner in which tax benefits are awarded under the Investment Law so that companies no
longer require Investment Center approval in order to qualify for tax benefits.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | However,
the Investment Law provides that terms and benefits included in any certificate of
approval already granted will remain subject to the provisions of the law as they were on
the date of such approval. Therefore, the Companys existing Approved Enterprise
will generally not be subject to the provisions of the Amendment. As a result of the
amendment, tax-exempt income generated under the provisions of the new law, will subject
the Company to taxes upon distribution or liquidation and the Company may be required to
record deferred tax liability with respect to such tax-exempt income. As of December 31,
2007, the Company did not generate income under the provisions of the Amendment.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
dividend distributed by an Approved Enterprise and Privileged Enterprise will
be subject to withholding tax of 15%.
| | ---------------------------------------------------------------------------------------------------------------------------

| | 2. | Measurement
of taxable income:
| | -- | ------------------------------

| | Commencing
in taxable year 2003, the Company has elected to measure its taxable income and file its
tax return under the Israeli Income Tax Regulations (Principles Regarding the Management
of Books of Account of Foreign Invested Companies and Certain Partnerships and the
Determination of Their Taxable Income), 1986. Accordingly, commencing taxable year 2003,
results for tax purposes are measured in terms of earnings in U.S. dollars.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Tax
benefits under the Law for the Encouragement of Industry (Taxes), 1969:
| | -- | ---------------------------------------------------------------------------

| | The
Company is an industrial company, as defined by this law and, as such, is
entitled to certain tax benefits, mainly accelerated depreciation of machinery and
equipment, as prescribed by regulations published under the Inflationary Adjustments Law,
the right to claim public issuance expenses and amortization of patents and other
intangible property rights as a deduction for tax purposes.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Corporate
tax rates:
| | -- | --------------------

| | Generally,
Israeli companies are subject to corporate Tax on their taxable income. On
July 25, 2005, the Knesset (Israeli Parliament) approved the Law of the Amendment of the
Income Tax Ordinance (No. 147), 2005, which prescribes, among others, a gradual decrease
in the corporate tax rate in Israel to the following tax rates: in 2005  34%, in
2006  31%, in 2007  29%, in 2008  27%, in 2009  26% and in 2010
and thereafter  25%. . 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 this report
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | The
Company has received final tax assessments through the year 2002.
| | -- | ---------------------------------------------------------------------

F - 33

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | b. | The
main reconciling item between the statutory tax rate of the Company and the
          effective tax rate is the recognition of valuation allowances in respect of
          deferred taxes relating to accumulated net operating losses carried forward
          among the various subsidiaries worldwide due to the uncertainty of the
          realization of such deferred taxes, the effect of the Approved
          Enterprise and undeductible expenses related to option expenses.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
tax expenses in 2005, 2006 and 2007 in the amount of $ 30, $ 45 and $ 228,
respectively in the financial statements are a result of taxes paid on income of certain
subsidiary, due to the transfer pricing arrangement between the companies.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Carryforward
losses:
| | -- | --------------------

| | As
of December 31, 2007, the Company had operating losses carryforward for tax purposes in
the amount of $ 5,532. The amount of the Companys carryforward operating
losses will be offset against taxable future income for an indefinite period.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007, the subsidiaries had operating losses carryforward for tax purposes
in the amount of $ 11,160. A portion of such losses expires over a period from 2008
through 2020, and some of them can be carried forward indefinite.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Non-Israeli subsidiaries:
| | -- | -------------------------

| | Non-Israeli
subsidiaries are taxed according to the tax laws in their respective domiciles of
residence. The Company has not made any provisions relating to undistributed earnings of
the Companys foreign subsidiaries since the Company has no current plans to
distribute such earnings. If earnings are distributed to Israel in the form of dividends
or otherwise, the Company may be subject to additional Israeli income taxes (subject to
an adjustment for foreign tax credits) and foreign withholding taxes. It is not
practicable to determine the amount of the unrecognized deferred tax liability for
temporary differences related to investments in foreign subsidiaries.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Income
(loss) before taxes on income:
| | -- | -------------------------------------

| |          | Year ended December 31,
| | -------- | -----------------------
|
|
|
|
| | Domestic |                        
| | Foreign  |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        

| | f. | Deferred
taxes:
| | -- | ---------------

| |                                                    | December 31,
| | -------------------------------------------------- | ------------
|
|
|
|
| | Carryforward losses                                |             
| | Research and development expenses                  |             
| | Accrued severance pay                              |             
| | Accrued vacation pay                               |             
| | Allowance for doubtful accounts                    |             
| |                                                    |             
| |                                                    |             
| | Net deferred tax assets before valuation allowance |             
| | Valuation allowance                                |             
| |                                                    |             
| |                                                    |             
| | Net deferred tax assets                            |             
| |                                                    |             

