---

---

# 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 1934
   For the fiscal year ended December 31, 2008
|- | ------------------------------------------------------------------------------------------------------------------------------------------

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

---



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



---

---

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:

8,925,638 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 basis of accounting the registrant has used to prepare the financial
statements included in this filing:

|            |                                                       |        
|----------- | ----------------------------------------------------- | -------
|
|
|
|
|U.S. GAAP x | International Financial Reporting Standards as issued | Other o
|            | by the International Accounting Standards Board o     |        

If
Other has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to follow.

Item 17 o Item 18 o

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

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate
by check mark whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.

Yes o No o



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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                                                | 12  
|          |                                                                              |     
|ITEM 5.   | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 | 25  
|          |                                                                              |     
|ITEM 6.   | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   | 41  
|          |                                                                              |     
|ITEM 7.   | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            | 48  
|          |                                                                              |     
|ITEM 8.   | FINANCIAL INFORMATION                                                        | 49  
|          |                                                                              |     
|ITEM 9.   | LISTING                                                                      | 50  
|          |                                                                              |     
|ITEM 10.  | ADDITIONAL INFORMATION                                                       | 53  
|          |                                                                              |     
|ITEM 11.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 67  
|          |                                                                              |     
|PART II   |                                                                              | 68  
|          |                                                                              |     
|ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 68  
|          |                                                                              |     
|ITEM 13.  | DEFAULTS, DIVIDENDS, ARREARAGES AND DELINQUENCIES                            | 68  
|          |                                                                              |     
|ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 68  
|          |                                                                              |     
|ITEM 15.  | CONTROLS AND PROCEDURES                                                      | 68  
|          |                                                                              |     
|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 68  
|          |                                                                              |     
|ITEM 16B. | CODE OF ETHICS                                                               | 69  
|          |                                                                              |     
|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 69  
|          |                                                                              |     
|ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS OF AUDIT COMMITTEES                    | 69  
|          |                                                                              |     
|ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 70  
|          |                                                                              |     
|ITEM 16F. | CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANTS                                | 70  
|          |                                                                              |     
|ITEM 16G. | CORPORATE GOVERNANCE                                                         | 70  
|          |                                                                              |     
|PART III  |                                                                              | 70  
|          |                                                                              |     
|ITEM 17.  | FINANCIAL STATEMENTS                                                         | 70  
|          |                                                                              |     
|ITEM 18.  | FINANCIAL STATEMENTS                                                         | 70  
|          |                                                                              |     
|ITEM 19.  | EXHIBITS                                                                     | 70  

- 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.

In December 2008, we decided to
terminate our South China operations and shut down our facility in Guangzhou. We stopped
marketing and deploying capture solutions development projects in South China, terminated
all the employment contracts of our Guangzhou team and closed the Guangzhou facility. This
shut-down required us to reclassify our 2007 numbers. The results of operations of this
business for each of the two years ended December 31, 2008 are reflected in our statements
of operations in the line item called Loss from discontinued operations, net of
tax.

- 1 -

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|                                    | 2004 | 2005 | 2006 | 2007      | 2008
|----------------------------------- | ---- | ---- | ---- | --------- | ----
|
|
|
|
|Statement of Operations Data:       |      |      |      |           |     
|Revenues                            |      |      | $    | 11,178    |     
|Cost of revenues                    |      |      |      | 3,472     |     
|Gross profit                        |      |      |      | 7,706     |     
|Research and development, net       |      |      |      | 929       |     
|Selling, administrative and general |      |      |      | 7,123     |     
|Goodwill and other intangibles      |      |     
|impairment                          |      |      |      | -         |     
|Restructuring and other special     |      |     
|charges                             |      |      |      | -         |     
|Operating (loss) profit from        |      |     
|continuing operations               |      |      |      | (346      | )   
|Financial (income) expense, net     |      |      |      | (178      | )   
|Other income                        |      |      |      | -         |     
|Taxes on income                     |      |      |      |           |     
|Loss from discontinued              |      |     
|operations, net of tax              |      |      |      | -         |     
|Equity profits from investments     |      |     
|in affiliated companies             |      |      |      | -         |     
|Net income (loss )                  |      |      |      | (168      | )   
|Net basic and dilutive income       |      |     
|(loss) per share:                   |      |     
|Continuing operations               |      |      | $    | (0.02     | )   
|Discontinued operations             |      |      |      | -         |     
|                                    |      |     
|Weighted average number of shares   |      |     
|outstanding for basic net loss      |      |     
|per share                           |      |      |      | 6,905,559 |     
|Weighted average number of shares   |      |     
|outstanding for dilutive net loss   |      |     
|per share                           |      |      |      | 6,905,559 |     

|                               | 2004 | 2005 | 2006 | 2007   | 2008
|------------------------------ | ---- | ---- | ---- | ------ | ----
|
|
|
|
|Summary of Balance Sheet Data: |      |      |      |        |     
|Cash and cash equivalents      |      |      | $    | 10,136 |     
|Working capital                |      |      |      | 12,232 |     
|Total Assets                   |      |      |      | 19,742 |     
|Long Term debt                 |      |      |      | -      |     
|Total liabilities              |      |      |      | 5,047  |     
|Shareholders' equity           |      |      |      | 14,695 |     

# RISK FACTORS

The impact of the current
global economic turmoil and any further deterioration of global economic conditions may
have a material adverse effect on our business, results of operations and financial
condition.

As
wesell our products and services in various countries all over the
world and, consequently, our sales and profitability are dependent on general economic
conditions globally and locally. The recent weakening of consumer and corporate
confidence, declining income and asset values in many areas and other adverse factors
related to the current deteriorating global economic conditions, aggravated by the
unprecedented currency volatility, have resulted and may continue to result in our current
and potential customers as well as the end-users of our products, services and solutions
postponing or reducing spending on our products, services and solutions. For example, some
customers may postponed new projects or choose not to upgrade their license.

- 2 -

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---

The
global financial crisis has also led to more limited availability of credit which may have
a negative impact on the financial condition, and in particular on the purchasing ability,
of some of our customers and may also result in requests for extended payment terms,
credit losses, insolvencies, limited ability to respond to demand or diminished sales
channels available to us. The general difficult economic conditions combined with
tightening credit markets may also cause financial difficulties for our suppliers and
collaborative partners which may result in their failure to perform as planned and,
consequently, in delays in the delivery of our products, services and solutions.

The
difficult global economic conditions may also result in inefficiencies due to our
deteriorated ability to appropriately forecast developments in our industry and plan our
operations accordingly. Also, continuing difficult general economic conditions, negative
developments in our industry, any significant underperformance relative to historical or
projected future results by us or any part of our business, or any significant changes in
the manner of our use of the acquired assets or the strategy for our overall business may
cause reductions in the future valuations of our investments and assets and result in
impairment charges related to goodwill or other assets. Adverse economic conditions
affecting us, our current and potential customers, their spending on our products,
services and solutions, and our suppliers and collaborative partners may have a material
adverse effect on our business, results of operations and financial condition.

For
a more detailed discussion of our liquidity and capital resources, see Operating and
Financial Review and Prospects  Liquidity and Capital Resources.

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
NIS 61,900 thousand (approximately $14,800 thousand at the date of issuance). Our ability
to meet our obligations under the convertible debentures and our other debt obligations
will depend on whether we can implement our strategy as well as on financial, competitive
and other factors including 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 convertible debentures. Our ability
to refinance our indebtedness, including the convertible debentures, 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. The global financial crisis has led to a more
limited availability of credit and, as a result, refinancing has become even more
difficult. 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 debentures,
which would permit our debenture holders and holders of other outstanding indebtedness to
accelerate their maturity dates.

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.

- 3 -

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---

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

In
March 2008, our Board of Directors has approved a plan to repurchase some of our
outstanding Series A convertible debentures that were issued in December 2006 on the Tel
Aviv Stock Exchange. Our Board of Directors approved the aggregate payment of up to $2,500
thousand for the repurchases. We have since then spent $2,224 thousand on the repurchase
of the convertible debentures.

While
we believe that debt repurchase is a sound investment decision for the company, allowing
us to significantly decrease our outstanding debt, the repurchase may impair our cash
position and may result in us having insufficient cash for current operations.

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.

In
the last two years, we made a few acquisitions of related businesses and complementary
businesses, including individual products, in an effort to expand capacity, enter new
markets and diversify our sources of revenue. In 2007, we acquired CPL, a provider of
document management solutions in the United Kingdom, and also acquired a 51% holding in
Asiasoft, a holding company of a group of subsidiaries and affiliated companies in China,
Hong-Kong and Singapore, which are information technology solutions providers. In January
2009 we acquired the remaining 49% of the Asiasoft shares. These acquisitions may require
additional expenditures, including integration and absorption costs. These expenditures
had strained management, financial and operational resources.

The
acquisition of 49% of the Asiasoft shares was paid through the issuance of our ordinary
shares to the seller. 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.

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.

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.

- 4 -

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---

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

| |  | 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 normally attempt to
recruit 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 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, 2006 and 2008, and our losses may continue. For the year ended December 31,
2008, we had an accumulated deficit of $20,441 thousand. We plan to maintain the level of
our aggregate product development expenses. Accordingly, to maintain our current level of
financial performance, we will need to increase our gross profit margins. 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.

- 5 -

---

---

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;
| | - | ------------------------------------------------------------------------------------------------------------------

| |  | 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.
Although in 2006, 2007 and 2008, we had no customer who accounted for more than 10% of our
total revenues but there are some customers sales to which represented material
portions out of our total revenues. 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 so 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.

- 6 -

---

---

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.

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 our former member of our board of directors, was,
at the time of his employment with us (which terminated in January 2001), 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.

- 7 -

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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
these that may be 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.

- 8 -

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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. Such hostility
has culminated in the recent armed conflict in the Gaza Strip in January 2009. 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.

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 military
reserve duty annually. Moreover, in the event of armed conflict in which Israel is
involved or the threat of such conflict, our executive officers and employees might 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 expand 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.

Our share price may
subject our stock to delisting

During
the last three months, our stock has been continuously trading for less than $1 a share.
According to the Nasdaq listing standards if the stock price of a listed company falls
below $1 a share for a period of 10 consecutive business days, such companys stock
may be subject to delisting unless such failure is cured within 30 calendar days from the
date on which Nasdaq notifies to the listed company of such failure. This Nasdaq rule is
currently suspended until July 20, 2009. We cannot assure you that such suspension will be
extended or that we will be able to regain compliance with the rule once the suspension is
over. If we cannot regain compliance once the suspension is over our stock may be subject
to delisting. If our stock will be delisted from Nasdaq we will lose our status as a
dually listed company which may result in us being subject to more stringent
reporting requirements in the Tel Aviv Stock Exchange which may cause an increase in our
reporting related costs and expenses.

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, British Pound, Singapore dollar, Chinese Yuan, Australian dollar 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 and are linked to U.S Dollar with a floor on the NIS/U.S Dollar exchange rate of
4.2. Since the date of issuance of the debentures, the U.S. dollar has been significantly
fluctuated against the NIS. We might need to use more U.S. dollars to make the payments of
the debentures, if the U.S. dollar will lose value against NIS while the debentures are
payable.

- 9 -

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

Because
of our small size and our business strategy to increase our sales. To the extent that our
efforts to generate new business and increase demand for our products and services are
successful, we will need to accurately estimate our need for personnel or marketing and
customer support, or 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.

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, 2008, we did not generate
income subject to the provisions of the new law.

- 10 -

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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.

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

The
conversion of some or all of the convertible debentures 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 debentures may
encourage short selling by market participants because the conversion of the convertible
notes could depress the price of our ordinary shares.

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|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 + 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

On
January 4, 2009, we completed the second and final step in the acquisition of Asiasoft, by
acquiring the remaining 49% of its share capital and issuing to Mr. Toh Kian Hong, the
seller of these shares, 400,000 ordinary shares representing approximately 4.2% of our
issued and outstanding share capital. For more about this acquisition, see Business
Overview-Marketing Strategy.

In
December 2008, we decided to terminate our South China operations and shut down our
facilities in Guangzhou. We stopped marketing and deploying capture solutions development
projects in South China, terminated all the employment contracts of our Guangzhou team
consisting of approximately 60 employees, closed our leased offices in Guangzhou and
ceased to actively market our S3 developed solutions.

In
January 2008, we completed our restructuring plan. The plan, initiated in the fourth
quarter of 2007, was 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. The plan
included dividing our operations to certain identifiable profit centers, consolidating
certain operations and reducing personnel.