F - 34

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | In
assessing the realization of deferred tax assets, management considers whether it is more
likely than not that all or some portion of the deferred tax assets will not be realized.
The ultimate realization of the deferred tax assets is dependent upon the generation of
future taxable income during the periods in which temporary differences are deductible
and net operating losses are utilized.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Based on consideration of these
factors, the Company has established a valuation allowance of $2,899 and $4,859 at
December 31, 2006 and 2007, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | The
Company adopted the provisions of FIN 48 on January 1, 2007. Prior to 2007           the
company used the provisions of SFAS 5 to determine tax contingencies. As of
          January 1, 2007 there was no material difference between the provision under
FIN           48 therefore there was no effect on the Companys shareholders equity
upon           the Companys adoption of FIN 48.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Total amount of gross
unrecognized tax benefits is $122 as of December 31, 2006 and 2007.
| | -----------------------------------------------------------------------------------------

| | g. | Under
the Income Tax (Inflationary Adjustments) Law, 1985 (the Israeli           law),
results for tax purposes in Israel are measured in real terms, in           accordance
with the changes in the Israeli Consumer Price Index (Israeli           CPI).
Accordingly, until 2002, results for tax purposes were measured in           terms of
earnings in NIS after certain adjustments for increases in the Israeli           CPI.
Commencing in taxable year 2003, the Company has elected to measure its           taxable
income and file its tax return under the Israeli Income Tax Regulations
          (Principles Regarding the Management of Books of Account of Foreign Invested
          Companies and Certain Partnerships and the Determination of Their Taxable
          Income), 1986. Such an elective obligates the Company for three years.
          Accordingly, commencing taxable year 2003, results for tax purposes are
measured           in terms of earnings in dollars.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2008, the Knesset (Israeli parliament) passed an amendment to the
Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law
starting 2008 and thereafter. Starting 2008, the results for tax purposes will be
measured in nominal values, excluding certain adjustments for changes in the Consumer
Price Index carried out in the period up to December 31, 2007. The amended law includes,
inter alia, the elimination of the inflationary additions and deductions and the
additional deduction for depreciation starting 2008.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 13: |  | SHAREHOLDERS EQUITY
|-------- | - | --------------------

| | a. | On
September 24, 2004, the Company sold 2,524,351 Ordinary shares of the           Company
at a purchase price of $ 3.16 per share to institutional investors           for
gross proceeds of approximately $ 8,000. The Company filed a           registration
statement which had become effective by the Securities and Exchange           Commission
on March 1, 2005.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection with the private placement, the Company filed a resale registration statement
covering the shares purchased in the private placement (including the shares underlying
the warrants). The registration statement became effective on March 1, 2005. However, the
Company did not obtain effectiveness of the registration statement within the timeframe
set forth in its agreements with the investors, which has subjected the Company to
liquidated damages of approximately $ 164 (including interest).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Employee
stock options:
| | -- | -----------------------

| | 1. | Employee
Stock Option Plan (1996):
| | -- | ----------------------------------

| | In
September 1996, the Board of Directors of the Company adopted, and the shareholders
approved, the Employee Stock 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, 2007, options to purchase 90,625 Ordinary shares are outstanding under
the plan at exercise price of $ 2.85 per share. The outstanding options under the
Plan become exercisable in four equal parts upon each of the first four anniversaries of
the option grant dates.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 35