During
2008, 2007 and 2006, the aggregate amounts of our capital expenditures were $308 thousand,
$434 thousand and $252 thousand, 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 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.

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# Products

eFLOW®

Our
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.

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.

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
eFLOW®server 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.

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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 eFLOW®Version 4 for the best performance and greatest accuracy.
eFLOW®s Version 4.0 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. eFLOW® Version 4 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.

At
the end of 2008, we released eFLOW® Version 4.5 which provides our customers an
enhanced user experience, powerful user-interface extended via Web clients, increased
efficiency and superior data recognition. Its Web enabled completion module introduces a
new zero-print user interface to meet customers demands, including cross platform
and cross browser compatibility. A new component, Collection Organizer, allows
unprecedented flexibly manipulating images, collections and classifications results.
The strategic direction leading to a full Service Oriented Architecture resulted with
additional services exposed as eFLOW® services, allowing a more flexible architecture
of current and future solutions. Additional research and development effort led to the
development of a unique algorithm, combining the recognition of machine printed
information with handwritten information, located both on the same form. The latest
versions of market leading recognition engines were embedded in eFLOW® Version 4.5 for
the best performance and greatest accuracy. Also, additional improvements to scalability
and availability resulted with a solution fitting more than ever to the large and
demanding enterprise environment.

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.

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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, Freedom provides
support throughout the entire invoice processing. Freedomcaptures 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.

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®s
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.

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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.

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 Portal

A 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.

Principal
Markets

As
of December 31, 2008, we operated 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 significant opportunities exist in other
countries of Western Europe and in Eastern Europe, South Africa and Australia. We have
several local sales and technical representatives in France, Spain, Italy, the Netherlands
and Australia. 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)

|                           | 2006 | 2007 | 2008
|-------------------------- | ---- | ---- | ----
|
|
|
|
|Europe                     |      |      |     
|Far East (excluding Japan) |      |      |     
|Japan                      |      |      |     
|North and South America    |      |      |     
|Africa                     |      |      |     
|Israel                     |      |      |     
|                           |      |      |     
|Total                      |      |      |     
|                           |      |      |     

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

|                           | 2006 | 2007 | 2008
|-------------------------- | ---- | ---- | ----
|
|
|
|
|Europe                     |      |      |     
|Far East (excluding Japan) |      |      |     
|Japan                      |      |      |     
|North and South America    |      |      |     
|Africa                     |      |      |     
|Israel                     |      |      |     
|                           |      |      |     
|Total                      |      |      |     
|                           |      |      |     

- 16 -

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Seasonality

Our
business significantly depends upon the requirements of large corporations and
governmental agencies. As 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 and the United Kingdom, fiscal
years generally end on March 31, thus activity in the Japanese and UK markets tends to
reduce the seasonality of our business. See the section of Item 5 herein entitled
Seasonality for additional details.

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.

Our
marketing strategy involves the use of value added resellers, distributors, system
integrators and original equipment manufacturers (OEMs). 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 frees 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 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, we made the following acquisitions:

In April
2007, we acquired 100% of CPL for $4,600 thousand. CPL is a leading provider of document
management solutions in the United Kingdom. This acquisition increased our presence in UK
as well as in the European market in general, doubling the size of our operations in the
European market. This acquisition provided us with exposure to new markets while extending
its offerings to both new and existing customers.

In
July 2007, we acquired 51% of the issued and outstanding stock of Asiasoft and the stock
of an Asiasoft subsidiary that were not then owned by Asiasoft for total payment including
acquisition costs of $2,700 thousand. Asiasoft is a holding company that holds all the
shares of certain leading developers and distributors of document capture, content
management and shared services software throughout China, Singapore, Hong Kong and
Malaysia. This acquisition provided us with a comprehensive and established infrastructure
in the region. It positioned us as one of the strongest players in the region by extending
its solution sales offering, thereby providing a complete imaging platform. In January
2009, we purchased the remaining 49% of Asiasoft, issuing 400,000 of TIS shares as a
payment for the remaining Asiasoft shares.

- 17 -

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These
two acquisitions add more capabilities, expand our portfolio, and bring us a step closer
to becoming one of the document capture market leaders in Europe and in Asia Pacific. We
believe that these acquisitions together with a restructuring process we engaged in at the
end of 2007, has laid renewed foundations for future growth. As a result of the aforesaid
restructuring plan, our revenues in 2008 reached record high of $32,222 thousand and
resulted by operating loss of $1,702, mainly due to non-recurring charges in amount of
$1,839, that resulted from impairment of intangible assets as further discussed below. As
a part of our strategy to maintain profitability and minimize financial risks, we decided
to terminate our South China operations, shut down our Guangzhou facility and keep our
operations in Asia Pacific more focused on our eFLOW® core business.

We
sell through a network of value-added resellers, distributors and systems integrators in
approximately 40 countries worldwide and where we do not sell directly to customers,. 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
June 2008, we entered into an extended alliance for the SAP accounts payable market with
Beck IT GmbH, the leading developer for standard-add-ons in the SAP business workflow
sector. Through this alliance we gained a direct access to the best experts in the SAP
area as well as to the complementary products for electronic invoice processing which Beck
IT has already developed. Through the cooperation with Beck IT, eFLOW®
seamlessly integrates into SAP R/3. The combined solution greatly increases our ability to
sell this solution to SAP customers around the world. The direct partnership with Beck IT
strengthens our offering in this segment and better positions us as a world leader of
solutions for electronic invoice processing products based on SAP.

In
July 2008, we entered a strategic partnership with ITyX Solutions AG to provide the
European market with a fully integrated, customizable data capture, classification, email
response and full mailroom workflow solution for superior information management. With its
broad range of enterprise response solutions ITyX is Europes most complete
all-in-one provider for digital online transactions. ITyXs products feature the
latest technology in email classification, response management, and voice capture. The
combination of eFLOW® and ITyXs technology into one unified solution helps
organizations more efficiently merge and classify critical incoming data across the entire
spectrum of sources, including email, fax, web, images and voice. Further, the joint
solution takes this vital data and seamlessly integrates it with existing back-office
systems such as SAP and Oracle. Utilizing this combined offering, organizations can now
enjoy faster response time, higher quality of service, and more focused and personalized
customer relationship management.

Also
in July 2008, we entered a strategic partnership with FDM Document Dynamics, an Italian
shared service and outsourcing leader in document management services and solutions. FDM
distributes a leading accounts payable solution based on our eFLOW® platform to
the Italian marketplace for end-to-end management of accounts payable, from the purchase
order to the payment (P2P) to the supplier. The solution integrates seamlessly to any ERP,
and is offered as a complete amalgamation of the invoicing process with other company
functions and systems. Once implemented, the solution we expect the solution to lead to
substantial cost savings, significant qualitative improvement of information, and maximum
control of the accounting process. It also offers secure web-based access from anywhere.

In
September 2008, we entered a strategic partnership with Imaging Business Machines, LLC
(IBML) to better serve high-end customers with a powerful combined information
processing solution. IBML is a leading provider of document capture solutions designed to
help organizations benefit from intelligent high speed scanning and demanding imaging.
Their products are used worldwide by leading financial institutions, health insurers and
provider organizations, business process outsourcers, mortgage banks, insurance companies,
federal agencies and state governments. The intelligent high speed scanning that IBML
offers, combined with our data capture recognition technology, provides the market with a
strong offering, particularly for the high-end market; for paper-heavy organizations.

- 18 -

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In
November 2008, we entered into an extended European wide technology and sales alliance
with Medius AB, the leading full service provider of process-related IT support. Through
this partnership, customers are provided with an efficient automated financial capture
solution for invoices and purchase orders, from purchase to payment, which reduces
processing costs. Mediuss workflow product, MediusFlow, captures and manages
financial information and integrates it seamlessly with customers enterprise
resource planning (ERP) systems. The integration results in a comprehensive end-to-end
EDI solution and business workflow that streamline business processes reduce costs and
strengthen internal controls. The combination of eFLOW® and MediusFlow solutions
offers a compelling solution for customers that are looking to further leverage their
investment in their ERP systems.

In
March 2007, we entered into 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 entered into an 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®, our 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 us to reach
a wider audience with its robust enterprise input management solution. In September 2007,
we have been awarded three new government, transportation and media projects in the USA.

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.

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

- 19 -

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| |  | 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 former member of our board of directors, was, at
the time of his employment with us (terminated on January 2001), 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.

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. On March 10, 2009, the United States Patent and Trade Office
registered a trademark for one of our significant solution and module names, namely
eFLOW®, for computer software applications; namely, software applications that
processes and integrates data provided from various sources across a single platform, in
Class 9 (U.S. CLS. 21, 23, 26, 36 and 38). In August 2007, we also filed trademark
applications with the United States Patent and Trademark Office for the names Top
Image Systems and TIS. Those applications were published on March 10,
2009. 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.

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Competition

The
data capture market is fragmented and is characterized by local application and
requirement differentiations, vertical solutions and various combined software offering to
the customers. The market is changing through increased ecommerce and the need to process
information more rapidly. Document volumes are growing at the same time as competition is
intensifying.

While
the market is fragmented, we see certain consolidation trends such that while there are
still over 50 competing software companies for document capture and automation in the
world, the five largest companies represent about 50% of the market for process and
transaction management. Our products compete with those developed and marketed by numerous
well-established companies including EMC, Mitek, Banctec, Kofax, AnyDoc, OCE, eCopy,
Fairfax, Global360, Ikon, Itesoft, Mitek, Parascript, Scansoft, Scan Optics, ABBYY,
Datacap, SER, and ReadSoft, A2iA, and many more as well as with manual data entry systems.
These companies vary in size, offering focusing and market reach. During the past few
years, several mergers and acquisitions have taken place between our competitors and
companies with related and complementary technologies.

Below
are some of the transactions made in 2008:

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

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

We
have three main global competitors; Kofax which became the market leader via acquisitions
and strong distribution channels, Readsoft is our second competitor mainly in the AP
 Invoice solution and especially in the EU market and EMC who acquired Captiva and
is acting strong in the global enterprise marketplace. In certain markets such as in the
United States, Europe, United Kingdom and Germany, we compete with more than one company
supplying similar solutions. In the Asia Pacific region we mainly compete mainly against
local technology providers and the large global competitors. 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.

Customers

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

During
2007 and 2008, 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.

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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 2008, we won more than 24 new projects in Germany
including: Leica Microsystems, the leading global designer and producer of optical systems
for the analysis of microstructures, that has selected us to automate its invoice
processing operation for twelve European countries at a shared service center in Wetzlar,
Germany.

To
further strengthen our presence in the German market, we entered into two alliances with
German-based technology providers and developers, ITyX Solutions AG and Beck IT GmbH.
These two partnerships strengthen our offering in the European accounts payables and
mailroom automations segments and better positions us as the world leader of solutions for
electronic invoice processing products based on SAP.

Additionally,
we successful established our presence in Austria and Switzerland, introducing our
advanced solutions and vast experience to these two German-speaking marketplaces. For
example, we added the leading Swiss telecommunication service provider, Sunrise
Communications AG, to our customer base. Sunrise Communications AG chooses eFLOW®
Invoice Reader to automate its entire invoice processing operation, effectively
streamlining its accounts payable function and aiding the company in compliance with
strict Swiss audit regulations. The eFLOW® solution also integrates into the
companys Open Text workflow and SAP audit.

In
2008, we solidified our presence in the Far East established with several major contracts
awarded in the financial industry including a Master License Agreement with a Global Bank
for number of countries in Asia Pacific region. There have been successful initial
implementations for customers and in 2009, the customer has plans to further implement the
project in the rest of the region, including plans to upgrade the entire solution to our
latest version of eFLOW® Version 4.5.

The
marketing activities carried out in 2007 and early 2008 reaped its returns in the form of
a much better pipeline and increased recognition from the Far East market. We see
significant activities in the Government sector around the region which we expect to reap
results in 2009. We also secured Cheque Truncation Systems projects as well as projects in
the Insurance sector both in Singapore and Hong Kong, all of which has prepared our Asia
team for more exposure and spring boarding eFLOW® towards being a recognized Data
Capture solution leader, for both the private and government sectors in Asia. With
population census surveys happening in the next couple of years for many of the Asian
countries, including Vietnam, Malaysia, Philippines, Hong Kong and others, we looking to
further enforce our already recognized accomplishments in this arena.

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.

In
2008, we also solidified our leadership in the UK marketplace. While we fully integrated
CPL business into our core activity, we started to see the fruits of the efforts we
invested in this market. The projects we won throughout 2008 in the UK include: a leading
UK insurance specialist that has selected eFLOW® as its solution for document
processing in order to speed up processing, reduce administration costs and errors, and
improve customer service and query resolution; Atkins, the largest engineering consultancy
in the UK; the largest multi-disciplinary consultancy in Europe and the worlds
eighth largest international design firm, all of which selected eFLOW® as an automated
solution for invoice and expense processing; INEOS, a global manufacturer with 70
manufacturing facilities in 14 countries throughout the world, that selected eFLOW® to
enable the automatic capturing of complex invoices and business rules; and a British
governmental agency that selected eFLOW® to process 5 million documents in six months.

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Warranty
and Service

We
generally negotiate our warranty obligations with respect to our products on a
case-by-case basis. Normally our warranty period is up to three months We may be exposed
to potential product liability claims by our customers and users of our products.
Currently, we hold worldwide and domestic product liability insurance and professional
indemnity policies that provide coverage limited to different amounts up to $10 million.
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 various maintenance and support agreements with our customers. These agreements
typically provide us with regular payments of fees ranging 15-18% per annum of the
applicable license fees. Our technical team also provides support to value-added
resellers, distributors and systems integrators to assist in the integration of our
products.

Governmental
Regulation

The
government of Israel encourages research and development projects through its Office of
the Chief Scientist Office, or OCS, pursuant to the Law for the Encouragement of
Industrial Research and Development, 1984 (the Research Law). In exchange for
assistance provided by the Israeli government in connection with research and development
costs 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 about $80 thousand as of December 31, 2008.

The
terms of the Research Law and the OCS grants restrict our ability to manufacture products
outside of Israel or transfer technologies outside of Israel, if those products or
technologies were developed using OCS grants or derive from such development. The OCS is
empowered, but not required, to allow such manufacture or transfer outside of Israel, Even
if we receive approval to manufacture our products outside of Israel, we may be required
to pay an increased total amount of royalties, which may be up to 300% of the grant amount
plus interest, depending on the manufacturing volume that is performed outside of Israel.
Further, even if we receive approval for the transfer of technology outside of Israel,
such approval is likely to involve a material payment to the OCS. We cannot be certain
that any approval of the OCS will be obtained on terms that are acceptable to us, or at
all.

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 below 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.

Organizational
Structure

Top
Image Systems Ltd. is part of a group of which it is the parent company. It has a number
of subsidiaries worldwide, the most significant and operational of which are the following
wholly owned subsidiaries:

| |  | TIS
America Inc. (incorporated in Delaware),
| | - | --------------------------------------------

| |  | Top
Image Systems UK Limited (incorporated in the United Kingdom);
| | - | ------------------------------------------------------------------

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| |  | Top
Image Systems (2007) UK Limited (incorporated in the United Kingdom), formerly know as
CPL;
| | - | -----------------------------------------------------------------------------------------------

| |  | TIS
Deutschland GmbH (incorporated in Germany);
| | - | -----------------------------------------------

| |  | Top
Image Systems (Singapore) Pte. Ltd (incorporated in Singapore), formerly known as
Asiasoft (S) Pte Ltd;
| | - | -----------------------------------------------------------------------------------------------------------

| |  | Top
Image Systems (China) Ltd (incorporated in China), formerly known as Asiasoft Systems
China Ltd;
| | - | ----------------------------------------------------------------------------------------------------

| |  | Top
Image Systems (Hong Kong) Ltd. (incorporated in Hong Kong), formerly known as ACME
Solutions Ltd;
| | - | -----------------------------------------------------------------------------------------------------

| |  | TIS
Japan Ltd. (incorporated in Japan).
| | - | ---------------------------------------

Each
of Top Image Systems (Singapore) Pte. Ltd., Top Image Systems (China) Ltd., and Top Image
Systems (Hong Kong) Ltd., is the wholly-owned subsidiary of Top Image Systems (Asia
Pacific) Pte. Ltd, formerly known as Asiasoft Global Pte. Ltd. The names of Asiasoft
Global and all of its subsidiaries were changed following our acquisition of the stock of
Asiasoft Global. The acquisition of Asiasoft Global was performed in two stages. In July
2007 we acquired 51% of the outstanding shares of Asiasoft Global and in
January 2009, we acquired the remaining 49%.

Top
Image Systems Hong Kong Ltd., primarily provides software development and customization
services in Hong Kong area. Top Image Systems (Singapore) Pte. Ltd., provides system
integration services for document workflow and imaging in Singapore, Malaysia and its
surrounding area. Top Image Systems (China) Ltd., is a Shanghai-based company that
provides outsourcing software services and serves as our main contact for business in
China.

In
December 2008, we ceased operations of our business conducted by Asiasoft Solution
Guangzhou Ltd. a wholly-owned Chinese subsidiary of Asiasoft Global. Asiasoft Solution
Guangzhou Ltd., was engaged in software development and integration services in Southern
China region of Guangzhou. For more information see
Recent Developments.

We
owned  100% of the  issued  and  outstanding  share  capital  at  e-Mobilis  Ltd.,  an
Israeli company.  e-Mobilis was dissolved in February 2009.

We
also hold several non-operating subsidiaries in Asia that serves for various purposes of
former Asiasoft Group of companies.

# Property, Plant and
Equipment

Our
principal executive offices located in Ramat Hahayal, Tel Aviv, Israel and our principal
business and service operations are located around the world in Cologne, Germany, London
and Leeds, United Kingdom, Tokyo, Japan, Singapore and Shanghai, China. We also have
several regional offices in Paris, France, Delft, the Netherlands and Hong Kong.

All
facilities are leased  we do not own any real property. The following table sets
forth details of the square footage and approximate monthly rental fees in U.S. dollars of
our main current leased property, all of which are fully utilized:

|Facility               | Monthly rent
in USD
(approximate) | Square meters
(approximate) | Expiration
date
|---------------------- | --------------------------------- | --------------------------- | ---------------
|
|
|
|
|Tel Aviv, Israel (1)   | 16 thousand                       | 700                         | 2012           
|Cologne, Germany       | 12 thousand                       | 430                         | 2013           
|London, United Kingdom | 8 thousand                        | 170                         | 2011           
|Leeds, United Kingdom  | 8 thousand                        | 90                          | 2011           
|Tokyo, Japan           | 12 thousand                       | 250                         | 2010           
|Singapore (2)          | 9 thousand                        | 230                         | 2012           
|Shanghai, China        | 6 thousand                        | 260                         | 2011           

| | (1) | The lease on facility in Tel Aviv (of approximately 700 square meters,
                    including approximately 110 square meters that we sublease to third party
                    for monthly rentals fees of $ 3 thousand.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The lease on facility in Singapore (of approximately 230 square meters,
                    including approximately 20 square meters that we sublease to third party
                    for monthly rentals fees of $ 2 thousand.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|ITEM 5. |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|------- |  | --------------------------------------------

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

You
should read the following discussion of our financial condition and results of operations
in conjunction with our consolidated financial statements and the related notes and other
financial information contained elsewhere in this annual report. This discussion contains
forward-looking statements that involve risks and uncertainties, including those discussed
in Item 3. Key InformationRisk Factors. See Forward-looking
statements at the beginning of this annual report.

Overview

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.

We
develop and market our software solutions to wide range of customers, based on one
end-to-end solution that automatically classifies, recognize and understand data that
processed into the organization systems. We process, validate and integrate the data into
ERP, CRM and workflow systems, while our solution, eFLOW® Unified Content
Platform, performs business-critical key data capture, lying within incoming
documents (paper forms, eForms, fax, image files, microfiche and electronic).

As
a result of our acquisition of Asiasoft, we also engaged in the sale of third party
products and other related value added services, mainly in the Asia Pacific, and in the
development and marketing of our AwareIMSsolutions fordata capture and
document management. We have yet to finalize the integration of AwareIMSintoeFLOW® Unified Content Platform and therefore our AwareIMSsolutions sold
mainly for domestic Asia Pacific customers, on a stand-alone basis.

During
the last two years of 2008 and2007, our efforts were aimed mainly at expending our
business through acquisitions and then integration of such acquisitions into our existing
business. We also performed a restructuring plan, in December 2007, to redesign
Companys structure and activities and adjust it to post acquisition era. Our
business plan for that time period included measures to reduce our cost structure and
align our costs and revenues, including reduction of our global workforce and the
consolidation of several of our activities. The plan included dividing our operations into
certain identifiable profit center, consolidating certain operations and reducing
personnel.

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In
connection with the implementation of the plan, we recorded $0.8 million in
          reorganization expenses in December 2007, associated mainly with payroll
          expenses and other costs.

In
December 2008, we decided to terminate our South China operations and shut down our
facility in Guangzhou. We believe that this business is not fully matured for that part of
the Chinese market. Therefore, we decided to focus more on our eFLOW® core
business.

During
2008 we increased our revenues and we believe that the revenue growth was primarily due
to:

| |  | Additional
business derived by the acquisitions made in 2007 and materialized fully in 2008 after
successful integration with our main business.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
increase in sales of our European subsidiaries, especially in Germany, followed by new
customers gains and successful expansions of existing customer base.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Recognition
of revenues from large customers contracts, including major contracts awarded in Asia
Pacific and Latin and North America.
| | - | --------------------------------------------------------------------------------------------------------------------------------------

Our
operating loss for 2008 decreased compared to 2007, however, our result were impacted by
the goodwill and other intangible assets impairment. Had we not incurred such impairment,
our operating results would reflect operating profit in amount of $137 thousand.

Our
operating loss in 2008 was also affected by an amount of approximately $89 thousand for
share-based compensation expense and amortization of acquisition-related intangibles in
amount of $560 thousand. We expect costs relating to share-based compensation to continue
to have an adverse impact on our results of operations.

In
2008 we had net income of $604 thousand compared to net loss of $6,348 thousand in 2007.
Our net income in 2008 was affected by several factors, mainly by financial income in
amount of $3,136 thousand due to decrease in market value of convertible debentures. It
was also negatively affected by result of loss from discontinued operations of Guangzhou
business amounted $840 thousand.

Sale
Cycle

Our
sales to end-user customers, value-added resellers, distributors and system integrators
are made on open credit terms and we do not hold collateral to secure payment. The terms
of the arrangements with these customers do not provide them with the right to return of
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 from customer
to customer, but usually we provide credit terms of up to 120 days for end-user customers
and up to 150 days for resellers, distributors and system integrators. In some
arrangements, management can offer longer payment terms as mentioned above, evaluating
business sense, creditworthiness of the customer and other facts needed to establish such
decision. We are not party to any extended payment arrangements.

Our
sales cycle for eFLOW® solutions 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.

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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)

|                           | 2006 | 2007 | 2008
|-------------------------- | ---- | ---- | ----
|
|
|
|
|Europe                     |      |      |     
|Far East (excluding Japan) |      |      |     
|Japan                      |      |      |     
|North and South America    |      |      |     
|Africa                     |      |      |     
|Israel                     |      |      |     
|                           |      |      |     
|Total                      |      |      |     
|                           |      |      |     

Acquisitions
and Dispositions

Our
business and financial position during the two years ended December 31, 2008 were
influenced by two acquisitions described below:

| | n | In
April 2007, we acquired all the outstanding shares of CPL for amount of $4,600 thousand
to increase our presence in the UK as well as in the European market in general. In
February 2008, we paid additional consideration of $240 thousand to the seller of CPL
upon achievement of certain milestone and according to stock purchase agreement.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | In
July 2007, we acquired 51% of Asiasoft and all the shares of the Asiasoft subsidiaries
that were not owed by Asiasoft for an aggregate sum (including acquisition costs) of
$2,700 thousand to provide us with a comprehensive and established infrastructure in
China, Singapore, Hong Kong. In January 2009, we completed the second and final step in
the acquisition of Asiasoft, by acquiring the remaining 49% of its share capital and
issuing to Mr. Toh Kian Hong, the seller of these shares, 400,000 ordinary shares
representing approximately 4.2% of our issued and outstanding share capital.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
acquisitions were accounted for as purchase, and, accordingly, the purchase price for the
acquisitions were allocated to the assets acquired and liabilities assumed based on their
respective fair values. The results of operations related to acquisitions are included in
our consolidated statements of operations from the date of acquisitions.