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 13: |  | SHAREHOLDERS EQUITY (Cont.)
|-------- | - | ----------------------------

| | 2. | Employee
Stock Option Plan (2000):
| | -- | ----------------------------------

| | The
Employee Stock Option Plan (2000) (the ESOP 2000) is designed to benefit
from, and is made pursuant to, the provisions of Section 102 of Israels Income Tax
Ordinance (New Version), 1961 and the rules promulgated there under (Section 102).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
total of 240,000 shares have been reserved for the purposes of the ESOP 2000. As of
December 31, 2007, 105,500 options are outstanding. All of the options are vested over a
three-year period, and have exercise prices between $ 0.99 and $ 4.125 per
share.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Employee
Stock Option Plan (2003):
| | -- | ----------------------------------

| | The
Employee Stock Option Plan (2003) (the ESOP 2003) is designed to benefit
from, and is made pursuant to, the provisions of Section 102 of the Israeli Income Tax
Ordinance.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2004 and in December 2006 the Board of Directors and the shareholders of the Company
approved the additional pool of options to purchase an additional 650,000 and 700,000
Ordinary shares, respectively, pursuant to the ESOP 2003.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007, 1,396,100 options are outstanding. All the options have an exercise
price between $ 1.31 and $ 3.84 per share.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | 4. | As
of December 31, 2007, an aggregate amount of 182,551 options is still           available
for future grant under all of the above mentioned plans.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | On
December 30, 2005, the Company decided to accelerate the vesting of 304,830           of
its unvested stock options previously awarded to employees and officers of           the
Company, to purchase the Companys shares pursuant to one of the           Companys
Stock Option Plans, such that, as of December 31, 2005, these           outstanding
options to purchase any of the Companys Ordinary shares, were           fully
vested.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the acceleration, in accordance with Accounting for Certain
Transactions involving Stock Compensation an interpretation of APB Opinion No. 25 (FIN
44), the Company recorded additional compensation expenses of $ 44, included
in general and administrative expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
impact of vesting accelerating on pro forma stock-based compensation required to be
disclosed in the financial statement footnotes under the provisions of SFAS No. 123, was
to increase such disclosed compensation cost for the year ended December 31, 2005 by
approximately $ 568 (see Note 2q).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 20, 2007, the Company decided to accelerate the vesting of 310,950 of its
unvested stock options previously awarded to employees and officers of the Company, to
purchase the Companys shares pursuant to one of the Companys Stock Option
Plans, such that, as of December 31, 2007, these outstanding options to purchase any of
the Companys Ordinary shares, were fully vested.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 36

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 13: |  | SHAREHOLDERS EQUITY (Cont.)
|-------- | - | ----------------------------

| | As
a result of the acceleration, in accordance with SFAS No. 123R, the Company recorded
additional compensation expenses of $ 498.
| | ----------------------------------------------------------------------------------------------------------------------------------

| | d. | Options
to directors:
| | -- | ---------------------

| | 1. | On
November 25, 2002, the shareholders of the Company approved the grant of an
          option to purchase 20,000 fully vested Ordinary shares at an exercise price of
          $ 0.46 per share, to the Chairman of the Board of Directors. The exercise
          price was equal to the market price of the shares on the date of the grant. In
          August 2005, all the options were exercised.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | On
December 27, 2006, the shareholders of the Company approved the grant of an
          option to purchase 125,000 ordinary shares to several members of the board, at
          an exercise price of $ 3.84 and vesting term of 2 years.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | On
December 20, 2007, the shareholders of the Company approved the grant of an
          option to purchase 210,200 ordinary shares to several members of the board, at
          an exercises price between $ 2.20 and $ 3.84 with vesting term of 2
          years.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following is a summary of the Companys stock options granted among the various
plans:
| | ------------------------------------------------------------------------------------------

| |                     | 2007
| | ------------------- | ----
|
|
|
|
| | Outstanding at the  |     
| | beginning of the    |     
| | year                |     
| | Granted             |     
| | Exercised           |     
| | Forfeited           |     
| |                     |     
| | Outstanding at the  |     
| | end of the year     |     
| |                     |     
| |                     |     
| | Exercisable at the  |     
| | end of the year     |     
| |                     |     
| |                     |     
| | Vested and expected |     
| | to vest at end of   |     
| | year                |     
| |                     |     