In
December 2008, we decided to terminate our operations in South China and shut down our
facility in Guangzhou. We stopped marketing and deploying capture solutions development
projects in South China, terminated all the employment contracts of our Guangzhou team and
closed the Guangzhou facility.

Convertible
Debentures Repurchase Plan

On
March 2008, our Board of Directors has approved a plan to repurchase some of our
outstanding Series A convertible debentures that were issued in December 2006 on the Tel
Aviv Stock Exchange. Our Board of Directors approved an aggregate amount of $2,500
thousand for the repurchase.

Since
we adopted the plan and as of March 31, 2009, we repurchased a total of NIS 17,511
thousands par value ($ 4,605 thousands) convertible debentures, for total consideration of
$2,224 thousand.

- 27 -

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Critical
Accounting Policies and Estimates

Our
discussion and analysis of our financial condition and results of operations are based on
our consolidated financial statements which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of our
financial statements in conformity with generally accepted accounting principles in the
United States requires our management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period, which could potentially result in materially
different results under different assumptions and conditions. These are our
managements best estimates based on experience and historical data; however, actual
results could differ materially from these estimates. Our significant accounting
principles are presented within Note 2 to our consolidated financial statements attached
to this annual report. While all the accounting policies impact the financial statements,
certain policies may be viewed to be critical. Management believes that the following
policies are those that are most important to the portrayal of our financial condition and
results of operations and are the most critical to aid in fully understanding and
evaluating our reported results:

| |  | Revenue
recognition
| | - | -------------------

| |  | Allowance
for doubtful accounts
| | - | -------------------------------

| |  | Marketable
securities
| | - | ---------------------

| |  | Goodwill
and other intangible assets
| | - | ------------------------------------

| |  | Convertible
Debentures
| | - | ----------------------

| |  | Fair
value measurements
| | - | -----------------------

| |  | Contingencies
| | - | -------------

| |  | Deferred
taxes
| | - | --------------

| |  | Share-based
compensation
| | - | ------------------------

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.

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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.

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 as a ratio of the extent of the progress toward
completion of the contract, using an input measure method of labor hours performed. 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, 2008, 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.

We
generally do not grant a right of return to our customers.

Allowance
for doubtful accounts

We
maintain an allowance for doubtful accounts for estimated losses inherent in our accounts
receivables portfolio. In establishing the required allowance, we base our determination,
among other factors, on information available about the debtors financial condition,
the volume of their operations and our evaluation of the security received from them.
Account balances are charged against the allowance after all means of collection have been
exhausted and the potential for recovery is determined to be remote.

Marketable
securities:

We
account for investments in marketable securities in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities (SFAS
No. 115). We determine 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.

FASB
Staff Position (FSP) No. 115-1, The Meaning of Other-Than- Temporary Impairment
and Its Application to Certain Investments (FSP 115-1) provides guidance
for determining when an investment is considered impaired, whether impairment is
other-than-temporary, and measurement of an impairment loss. An investment is considered
impaired if the fair value of the investment is less than its cost. We consider various
factors to determine whether to recognize an impairment charge, including the
Companys intent and ability to hold the investment for a period of time sufficient
to allow for any anticipated recovery in market value, the length of time and extent to
which the fair value has been less than the cost basis, the credit ratings of the
securities and the financial condition and near-term prospects of the issuers. If, after
consideration of all available evidence to evaluate the realizable value of its marketable
securities, impairment is determined to be other-than-temporary, then an impairment loss
should be recognized equal to the difference between the marketable securities
carrying amount and its fair value. For the year ended December 31, 2008, we recorded an
other-than-temporary impairment loss in the amount of $ 420 thousand as financial
expenses.

- 29 -

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Valuation
of Long-Lived Assets, Goodwill and other intangible assets

In accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144), we perform tests for impairment of
long-lived assets whenever events or circumstances suggest that other long-lived assets
may not be recoverable. This analysis differs from our goodwill analysis in that an
impairment is only deemed to have occurred if the sum of the forecasted undiscounted
future cash flows related to the assets are less than the carrying value of the asset we
are testing for impairment. If the forecasted cash flows are less than the carrying value,
then we must write down the carrying value to our estimated fair value based primarily
upon forecasted discounted cash flows. We recorded impairments of certain
acquisition-related amortizable intangible assets of $497 thousand in 2008 based primarily
upon forecasted discounted cash flows. If future forecasts are revised, they may indicate
or require future impairment charges. We base our fair value estimates on assumptions we
believe to be reasonable but that are unpredictable and inherently uncertain. Actual
future results may differ from those estimates.

The
provisions of Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets (SFAS 142), require that a two step impairment
test be performed on goodwill. Impairment of goodwill is tested at the Companys
reporting unit level by comparing the carrying amount, including goodwill, to the fair
value.

The
Company operates in one operating segment, and this segment comprises two reporting units
 ASG and ROW (rest of the world  all companies in the
group, except AsiaSoft) for purposes of SFAS 142. We conduct our annual goodwill
impairment test assigned to ASG and ROW during the second and the fourth quarters of the
year, respectively, or more frequently if impairment indicators are present..

In December 2008, due to the changes
in the global economy and in our business, we determined that goodwill had been impaired.
We obtained an independent appraisal to assess whether goodwill and other intangibles
carried on our books needed to be written down.

The
appraisal was conducted in accordance with paragraphs 19-22 of SFAS 142, which requires a
two-step analysis. The first step used the discounted cash flow approach to measure the
fair value of ROW and ASG reporting units, the result of which indicated that the carrying
amount of ASG reporting unit, including goodwill, exceeded its fair value. The second step
was then conducted in order to measure the amount of impairment loss, by means of a
comparison between the implied fair value of the goodwill and the carrying amount of the
goodwill. In the second step, the fair value of ASG reporting unit was assigned, as
determined in the first step, to the reporting units individual assets and
liabilities. The excess of the fair value of the reporting unit over the amounts assigned
to its assets and liabilities represented the implied fair value of the goodwill. As a
result, we impaired goodwill of ASG reporting unit to its fair value by $1,342 thousands
as at December 31, 2008.

We
will continue to perform an impairment test at least annually and on an interim basis
should circumstances indicate that an impairment loss may exist. The outcome of such
testing may lead to the recognition of additional impairment loss.

Convertible
debentures

The
Company adopted SFAS No. 159 The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 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.

- 30 -

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Prior
to the adoption of SFAS 159, the Company accounted for convertible debt 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 to the U.S. Dollar with a floor on the NIS/ U.S. Dollar exchange
rate, 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. Prior to the adoption of SFAS 159, the fair value
assigned to the embedded derivative instrument was marked to market in each reporting
period and was included in long term liabilities on the balance sheet.

Fair
value of 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.

Effective
January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements (SFAS
No. 157) and, effective October 10, 2008, adopted FASB Staff Position
(FSP) No. 157-3, Determining the Fair Value of a Financial Asset When
the Market for That Asset Is Not Active (FSP 157-3), except as it
applies to the nonfinancial assets and liabilities subject to FSP No. 157-2,
Effective Date of FASB Statement No. 157 (FSP 157-2). SFAS No. 157
clarifies that fair value is an exit price, representing the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market
participants. As such, fair value is a market-based measurement that should be determined
based on assumptions that market participants would use in pricing an asset or a
liability.

- 31 -

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---

As
a basis for considering such assumptions, SFAS No. 157 establishes a three-tier value
hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring
fair value:

| | Level
1  Observable inputs that reflect quoted prices (unadjusted) for identical assets
or liabilities in active markets.
| | --------------------------------------------------------------------------------------------------------------------------

| | Level
2  Valuations based on one or more quoted prices in markets that are not active or
for which all significant inputs are observable, either directly or indirectly.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Level
3  Unobservable inputs which are supported by little or no market activity and
significant to the overall fair value measurement.
| | ----------------------------------------------------------------------------------------------------------------------------------------

The
fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.

In
accordance with SFAS 157, we measure our marketable securities and convertible debt at
fair value. Marketable securities are classified within Level 2, because the valuation
inputs are based on unadjusted quoted prices and market observable data of similar
instruments in inactive markets. Convertible debt is classified within Level 1, since
this asset is valued using quoted market price in an active market.

Contingencies

From
time to time, we are defendant or plaintiff in various legal actions, which arise in the
normal course of business. We are required to assess the likelihood of any adverse
judgments or outcomes to these matters as well as potential ranges of probable losses.
When we believe that it is probable that we will not prevail in a particular matter and
damages can be reasonably estimated, we then estimate the amount of the liability based in
part on advice of legal counsel.

Income
Taxes

We
account for income taxes under SFAS 109, Accounting for Income Taxes. Under
SFAS 109, deferred tax assets or liabilities are recognized in respect of temporary
differences between the tax bases of assets and liabilities and their financial reporting
amounts as well as in respect of tax losses and other deductions which may be deductible
for tax purposes in future years, based on tax rates applicable to the periods in which
such deferred taxes will be realized. Deferred tax assets for future tax benefits from
realization, are included in the balance sheets, when, in our estimation, their
realization is more likely than not.

Valuation
allowances are established when necessary to reduce deferred tax assets to the amount
expected to be realized. A valuation allowance has been made for all of our deferred tax
assets and those of our subsidiary companies, since we believe that it is more likely than
not that the deferred tax assets will not be realized, as we are uncertain as to whether
loss carry forwards will be utilizable in the foreseeable future.

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. It also provides
guidance on derecognition, measurement and classification of income tax uncertainties,
along with any related interest and penalties,

We
adopted FIN 48 as of 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 provisions of SFAS 5 and FIN 48. Therefore no adjustment was
recorded to the accumulated deficit in our consolidated financial statements.

Share-based
compensation

We
implemented SFAS 123R using the modified prospective method starting January 1, 2006. We
have selected the Monte-Carlo option-pricing model to determine the fair value of our
awards on the date of grant. 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. The Company has historically
not paid dividends and has no foreseeable plans to pay such dividends. The risk-free
interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an
equivalent term.

- 32 -

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---

An
implementation of SFAS 123R resulted in increase in our operating expenses. We expect to
grant additional stock-based awards in future years which will result in additional
share-based compensation expense.

On
December 11, 2008, effective as of January 1, 2009, our Board of Directors approved a plan
in which we offered our option holders an opportunity to surrender their
underwater vested options and be issued with new options, each having an
exercise price of $1.30 per share. The number of the options which have been outstanding
before the introduction of the plan was approximately 1.5 million options with an average
exercise price of $3.17 a share.

As
of March 31, 2009 we issued options to purchase up to 641 thousands of our shares in
replacement of 1,071 thousands options that have been surrendered to us. The reduction in
the number of options to be issued was based on a formula that takes into account our
share price as of January 1, 2009, the original option exercise price and the total number
of the options held by each option holder. The total value of the options held by each
option holder before and after the exchange of the options remained the same. Except for
the exercise price and the number of TIS shares, each new option has the same terms as the
original option and will expire on the expiration date of the original option.

Recently
Enacted Accounting Pronouncements

In
April 2008, the FASB issued FSP SFAS No. 142-3, Determination of the
Useful Life of Intangible Assets. FSP SFAS No. 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets. The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under Statement 142
and the period of expected cash flows used to measure the fair value of the asset under
FASB Statement No. 141(revised 2007), Business Combinations which will be
effective for business combinations occurring in periods beginning after December 15,
2008. This FSP is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. We do not
expect the adoption of FSP SFAS No. 142-3 to have a material impact on our
consolidated financial statements.

In
December 2007 the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements  an amendment of Accounting Research
Bulletin No. 51, or SFAS 160. SFAS 160 addresses the accounting and
reporting standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parents ownership interest, and the valuation
of retained noncontrolling equity investments when a subsidiary is deconsolidated.
SFAS 160 also establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the interests of the noncontrolling
owners. SFAS 160 is effective for fiscal years beginning after December 15,
2008. We currently evaluating the impact of SFAS 160 on our consolidated financial
statements as it relates to acquisition of additional 49% in ASG.

In
February 2008, the FASB issued FSP No. FAS 157-2, Effective Date of FASB
Statement No. 157". The Staff Positions defer the effective date of Statement
157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and
nonfinancial liabilities except for items that are recognized or disclosed at fair value
on a recurring basis at least annually, and amend the scope of Statement 157.We adopted
Statement 157 and the related FASB staff positions except for those items specifically
deferred under FSP No. FAS 157-2.

In
November 2008, the FASB ratified EITF Issue No. 08-6, Equity Method Investment Accounting
Considerations, or EITF 08-6. EITF 08-6 clarifies the accounting for certain transactions
and impairment considerations involving equity method investments. This issue is effective
for fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. Earlier application by an entity that has previously adopted an alternative
accounting policy is not permitted. The adoption of EITF 08-6 is not expected to have a
material impact on our consolidated financial statements.

- 33 -

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Results
of Operations

The
following table sets forth the percentage relationships of certain items from our
consolidated statements of operations, as a percentage of revenues for the periods
indicated:

|                                             | Year ended December 31,
|-------------------------------------------- | -----------------------
|
|
|
|
|Revenues                                     |                        
|Cost of revenues                             |                        
|                                             |                        
|                                             |                        
|Gross profit                                 |                        
|Research and development costs, net          |                        
|Selling and marketing expenses               |                        
|General and administrative expenses          |                        
|Restructuring costs                          |                        
|Impairment of Goodwill and other intangible  |                        
|assets                                       |                        
|                                             |                        
|                                             |                        
|Total operating expenses                     |                        
|                                             |                        
|                                             |                        
|Operating (loss) profit                      |                        
|Financial income, net                        |                        
|                                             |                        
|                                             |                        
|Income (loss) from continuing operations     |                        
|before taxes on income                       |                        
|Taxes on income                              |                        
|Other Income                                 |                        
|Net loss from discontinued operations        |                        
|                                             |                        
|Equity profits from investment in affiliated |                        
|companies                                    |                        
|                                             |                        
|                                             |                        
|                                             |                        
|Net income (loss)                            |                        

- 34 -

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Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007

Revenues.
          Total revenues for the year ended December 31, 2008 amounted to $32,222
thousand           compared to $23,189 thousand for the year ended December 31, 2007, an
increase           of 39.0%. The increase in revenues is mainly due to revenues generated
through           our newly-acquired businesses, CPL and Asiasoft, which were acquired
during           2007.

Product
revenues increased by $4,690 thousand or by 40.0%, from $11,701 thousand in 2007 to
$16,391 thousand in 2008. The increase in product revenues was primarily as a result of
the hardware and third party revenues of the acquired business, Asiasoft. Service revenues
increased by 4,343 or by 37.8%, from $11,488 thousand in the year ended December 31, 2007
to $15,831 thousand in the year ended December 31, 2008. The increase in service revenues
were as a result of both, the business acquisition in 2007 and actual increase in customer
demand for professional services related to our eFlow product.

Cost
of Revenues. Cost of Revenues increased by 14.5%, from $13,170 thousand in 2007 to
$15,075 thousand in 2008. The increase is a result of higher revenues that resulted in
higher expenses to third party product costs, mainly at Asiasoft. The increase was partly
offset by a decrease in labor expenses resulted from: (i) a reduction of 6%- 10% in
employees and managers payroll that took place on October 2008 (ii) a onetime expense
recorded in 2007 due to an acceleration of employees options vesting.

Research
and Development. Research and Development expenses decreased by 26.4%, from $2,393
thousand in 2007 to $1,762 thousand in 2008. Most of the cost of our Research and
Development is incurred in Israel, where our Research and Development team is located. The
decrease in Research and Development expenses was primarily attributed to a decrease in
labor expenses due to: (i) a reduction of 6%- 10% in employees and managers payroll that
took place on October 2008 (ii) a onetime expense recorded in 2007 due to an acceleration
of employees options vesting (iii) decrease in number of employees.

Selling
and Marketing. Selling and Marketing expenses amounted to $9,292 thousand in the year
ended December 31, 2008 and $9,231 in the year ended December 31, 2007. The increase in
sales commission as a result of the increase in revenues was offset in full by the
decrease in labor expenses due to: (i) a reduction of 6%- 10% in employees and managers
payroll that took place on October 2008 (ii) a onetime expense recorded in 2007 due to an
acceleration of employees options vesting.

General and Administrative Expenses. General and Administrative expenses in the year
ended December 31, 2008 amounted $5,956 thousand, compared to $5,655 for the year ended
December 31, 2007. This increase of 5.3% is attributable to our newly acquired businesses,
CPL and Asiasoft, during 2007, which was partly offset by a decrease in labor expense due
to: (i) a reduction of 6%- 10% in employees and managers payroll that took place on
October 2008 (ii) a onetime expense recorded in 2007 due to an acceleration of
employees options vesting.

Restructuring
and other special charges. We didnt have restructuring charges in 2008.
Restructuring and other special charges in 2007 amounted to $849 thousand attributable to
staff reduction and the resulting payment of termination benefits.

Goodwill
and other intangible assets impairment. Our Goodwill and other intangible assets
comprise from several acquisitions we made in recent years is subject to evaluation for
impairments in accordance with SFAS No. 142. In December 2008, due to economic downturn,
uncertainty and changes in our business activities, goodwill and other intangible assets
were impaired. We partly impaired a goodwill related to ASG reporting unit and certain
intangibles assets by $1,839 thousand in 2008 to their fair value in the amount of $5,813
thousands and $336 thousands, respectively, as of December 31, 2008. We didnt have
any impairment in 2007.

Financial
Income, net. Our net financial income for the year ended December 31, 2008 increased
by 67.8% to $3,136 thousand, from $1,869 thousand for the year ended December 31,
2007. This increase is primarily due to the decrease in fair value of our convertible
debentures, which are recorded, starting January 1, 2008, in accordance with SFAS No. 159,
at their market value (for further details please refer to the Note 11 of our financial
statements).

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Net
loss from discontinued operations. In December, 2008 we decided to terminate our
operations in Southern China and shut down our facility in Guangzhou. Net loss from these
discontinued operations was approximately $840 thousand for 2008 and net loss of $104
thousand for 2007. For more information about the shut down of our Guangzhou facility, see
Information about the Company-Recent Developments.

Net
income (loss). As a result of the foregoing and also results attributable to taxes on
income, other income and equity profits from investment in affiliated companies which its
total effect considered to be insignificant to our entire operations, we derived net
income in amount of $604 thousand in 2008, compared to net loss of $6,348 thousand in
2007.

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

Revenues.
          Total revenues for the year ended December 31, 2007 amounted to $23,189
thousand           compared to $20,224 thousand for the year ended December 31, 2006, an
increase           of 14.7%. Product sales decreased by $443 thousand or  4%, from
$12,144           thousand in 2006 to $11,701 thousand 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 $3,408 thousand, or approximately 42.2%, from $8,080
thousand in           the year ended December 31, 2006 to $11,488 thousand 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 $5,522 thousand or 72.2%, from $7,648
thousand in the year ended December 31, 2006 to $13,170 thousand 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. Research and development expenses in the year ended December 31, 2007
amounted to $2,393 thousand compared to $1,792 thousand 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 $14,886 thousand compared to $10,263 thousand
for the year ended December 31, 2006. This increase of $4,623 thousand or 45%, 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 thousand 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 $1,869 thousand, compared to financing expense of $325 thousand 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 thousand, compared to a net income of $801 thousand in year ended
December 31, 2006.

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.

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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 3.4% and 3.8% in 2007
and 2008, 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 2007 and 2008, the appreciation of the NIS against the dollar,
which amounted to 8.97% and 1.1% respectively, 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 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. Such hostility has culminated in the recent armed
conflict in the Gaza Strip in January 2009. 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.

Some
of our executive officers and employees in Israel are obligated to perform military
reserve duty annually. Moreover, in the event of armed conflict in which Israel is
involved or the threat of such conflict, our executive officers and employees might 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 expand 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.

Economic
Conditions

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.

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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, 2008, we had $8,360 thousands in cash, cash equivalents, short-term
deposits and long-term marketable securities, compared to $12,893 thousands as of December
31, 2007.

Our capital resources today based and
derived from issuance of convertible debentures on the Tel Aviv Stock Exchange in amount
of NIS 61,900 thousand (approximately $14,800 thousand at the date of issuance). During
2008 and 2007, we generated negative cash flow from operating activities in the amounts of
$3,014 thousands and $3,671 thousand respectively.. We believe that our current cash, cash
equivalents, cash deposits and marketable securities and our forecasted positive cash
flows for future periods, will be sufficient to meet our cash requirements for both the
short and long terms.

In
March 2008, our Board of Directors has approved a plan to repurchase some of our
outstanding Series A convertible debentures that we issued in December 2006 on the Tel
Aviv Stock Exchange. The Board has authorized the payment of up to $2,500 thousand for the
repurchase. Since we adopted the plan, we repurchased a total of NIS 17,511 thousands par
value ($4,605 thousands) convertible debentures, for total consideration of $2,224
thousand Along with the acquisitions we made in 2007 and funds we used to integrate these
acquired entities into the Group, the repurchase of the convertible debentures was another
reason for the decrease in the amount of our liquid assets as of December 31, 2008, as
compared with December 31, 2007 and December 31, 2006.

Net
cash used in operating activities for the year ended December 31, 2008 was $3,014 thousand
as compared to $3,671 thousand in 2007. The decrease in cash used in operating activities
in 2008 was attributed to the increase in net profit compared to 2007 loss, which was
offset mainly by the decrease in fair value of our convertible debentures and the decrease
in deferred revenues.

Net
cash provided by investing activities for the year ended December 31, 2008 was $423
thousand as compared to $4,515 thousand in 2007. In both of 2008 and 2007, net cash
provided by investing activities consisted primarily of redemption and maturity of
marketable securities, which were partially offset by payments for the acquisitions in
2007.

For
the year ended December 31, 2008, the aggregate amount of our capital expenditures was
$308 thousand. These expenditures were principally for the purchases of computer hardware
and software.

Net
cash provided by financing activities was $372 thousand in 2008 compared to $804 thousand
in 2007. The decrease net cash provided by financing activities attributable to changes in
borrowings from the banks, offset by the amounts used in repurchase of convertible
debentures.

In
2007, we invested in marketable securities, with contractual maturities of up to 38 years,
which were 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 their
market value. During 2008, we sold $4,000 thousand of the amount invested as of December
31, 2007 at their par value. As of December 31, 2008 our investments in auction rates
securities (ARS) are valued at $1,050 thousand, before a write off, as
discussed below. These securities have contractual maturities of up to 38 years, are
collateralized by student loans guaranteed by the U.S. Department of Education. Those
securities are AAA rated, as rated by Standard & Poors and Moodys rating
services. Due to events in credit markets starting February 2008, the auction events for
these instruments failed and therefore they are not currently trading and as a result do
not currently have a readily determinable market value. However, we continue to earn
interest on our auction rate securities at the maximum contractual rate (which was a
blended rate of 1.961% at December 31, 2008) and there has been no payment default with
respect to such securities. Accordingly, the estimated fair value of these auction rate
securities no longer approximates par value. As of December 31, 2008 the outstanding
investment in marketable securities were impaired and are recorded at 60% of their par
value. The other than temporary impairment of available-for-sale securities totaled $ 420
thousand for the year ended December 31, 2008, and such losses were recorded under
financial income, net on our financial statements.

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Convertible
debentures

On
December 27, 2006, we completed a public offering of approximately NIS 61,900 thousand
(approximately $14,800 thousand) aggregate principal amount of convertible debentures on
the Tel Aviv Stock Exchange. The public offering was comprised 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 of 4.2 (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 NIS 500
thousand 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 thousand (approximately $14,526 thousand).

The
debentures may be converted at the election of the holder into our ordinary shares at the
conversion price of NIS 20.30 (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 NIS 25.50 (approximately $6.7) 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 (the Securities Act).

In
2007, NIS 500 thousand 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 thousand.

In
March 2008 our Board of Directors approved a plan for the repurchase of some of our
outstanding Series A convertible debentures that were issued in December 2006 on the Tel
Aviv Stock Exchange. According to the plan, these repurchases may be in open market
transactions, privately negotiated transactions or a combination of the two. Our Board of
Directors have authorized the payment of up to $2,500 thousand for the repurchase. As of
March 31, 2009, we repurchased a total of NIS 17,511 thousands par value ($4,605
thousands) convertible debentures, for total consideration of $2,224 thousand. The
outstanding balance as of March 31, 2009 of our convertible debenture is NIS 43,363
thousands ($10,324 thousands).

Lines
of Credit

We currently have a short-term line
of credit with First International Bank of Israel. The total amount available as of March
31, 2009 under this line of credit is the lesser of $1,000 thousand and 60% of certain
eligible trade receivables.