| | The
aggregate intrinsic value in the table above represents the total intrinsic value (the
difference between the Companys closing stock price on the last trading day of the
fourth quarter of fiscal 2007 and the exercise price, multiplied by the number of
in-the-money options) that would have been received by the option holders had all option
holders exercised their options on December 31, 2007. This amount changes, based on
the fair market value of the Companys stock. Total intrinsic value of options
exercised for the year ended December 31, 2007 was approximately $ 17. As of
December 31, 2007, there was approximately $ 104 of total unrecognized compensation
costs related to non-vested share-based compensation arrangements granted under the
Companys stock option plans.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
weighted average grant date fair values of options granted during 2005, 2006 and 2007
were $ 1.84, $ 1.84 and $ 1.02, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | That
cost is expected to be recognized over a weighted-average period of 0.63 years.
| | ------------------------------------------------------------------------------------

F - 37

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 13: |  | SHAREHOLDERS EQUITY (Cont.)
|-------- | - | ----------------------------

| | The
options outstanding as of December 31, 2007, have been separated into ranges of exercise
price as follows:
| | --------------------------------------------------------------------------------------------------------------

| | Range ofexerciseprice | OptionsOutstandingas ofDecember 31,2007 | Weightedaverageremainingcontractuallife (years) | Weightedaverageexerciseprice | Optionsexercisableas ofDecember 31,2007 | Weightedaverageexerciseprice ofoptionsexercisable
| | --------------------- | --------------------------------------- | ----------------------------------------------- | ---------------------------- | --------------------------------------- | -------------------------------------------------
|
|
|
| | $0.99 - $1.46         |                                         |                                                 |                              | 86,000                                  |                                                  
| | $2.08 - $2.85         |                                         |                                                 |                              | 766,225                                 |                                                  
| | $3.27 - $4.13         |                                         |                                                 |                              | 740,000                                 |                                                  
| |                       |                                         |                                                 |                              |                                         |                                                  
| |                       |                                         |                                                
| |                       |                                         |                                                 |                              | 1,592,225                               |                                                  
| |                       |                                         |                                                 |                              |                                         |                                                  

| | f. | Dividends:
| | -- | ----------

| | Dividends
may be paid by the Company only out of the Israeli companys 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company does not anticipate paying dividends in the foreseeable future.
| | ---------------------------------------------------------------------------

|NOTE 14: |  | GEOGRAPHICAL INFORMATION
|-------- | - | ------------------------

| | a. | Business
segment, geographical areas and foreign operations:
| | -- | ------------------------------------------------------------

| | The
Company applies Statement of Financial Accounting Standards No. 131 Disclosures
about Segments of an Enterprise and Related Information (SFAS No. 131).The
Company manages its business on the basis of one reportable segment (see Note 1 for a
brief description of the Companys business). Total revenues are attributed to
geographic areas based on the location of the customers.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 38

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 14:- GEOGRAPHICAL
INFORMATION (Cont.)

| | b. | Geographic
information:
| | -- | -----------------------

| |    |                                            | Year ended December 31,
| | -- | ------------------------------------------ | -----------------------
|
|
|
|
| | 1. | Product sales:                             |                        
| |    | Israel                                     |                        
| |    | Far East (excluding Japan)                 |                        
| |    | Europe                                     |                        
| |    | North and south America                    |                        
| |    | Africa                                     |                        
| |    | Japan                                      |                        
| |    |                                            |                        
| |    |                                            |                        
| |    |                                            |                        
| |    |                                            |                        
| |    | Service revenues:                          |                        
| |    | Israel                                     |                        
| |    | Far East (excluding Japan)                 |                        
| |    | Europe                                     |                        
| |    | North and south America                    |                        
| |    | Africa                                     |                        
| |    | Japan                                      |                        
| |    |                                            |                        
| |    |                                            |                        
| |    |                                            |                        
| |    |                                            |                        
| |    |                                            |                        
| |    | Total revenues                             |                        
| |    |                                            |                        
| |    |                                            |                        
| |    | Sales to single customers exceeding 10% of |                        
| |    | revenues:                                  |                        
| |    |                                            |                        
| |    | Customer A                                 |                        
| |    |                                            |                        

| | *) | Less
than 10%.
| | -- | --------------

| | 2. | Total
revenues from products derived from external customers are divided as follows:
| | -- | ------------------------------------------------------------------------------------

| |                              | Year ended December 31,
| | ---------------------------- | -----------------------
|
|
|
|
| | Licenses                     |                        
| | Hardware                     |                        
| |                              |                        
| |                              |                        
| | Total revenues from products |                        
| |                              |                        

| | 3. | The
Companys substantial long-lived assets are located in Israel.
| | -- | ------------------------------------------------------------------