As of December 31, 2008, we had an
outstanding credit in NIS and USD at approximately $1,323 thousands and $1,482
respectively. The revolving line of credit in NIS bears interest at a rate of Prime+1.75%
(as of December 31, 2008, the prime rate was 4%). The revolving line of credit in USD
bears interest at a rate of Libor+2% (as of December 31, 2008, the Libor rate was 0.135%).
As of December 31, 2008, we have approximately $400thousand of outstanding credit
nominated in Singapore dollars, due to line of credit in our Singapore subsidiary. The
revolving line of credit in Singapore dollars bears interest at a rate of Prime Lending
Rate (PLR)+1.5% (as of December 31, 2008, the PLR was 3%). As of December 31,
2008, we have approximately $381 thousand of outstanding credit nominated in GBP, due to
line of credit in our UK subsidiary. The revolving line of credit in GBP bears interest at
a rate of 2 %. Any indebtedness under this credit line is payable on demand and secured by
a floating charge on our assets in Israel and by restricted cash deposits in the UK and
Singapore. 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. As of December 31, 2008 we were not in any such default.

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Research
and Development, Patents and Licenses.

In
order to accommodate the rapidly changing needs of our markets, we place considerable
emphasis on research and development projects designed to improve our existing product
lines and to develop new product lines to meet the changing needs of our market. In 2008,
as part of our restructuring effort we attempted to reduce our research and development
cost without compromising any significant research and development program. We were
successful in reducing our research and development expenses to $1,762 thousand in 2008
from $2,393 thousand in 2007 without affecting any material research and development
program. As of December 31, 2008, 12 of our employees were engaged primarily in research
and development activities. We expect that we will continue to commit substantial
resources to research and development in the future.

The
main focus of our research and development in 2008 was releasing new version of
eFLOW®, that was released at the end of 2008.

For
the complete eFLOW® Version 4.5 overview, please read Item 4 Information
about the Company  Products in this annual report.

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 data 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 2007 and expect CAGR of
15% from 2005 to 2010.

While
the current economic downturn is likely to affect us, we believe our sector relatively
less vulnerable compared to other sectors. Our niche market is associated with efficiency
and improved processes, and companies can demonstrate a fast return on investment.
Purchasing a system doesnt require a great deal of investment for our customers and
does not include any major changes in operation. In past downturns, our sector has been
less prone to reductions in IT spending than most other segments in the software solution
market. We do, however, experience price reduction while professional services stay stable
and become more specific in their nature. For more information regarding the impact of the
recent economic downturn see Key Information  Risk Factors.

The
area of document classification is gaining momentum and we see this as the new growth of
the capture market. This solution is targeted to organizations with business to consumer
orientation such as banks, utility companies, insurance companies, and telecommunication
service provides. We have a number of references and successes and proved we have a
superior technology.

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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, 2008:

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

Our
contractual obligations and commitments at December 31, 2008 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 Note 12 to the consolidated financial statements for the year ended December
31, 2008 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 discussed in Note 13 of the Notes
to Consolidated Financial Statements for the year ended December 31, 2008 contained
elsewhere in this annual report, effective January 1, 2007, we adopted the provisions of
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan
interpretation of FASB Statement No. 109. As December 31, 2008, we had a total
liability of $122 thousand for gross unrecognized tax benefits. Due to the uncertainties
related to those tax matters, we are currently unable to make a reasonably reliable
estimate of when cash settlement with a relevant tax authority will occur.

As
for our short term loan, please see discussion under Liquidity and Capital Resources
 Lines of Credit 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 as of
March 31, 2009. 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         | 56  | Chairman of the Board                     
|Ido Schechter       | 48  | Chief Executive Officer and Director      
|Gili Shalita        | 33  | Interim Chief Financial Officer           
|Oded Leiba          | 38  | UK General Manager                        
|Ofir Shalev         | 37  | Vice President of Research and Development
|Asael (Asi) Karfiol | 44  | External Director                         
|Elie Housman        | 71  | Director                                  
|Lior Lurye          | 42  | External Director                         
|Lyron Bentovim      | 39  | Director                                  

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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.

Gili
Shalita has been the Interim CFO of TIS since August 2008.  From August 2007 until
she became Interim CFO, Ms. Shalita served as the Director of Finance of the
Company.  Prior to joining TIS, Ms. Shalita served as the Controller of PMC-Sierra
Israeli branch (Formerly: Passave) since March 2005. From July 2003 until March 2005, Ms.
Shalita served as risk and control manager of Intel Israel. Between the years 2000 and
2003, Ms. Shalita worked at Ernst & Young Israel, as a CPA in the high-tech practice
group. Ms. Shalita is certified licensed public accountant (Isr.). She holds a B.A. in
Economics and Accounting from the Tel Aviv University and an M.B.A. in Finance from the
Bar Ilan University.

Oded
Leiba has been serving as the UK General Manager since May 2001. From May 1999 to May
2001, Mr. Leiba was our representative in Japan and worked with our exclusive distributor,
EDMS, for a period of three years. Before joining TIS, Mr. Leiba worked 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 been serving 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 our semi-structured data module that plugs into the
eFLOW® Unified Content Platform®. 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.

- 42 -

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Asi
Karfiol was elected to serve as an external director of TIS 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
Group International (Charterhouse) from 1989 until June 2001. At Charterhouse,
Mr. Housman was involved in the acquisition of a number of companies with total sales of
several hundred million dollars. Prior to Charterhouse, he was co-owner of AP Parts, a
$250 million automotive parts manufacturer. Mr. Housman was also the Chairman of Novo Plc.
in London, a leading company in the broadcast storage and services industry. At present,
Mr. Housman is a director of three public companies, deltathree, Inc., ICTS International,
N.V., a prominent aviation security company and EVCI Career Colleges Incorporated. In
addition, Mr. Housman serves as a director of Jazz Photo, Inc., and Bartech Systems
International, Inc., which are both privately held companies in the United States.

Lior
Lurye was elected to serve as an external director of TIS in February 2009. Since 1999 Ms.
Lurye is CEO and owner of Lior Lurye Computer Applications Ltd. and controls Nituah
Management Services Ltd. In those capacities she has engaged in the provision of technical
and business counsel to companies with regard to information systems, cellular application
systems, Internet, CRM and telephony, call centers and automatic services on the Internet.
She is also active in foreign real estate investments. She has an Executive MBA, cum
laude, from the University of Tel Aviv and a B.Sc. in Mathematics and Computer Science
from Touro College.

Lyron
Bentovim has been serving as a director of TIS since November, 2008. Since December, 2001
Mr. Bentovim has been a Portfolio Manager for Skiritai Capital LLC, an investment advisor
based in San Francisco which holds approximately 13.2% of our issued and outstanding
capital stock of the Company. He has over 15 years of industry experience, including his
experience as a member of the board of directors at Three-Five Systems, Sunrise Telecom,
and Argonaut Technologies. Prior to his position in Skiritai Capital LLC, Mr. Bentovim
served as the President, COO, and co-founder of WebBrix Inc. Additionally, Mr. Bentovim
spent time as a Senior Engagement Manager with strategy consultancies USWeb/CKS, the
Mitchell Madison Group and McKinsey & Company. As a Senior Engagement Manager, Mr.
Bentovim advised many Fortune 1000 companies in the Financial Services, Insurance, Retail,
and Manufacturing sectors. During his consulting career, Mr. Bentovim assisted companies
in exploring and developing solutions in the areas of strategic planning and operational
improvements. Mr. Bentovim is experienced in evaluating Global 500 organizations and
implementing strategies designed to streamline processes, reduce inefficiencies and
achieve significant overhead reductions. Mr. Bentovim has a MBA from Yale School of
Management and a Law degree from the Hebrew University in Jerusalem.

There
are no familial relationships between any of the persons named above. Elie Housman was
initially appointed to the Board seat by Charterhouse who was a major shareholder of TIS
during 2008, pursuant to the terms of the investment by Charterhouse in us and a voting
agreement with Mr. Nakar. Charterhouse is no longer a major shareholder in TIS and the
voting agreement is no longer in effect. For further details, see Major Shareholders
and Related Party Transactions  Significant Changes in Percentage Holding. Mr.
Housman left the employ of Charterhouse in 2001.

# Compensation

The
aggregate direct remuneration paid or payable to all persons who served in the capacity of
executive officer during 2008 was approximately $863 thousand including approximately $60
thousand, which was set aside for pension and retirement benefits and including amounts
expended by us for automobiles made available to our executive officers.

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The
total amount paid or payable to the directors, including external directors, for 2008 was
$71 thousand. As of March 31, 2009, 487,122 options to purchase our ordinary shares were
outstanding to certain executive officers and directors (consisting of 7 persons), of
which 451,777 options are currently exercisable or exercisable within 60 days of March 31,
2009. See Share Ownership.

In
February 9, 2009 our shareholders approved our Board of Directors decision that each
director will receive compensation for his service as a member of the Board of Directors,
in the amount of NIS15,570 (approximately $4,078) per year and NIS3,000 (approximately
$769) for each meeting of the Board of Directors or a committee in which they participated
or will participate.

Ido
Schechter, our Chief Executive Officer who is also a director is entitled, by virtue of
him being an employee of the Company to severance upon termination of his employment. The
terms of severance are dictated by Israeli law and provide for one months salary for
every year in which Dr. Schecter has been employed by the Company.

# Committees of the Board

Audit
Committee

Our
audit committee is comprised of Elie Housman, Asael Karfiol and Lior Lurye. The Companies
Law 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. In addition, as
described under Item 16, the audit committee is responsible for the approval of all audit
and non-audit services provided to the Company by Ernst and Young and to oversee the
qualifications, independence, appointment, compensation and performance of the
Companys independent auditors. The audit committee operates under a charter adopted
by our Board of Directors and which is on display on our website at
http://www.topimagesystems.com. An audit committee must consist of at least three
directors, including all of the external directors of the Company. Furthermore, as
required by the NASDAQ rules all the members of our audit committee to be independent.

Compensation
Committee

The
Compensation Committeeis comprised of Izhak Nakar, Lyron Bentovinan and Asi
Karfiol. The function of the compensation includes assisting the board of directors in
discharging its responsibilities relating to compensation of the Companys directors
and executives and the overall compensation programs. The primary objective of the
committee is to develop and implement compensation policies and plans that are appropriate
for the Company in light of all relevant circumstances and which provide incentives that
further the Companys long-term strategic plans and are consistent with the culture
of the Company and the overall goal of enhancing enduring shareholder value. The committee
operates under a charter adopted by our Board of Directors and which is on display on our
website at http://www.topimagesystems.com. However, notwithstanding the provisions
of the Compensation Committee Charter, the Board of Directors decided to require the
compensation committee to submit its recommendations to the Board of Directors, which
shall be solely authorized to approve the recommendations of the compensation committee.

# 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 Elie Housman, Lyron Bentovim , Lior Lurye and Asael Karfiol are each
independent directors for purposes of the NASDAQ rules.

- 44 -

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---

Israeli
law requires that a public company, such as TIS, have at least two external directors. The
two external directors of the Company are Lior Lurye and Asael Karfiol. 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. Our Board of Directors decided 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 Asael Karfiol 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 Lior Lurye possesses professional competence as required by the above
mentioned regulations.

# Employees

We
employed the following employees as of December 31, 2007 and 2008:

|Facility                   | No of Employees as of December 31,
|-------------------------- | ----------------------------------
|
|
|
|
|Israel                     |                                   
|Germany and rest of Europe |                                   
|Japan                      |                                   
|USA                        |                                   
|United Kingdom             |                                   
|Singapore and Hong Kong    |                                   
|                           |                                   
|Shanghai, China            |                                   
|Guangzhou, China           |                                   
|                           |                                   
|Total                      |                                   

We
have never experienced any strikes or work stoppages. Substantially all of our employees
have employment agreements and none are represented by a labor union.

We
are subject to labor laws and regulations in Israel and in other countries where our
employees are located. Although our Israeli employees are not parties to any collective
bargaining agreement, we are subject to certain provisions of collective bargaining
agreements that are applicable to our Israeli employees by virtue of expansion orders of
the Israeli Ministry of Industry, Commerce and Labor.   Israeli labor laws and
the laws of other countries where our employees are located may differ materially from
U.S. labor laws and, in some cases, impose material obligations on us (such as
requirements to pay overtime, minimum wages, procedures for dismissal, severance pay or
obligatory pensions and mandatory cost of living increases).

# Share Ownership

Board
of Directors, Senior Management and Certain Employees

Izhak
Nakar, the chairman of our Board of Directors beneficially owned 1,731,735 ordinary shares
representing 18.4% of the Companys issued and outstanding share capital, as of March
31, 2009. Lyron Bentovim, a director in the Company, beneficially owns 1,237,367 ordinary
shares representing 13.2% of the Companys issued and outstanding share capital, as
of March 31, 2009. Ido Schechter, our Chief Executive Officer, beneficially owned 620,281
ordinary shares representing 6.5% of the Companys issued and outstanding share
capital, as of March 31, 2009. All other directors and executive officers each
beneficially owned less than 1% of the Companys shares. In addition, the following
table sets forth information regarding options held by our directors and officers
currently exercisable or exercisable within 60 days as of March 31 2009. Ordinary shares
subject to these options are deemed to be outstanding for the purpose of computing the
ownership percentage of the person holding these options, but are not deemed to be
outstanding for the purpose of computing the ownership percentage of any other person.

- 45 -

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|Name                                | Ordinary Shares
Underlying
Options | Expiration
Dates | Exercise Prices
($/share)
|----------------------------------- | ---------------------------------- | ---------------- | -------------------------
|
|
|
|
|Izhak Nakar                         |                                    |                  |                          
|Ido Schechter                       |                                    |                  |                          
|5 directors and officers as a group |                                    |                  |                          

None
of the ordinary shares beneficially owned by any of the directors or executive officers of
the Company has any voting rights which are different than the voting rights held by all
other holders of ordinary shares.

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.

On
December 11, 2008, our Board of Directors approved a plan in which we offered our option
holders an opportunity to surrender their underwater vested options and be
issued with new options, each having an exercise price of $1.30 per share. The number of
the options which have been outstanding before the introduction of the plan was
approximately 1.5 million options with an average exercise price of $3.17 a share.

As
of March 31, 2009 we issued options to purchase up to 641 thousands of our shares in
replacement of 1,129 thousands options that have been surrendered to us. The reduction in
the number of options to be issued was based on a formula that takes into account our
share price as of January 1, 2009, the original option exercise price and the total number
of the options held by each option holder. The total value of the options held by each
option holder before and after the exchange of the options remained the same. Except for
the exercise price and the number of TIS shares, each new option has the same terms as the
original option and will expire on the expiration date of the original option. Below is
information with respect to our options 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. As of March 31, 2009, no options
were outstanding under the plan.

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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 March 31, 2009, options to
purchase an aggregate of 51,580shares were outstanding. Most of outstanding
options are exercisable and have exercise prices of $1.30 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. As of March 31, 2009, options to purchase an
aggregate of 684,743 ordinary shares were outstanding. Most of outstanding options are
exercisable at an exercise price of $1.30

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, 2008, no non-plan options are outstanding.

- 47 -

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

# Major Shareholders

The
following table sets forth certain information regarding the beneficial ownership of our
outstanding ordinary shares as of March 31, 2009 for each person who we know beneficially
owns five percent or more of the outstanding ordinary shares.

Beneficial
ownership of shares is determined under rules of the SEC (the Commission) and
generally includes any shares over which a person exercises sole or shared voting or
investment power. In addition, the following table includes the number of shares
underlying options or warrants that are currently exercisable or may be exercised in 60
days. Ordinary shares subject to these options are deemed to be outstanding for the
purpose of computing the ownership percentage of the person holding these options, but are
not deemed to be outstanding for the purpose of computing the ownership percentage of any
other person. Applicable percentages are based on 9,325,638 ordinary shares outstanding as
of March 31, 2009.

|Name                               | Number of Shares
Beneficially Owned | Percentage of Shares
|---------------------------------- | ----------------------------------- | --------------------
|
|
|
|
|Nir 4 You Technologies Ltd. (1)    |                                     |                     
|Izhak Nakar(1)(2)                  |                                     |                     
|Skiritai Capital LLC(3)            |                                     |                     
|Lyron L. Bentovim(3)               |                                     |                     
|Russell R. Silvestri(3)            |                                     |                     
|Ido Schechter(4)                   |                                     |                     
|Intana Capital Master Fund Ltd.(5) |                                     |                     
|Intana Management, LLC(5)(6)       |                                     |                     

| | (1) | The
information is based upon Schedule 13G filed with the Commission by Nir 4           You
Technologies Ltd., and Mr. Izhak Nakar on February 17, 2009.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Includes
1,562,735 ordinary shares held by Nir 4 You Technologies Ltd.
| | --- | ----------------------------------------------------------------------

| | (3) | The
information is based upon Amendment No. 2 to Schedule 13G filed with the           SEC by
Skiritai Capital LLC, Lyron Bentovim and Russell Silvestri. Skiritai           Capital
LLC is the general partner of Leonidas Opportunity Fund L.P., and           Leonidas
Opportunity Offshore Fund Ltd. Russell R. Silvestri and Lyron Bentovim           are the
two managing directors of Skiritai Capital LLC. The Amendment attributes
          ownership of 1,237,367 ordinary shares to Skiritai Capital LLC, Russell
          Silvestri and Lyron Bentovim.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | The
information is based upon Schedule 13G filed with the SEC by Dr. Ido           Schecher
on February 19, 2009.
| | --- | -----------------------------------------------------------------------------------------------------------------

| | (5) | The
information is based upon Amendment No. 2 to Schedule 13G filed with the           SEC by
Intana Management, LLC, and Intana Capital Master Fund Ltd., on February           5,
2009.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | Includes
873,401 ordinary shares held by Intana Capital Master Fund Ltd.
| | --- | ------------------------------------------------------------------------

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Significant
Changes in Percentage Holding

In
February 2009, Mr Izhak Nakar, our Chairman of the Board of Directors, and Dr. Ido
Schechter, our Chief Executive Officer completed the purchase of 1,687,810 ordinary shares
of TIS which were owned by Charterhouse Group International, one of our major
shareholders. Mr. Izhak Nakar purchased 1,282,735 shares, through Nir 4 You Technologies
Ltd., an investment company under his full control and Dr. Ido Schechter purchased 405,075
shares.

# Related Party
Transactions

According
to our agreement with Mr. Izhak Nakar, Mr. Nakar is being 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 the affairs of the Company. During 2008 we paid Mr. Nakar $180
thousands.

According
to our agreement with Dr. Ido Schechter, the Chief Executive Officer of the Company, Dr.
Schechter is entitled to base salary of $254 thousands (nominated in NIS) per year and to
automobile allowance, pension, retirement, severance, vacation or similar benefits. During
2008 Dr. Schechter was paid $292 thousand. Such amount included his base salary and $38
thousand paid or reserved for automobile allowance, pension, retirement, severance,
vacation or similar benefits. For a description of Dr. Schechters terms of severance
see Compensation.

Mr.
          Lyron Bentovim, a member of our Board of Directors is a managing director of
          Skiritai Capital LLC, a major shareholder of the Company. Mr. Bentovim is
          entitled to the payment payable to all of our non-employee directors.

From
time to time, as new members join our Board of Directors, they become parties to our
letter of indemnification to be given to our directors and officers. This letter was
approved by our shareholders at a shareholders meeting held on November 15, 2005. The
aggregate indemnification amount that the Company will pay to all its officers and
directors pursuant to these letters of indemnification shall not exceed $5,000,000.

|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.

|                             | 2008 | 2007 | 2006
|---------------------------- | ---- | ---- | ----
|
|
|
|
|Export Revenues              |      |      |     
|Export Revenues              |      |      |     
|                             |      |     
|Total Revenues               |      |      |     
|Percentage of Total Revenues |      |      |     
|                             |      |     
|Breakdown of Revenues        |      |     
|Product Revenues             |      |      |     
|Service Revenues             |      |      |     

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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.

We
obtained the status of Approved Enterprise under the Law for the Encouragement
of Capital Investments, 1959, under which we may take advantage of certain tax exemptions.
We may further obtain such status in the future. If we distribute a cash dividend from
income which is tax exempt, we would have to pay corporate tax at a rate of up to 25% on
the amount equal to the amount distributed and on the amount of corporate tax which would
have been due in the absence of the tax exemption, in addition to withholding tax on such
dividends paid. For further description of the conditions limiting our ability to declare
and pay dividends see Taxation.

The
distribution of dividends may also be limited by the Companies Law, which permits the
distribution of dividends only out of retained earnings or earnings derived over the two
most recent fiscal years, whichever is higher, provided that there is no reasonable
concern that payment of a dividend will prevent a company from satisfying its existing and
foreseeable obligations as they become due. Our articles of association provide that
dividends will be paid at the discretion of, and upon resolution by, our board of
directors however, the board of directors at its discretion, may transfer the decision in
this matter to the general meeting.

|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, 2008 |  |                      
|                  |  |                      
|                  |  |                      
|December 31, 2007 |  |                      
|                  |  |                      
|                  |  |                      
|December 31, 2006 |  |                      
|                  |  |                      
|                  |  |                      
|December 31, 2005 |  |                      
|                  |  |                      
|                  |  |                      
|December 31, 2004 |  |                      
|                  |  |                      

- 50 -

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---

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, 2008  |  |                      
|                   |  |                      
|                   |  |                      
|September 30, 2008 |  |                      
|                   |  |                      
|                   |  |                      
|June 30, 2008      |  |                      
|                   |  |                      
|                   |  |                      
|March 31, 2008     |  |                      
|                   |  |                      
|                   |  |                      
|December 31, 2007  |  |                      
|                   |  |                      
|                   |  |                      
|September 30, 2007 |  |                      
|                   |  |                      
|                   |  |                      
|June 30, 2007      |  |                      
|                   |  |                      
|                   |  |                      
|March 31, 2007     |  |                      
|                   |  |                      

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, 2009    |  |                      
|                  |  |                      
|                  |  |                      
|February 28, 2009 |  |                      
|                  |  |                      
|                  |  |                      
|January 31, 2009  |  |                      
|                  |  |                      
|                  |  |                      
|December 31, 2008 |  |                      
|                  |  |                      
|                  |  |                      
|November 30, 2008 |  |                      
|                  |  |                      
|                  |  |                      
|October 31, 2008  |  |                      
|                  |  |                      

- 51 -

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---

Our
ordinary shares have been dual-listed for trading on the Tel Aviv Stock Exchange (TASE)
since December 3, 2006. Since the date of listing in the TASE, 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.

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.

On
December 27, 2006, we completed a public offering of approximately 61,900 thousand NIS
(approximately $14,800thousands) 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 thousand (approximately $14,100 thousand).

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.

- 52 -

---

---

In March, 2008, our Board of
Directors has approved the payment of up to $2,500 thousand to repurchase some of our
outstanding Series A convertible debentures that the Company issued in December, 2006 on
the Tel Aviv Stock Exchange. These repurchases may be in open market transactions,
privately negotiated transactions or a combination of the two. As of March 31, 2009 we
repurchased a total of NIS 17,511 thousands par value ($ 4,605 thousands) convertible
debentures, for total consideration of $2,224 thousand .

|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, chief business manager, deputy chief executive officer, vice chief executive
officer, any person filling any of those roles in a company even if his title is different
and any other manager directly subordinate to the chief executive officer. An office
holders fiduciary duties consist of a duty of care and a duty of loyalty. The duty
of care includes avoiding negligent acts and acting skillfully as a reasonable office
holder would act. The duty of loyalty includes avoiding any conflict of interest between
the office holders position in the company and his personal affairs, avoiding any
competition with the company, avoiding exploiting any business opportunity of the company
in order to receive personal advantage for himself or others, and revealing to the company
any information or documents relating to the companys affairs which the office
holder has received due to his position as an office holder of the company.

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

In
the case of a transaction in which an office holder has a personal interest, that is not
an extraordinary transaction, as defined under Israeli law, and after the office holder
complies with the above disclosure requirement, only board approval is required. 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 our directors (whether regarding in their capacity as
directors or regarding the provision of other services) require audit committee, board of
directors and shareholder approval.

- 53 -

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External
Directors

Under
the Israeli Companies Law, public companies 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. 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.

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 law is three years (extendable for an
additional three year 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.

- 54 -

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---

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. Doron Cohen of Fahn Kanne Control Management Ltd., a member firm
of Grant Thornton International.