F - 39

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|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 15: |  | BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE
|-------- | - | -----------------------------------------------

| | The
following table sets forth the computation of basic and diluted net earnings (loss) per
share:
| | --------------------------------------------------------------------------------------------------

| |                                                   | Year ended
December 31,
| | ------------------------------------------------- | -----------------------
|
|
|
|
| | Numerator for basic net earnings (loss) per share |                        
| | - net income (loss) available to shareholders     |                        
| |                                                   |                        
| |                                                   |                        
| | Interest expenses on convertible debentures       |                        
| |                                                   |                        
| |                                                   |                        
| | Net income used for the computation of diluted    |                        
| | net earnings (loss) per share                     |                        
| |                                                   |                        
| |                                                   |                        
| | Weighted average Ordinary shares outstanding      |                        
| |                                                   |                        
| | Effect of dilutive securities:                    |                        
| |                                                   |                        
| | Employees stock options                           |                        
| |                                                   |                        
| | Convertible debentures                            |                        
| |                                                   |                        
| |                                                   |                        
| |                                                   |                        
| |                                                   |                        
| |                                                   |                        
| | Diluted weighted average Ordinary shares          |                        
| | outstanding                                       |                        
| |                                                   |                        
| |                                                   |                        
| | Basic and diluted net earnings (loss) per share   |                        
| |                                                   |                        

| | *) | Anti-dilutive.
| | -- | --------------

|NOTE 16: |  | FINANCIAL INCOME (EXPENSES), NET
|-------- | - | --------------------------------

| |                                                           | Year ended
December 31,
| | --------------------------------------------------------- | -----------------------
|
|
|
|
| | Interest income, net                                      |                        
| | Exchange rate gain (loss) and bank charges *)             |                        
| | Expenses in respect of convertible debentures **)         |                        
| | Income from decrease in fair value of embedded derivative |                        
| | of convertible debenture **)                              |                        
| | Gain from marketable securities                           |                        
| |                                                           |                        
| |                                                           |                        
| |                                                           |                        
| |                                                           |                        

| | *) | Includes
income (expense) from forward transactions in the amount of           $ 109, $ (61)
and $  33 for the years ended December 31, 2005,           2006 and 2007,
respectively.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | **) | See
also Note 2.1
| | --- | -----------------

F - 40

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|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO FINANCIAL STATEMENTS                             
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 17: |  | RESTRUCTURING CHARGES
|-------- | - | ---------------------

| | During
the fourth quarter of 2007, the Companys management and Board of Directors approved
certain reorganization and restructuring plan which resulted in a total charge of $ 849.
The charge arose in connection with the decision to restructure the Companys
corporate management, reduce overhead and consolidate its activities. Included in the
total charges were mainly severance charges and employee-related liabilities arising in
connection with a head-count reduction of 24 employees.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 18: |  | RELATED PARTY TRANSACTION
|-------- | - | -------------------------

| | Based
on a resolution of the shareholders of the Company on December 20, 2007, the Chairman of
the Board of Directors, Mr. Izhak Nakar, was entitled to a bonus of $ 300 in respect
of his assistance to the Company in connection with the acquisition of CPL and ASG In
addition, Mr. Nakar was paid a fee of $ 1.2, plus reimbursement of any expenses, for
every business day invested by him in consideration for his active involvement with CPL
and ASG and any other business throughout 2007. During 2007, Mr. Nakar received a
compensation of $ 166 for his service as a Board member and for consulting fees.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 19: |  | SUBSEQUENT EVENT (UNAUDITED)
|-------- | - | ----------------------------

| | On
March 12, 2008 Board of Directors has approved the payment of up to $ 2.5 thousand
to repurchase outstanding Series A convertible debentures that the Company issued in
December, 2006 on the Tel Aviv Stock Exchange. These repurchases may be in open market
transactions, privately negotiated transactions or a combination of the two.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 41

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