In
addition, under the Israeli Companies Law, all companies must appoint a certified public
accountant to audit the companys financial statements and to report to the chairman
of the board of directors any material improprieties that it may discover with respect to
the accounting control of the company. In our last shareholders meeting, on February 9,
2009, 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 the amendment of the law in
2005, the shareholders approved the indemnification letter currently in place with regard
to the Companys directors. See Major Shareholders and Related Party
Transactions  Related Party Transactions.

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.

- 55 -

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---

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, 2009

Rights,
Preferences, Restrictions of Shares

Our
authorized share capital consists of one class 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.

- 56 -

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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 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.

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.

- 57 -

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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;
| | - | ------------------------------------------------------

| |  | 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

Other
than as described below, 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:

| |  | On
April 11, 2007, we entered, together with our wholly-owned subsidiary, Top Image Systems
UK Limited, into an agreement with Roger and Edward Stocker the shareholders of Capture
Projects Limited., a UK company (CPL), for the purchase of 100% of the issued
and outstanding share capital of CPL. The purchase price paid for the CPL shares was up
to GBP2,700 thousand (approximately $5,200 thousand) of which GBP1,800 thousand
(approximately $3,520 thousand) were to be paid and the closing of the transactions
contemplated by the agreement and the remaining sums were to be paid based on the
financial results of 2007. The aggregate payment made in connection with the transaction
was $4,845 thousand which amount includes legal costs.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | In
June 12, 2007 Top Image Systems Ltd. entered into a Stock Purchase Agreement with Toh
Kian Hong and PC Holdings Pte. Ltd., a Singapore limited liability company for the
acquisition of 51% of the issued and outstanding share capital of Asiasoft Global Pte.
Ltd., a Singapore limited liability company. The consideration paid for the Asiasoft
shares consisted of up to $980 thousand in cash. $745 thousand of the cash consideration
was paid at the closing of the transaction contemplated by the agreement and the
remaining $245 thousand were held back against breaches of the sellers representations
and warranties and were to be paid 12 months after the closing. The agreement also
included the assumption of liabilities related to the acquisition of the minority
interest in Shanghai Asiasoft Ltd., a subsidiary of Asiasoft Systems China Limited, a
subsidiary of Asiasoft Global for approximately $600 thousand. The transactions closed in
July 2007. The aggregate amount paid in connection with that acquisition, including
transaction costs, was $2,700 thousand.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
connection with the foregoing acquisition Top Image Systems Ltd. Also entered into a Call
Option Agreement with Toh Kian Hong, dated June 12, 2007, for the purchase of the
remaining 49% of the issued and outstanding share capital of Asiasoft Global. The option
for the purchase of the remainder of the shares was exercisable for a purchase price of
$1,490 thousand which was to be paid in cash or, at the direction of TIS, in a
combination of cash and TIS stock. The call option agreement also provided that to the
extent payment is made in part in shares of TIS, the seller shall be granted piggybackregistration
rights with respect to such shares for a period of 18 months following the exercise of
the option, allowing the seller to register the TIS shares owned by him if TIS registers
any of its own securities for trade during such period. To the extent that no TIS shares
will be registered by TIS for trade during such period, the seller may, within 20 days
after termination of that 18 month period, demand registration his shares to the extent
that they may not by then be sold under rule 144 of the Securities Act of 1933.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On
January 4, 2009, Top Image Systems Ltd, and Toh Kian Hong entered into a Call Option
Amendment Agreement, amending the Call Option Agreement and providing that the aggregate
consideration payable for the remaining Asiasoft Global shares will be 400,000 TIS
shares. The TIS shares to be issued to Toh Kian Hong were subject to registration rights
substantially similar to those granted to Toh Kian Hong in the original Call Option
Agreement.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
connection with our acquisition of CPL and Asiasoft we paid our Chairman of the Board, Mr.
Izhak Nakar, in 2007 the sum of $300 thousand, as success bonus. Payment was approved by
our shareholders resolution, in a meeting held on December 20, 2007.

# Israeli Taxation,
Foreign Exchange Regulation and Investment Programs

The
following is a summary of the principal Israeli tax laws applicable to us, the Israeli
Government programs from which we benefit, and Israeli foreign exchange regulations. This
section also contains a discussion of material Israeli tax consequences to our
shareholders who are not residents or citizens of Israel. This summary does not discuss
all aspects of Israeli tax law that may be relevant to a particular investor in light of
his or her personal investment circumstances, or to some types of investors subject to
special treatment under Israeli law. Examples of investors subject to special treatment
under Israeli law include residents of Israel, traders in securities, or persons who own,
directly or indirectly, 10% or more of our outstanding voting capital, all of whom are
subject to special tax regimes not covered in this discussion. Some parts of this
discussion are based on new tax legislation that has not been subject to judicial or
administrative interpretation. The discussion should not be construed as legal or
professional tax advice and does not cover all possible tax consequences.

General
corporate tax structure in Israel

Israeli
companies were subject to corporate tax at the rate of 27% in 2008. Pursuant to tax
reform legislation that came into effect in 2005, the corporate tax rate is to undergo
further staged reductions to 25% by the year 2010. In order to implement these
reductions, the corporate tax rate is scheduled to decline to 26% in 2009 and 25% in
2010.

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However,
as discussed below, the rate is effectively reduced for income derived from our Approved
Enterprise and Privileged Enterprise plans.

As
of December 31, 2008, we had operating loss carry forwards for tax purposes in the amount
of $10,739 thousand. The amount of our carry forward operating losses will be offset
against taxable future income for an indefinite period.

As
of December 31, 2008 the foreign subsidiaries had operating loss carry forwards for tax
purposes in the amount of $13,159 thousand. A portion of such losses expires over a period
from 2008 through 2020, and some of them can be carried forward indefinitely.

Law
for the Encouragement of Capital Investments, 1959

Our
facilities in Israel have been granted Approved Enterprise status under the Law for the
Encouragement of Capital Investments, 1959, commonly referred to as the Investment
Law. The Investment Law provides that capital investments in a production facility
(or other eligible assets) may be designated as an Approved Enterprise. Until 2005, the
designation required advance approval from the Investment Center of the Israel Ministry
of Industry, Trade and Labor. Each certificate of approval for an Approved Enterprise
relates to a specific investment program, delineated both by the financial scope of the
investment and by the physical characteristics of the facility or the asset.

Under
the Approved Enterprise programs, a company is eligible for governmental grants, but may
elect to receive an alternative package comprised of tax benefits (Alternative Track).
Under the alternative package, a companys undistributed income derived from an
Approved Enterprise is exempt from corporate tax for an initial period (two to ten years,
depending on the geographic location of the Approved Enterprise within Israel). The
exemption begins in the first year that the company realizes taxable income from the
Approved Enterprise. 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.

After
expiration of the initial tax exemption period, the company is eligible for a reduced
corporate tax rate of 10% to 25% for the following five to eight years, depending on the
extent of foreign investment in the company (as shown in the table below). The benefits
period under Approved Enterprise status is limited to 12 years from completion of the
investment or commencement of production, or 14 years from the date of the approval,
whichever is earlier.

On
April 1, 2005, an amendment to the Investment Law came into effect. The amendment revised
the criteria for investments qualified to receive tax benefits. An eligible investment
program under the amendment will qualify for benefits as a Privileged Enterprise (rather
than the previous terminology of Approved Enterprise). Among other things, the amendment
provides tax benefits to both local and foreign investors and simplifies the approval
process. The period of tax benefits for a new Privileged Enterprise commences in the
Year of Commencement. This year is the later of (1) the year in which taxable
income is first generated by a company, or (2) a year selected by the company for
commencement, on the condition that the company meets certain provisions provided by the
Investment Law (Year of Election). The amendment does not apply to investment programs
approved prior to December 31, 2004. The new tax regime applies to new investment
programs only.

The
tax benefits available under Approved Enterprise or Privileged Enterprise relate only to
taxable income attributable to the specific Approved Enterprise or Privileged Enterprise,
and our effective tax rate will be the result of a weighted combination of the applicable
rates.

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|Percent of
Foreign Ownership | Rate of
Reduced Tax | Reduced Tax Period | Tax Exemption Period
|---------------------------- | ------------------- | ------------------ | --------------------
|
|
|
|
|0-25%                        | 25%                 | 5 years            | 2 years             
|25-49%                       | 25%                 | 8 years            | 2 years             
|49-74%                       | 20%                 | 8 years            | 2 years             
|74-90%                       | 15%                 | 8 years            | 2 years             
|90-100%                      | 10%                 | 8 years            | 2 years             

The
Company received approvals for an initial program and three expansions during the years
1990, 1991, 1999 and 2000, of which the first two programs have already expired. The
period of benefits for the third and forth expansions have not yet commenced.

The
benefits available to an Approved Enterprise are conditioned upon terms stipulated in the
Investment Law and the related regulations and the criteria set forth in the applicable
certificate of approval (for an Approved Enterprise). If we do not fulfill these
conditions, in whole or in part, the benefits can be cancelled and we may be required to
refund the amount of the benefits, linked to the Israeli consumer price index plus
interest. We believe that our Approved Enterprise and Privileged Enterprise programs
currently operate in compliance with all applicable conditions and criteria, but we
cannot assure you that they will continue to do so.

If
a company requested the alternative package of benefits for an Approved Enterprise under
the old law before the 2005 amendment, it was precluded from filing a Year of Election
notice for a Privileged Enterprise for three years after the year in which the Approved
Enterprise was activated (the Cooling Period). In November 2008, the law was
amended to shorten the Cooling Period to two years. Following the amendment, the Year of
Election for our first Privileged Enterprise is 2006.

If
a company distributes dividends from tax-exempt income, the company will be taxed on the
otherwise exempt income at the same reduced corporate tax rate that would have applied to
that income. Distribution of dividends derived from income that was taxed at reduced
rates, but not tax-exempt, does not result in additional tax consequences to the company.
Shareholders who receive dividends derived from Approved Enterprise or Privileged
Enterprise income are generally taxed at a rate of 15%, which is withheld and paid by the
company paying the dividend, if the dividend is distributed during the benefits period or
within the following 12 years (the limitation does not apply to a Foreign Investors
Company, which is a company that more than 25% of its shares owned by non-Israeli
residents).

The
amendment to the Investment Law treats the repurchase of shares out of Privileged
Enterprise tax exempt income as deemed dividend.

As
a result of the 2005 amendment, tax-exempt income attributed to Privileged Enterprise will
subject us to taxes also upon complete liquidation.

Law
for the Encouragement of Industry (Taxes), 1969

We
believe that we currently qualify as an Industrial Company within the meaning of the Law
for the Encouragement of Industry (Taxes), 1969 (the Industrial Encouragement Law).
The Industrial Encouragement Law defines an Industrial Company as a company
that is resident in Israel and that derives at least 90% of its income in any tax year,
other than income from defense loans, capital gains, interest and dividends, from an
enterprise whose major activity in a given tax year is industrial production.

The
following are the principal corporate tax benefits that are available to an Industrial
Company:

| | n | Amortization
of the cost of purchased know-how and patents over an eight-year period for tax purposes.
| | - | ------------------------------------------------------------------------------------------------------

| | n | Accelerated
depreciation rates on equipment and buildings.
| | - | ----------------------------------------------------------

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| | n | Under
specified conditions, an election to file consolidated tax returns with related Israeli
Industrial Companies.
| | - | -------------------------------------------------------------------------------------------------------------------

| | n | Expenses
related to a public offering are deductible in equal amounts over three years.
| | - | ---------------------------------------------------------------------------------------

Eligibility
for the benefits under the Industry Encouragement Law is not subject to receipt of prior
approval from any governmental authority. We cannot assure you that we qualify or will
continue to qualify as an Industrial Company or that the benefits described above will be
available in the future.

Foreign
Exchange Regulations

An
Israeli company calculates its tax liability in US dollars according to certain orders.
The tax liability, as calculated in US dollars is translated into NIS according to the
exchange rate as of December 31st of each year.

Dividends,
if any, paid to the holders of our ordinary shares, and any amounts payable upon our
dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of
our ordinary shares to an Israeli resident, may be paid in non-Israeli currency. If these
amounts are paid in Israeli currency, they may be converted into freely repatriable U.S.
dollars at the rate of exchange prevailing at the time of conversion. In addition, the
statutory framework for the potential imposition of exchange controls has not been
eliminated, and may be restored at any time by administrative action.

Taxation
of Non-Israeli Shareholders on Receipt of Dividends

Under
Israeli tax law, a distribution of dividends from income attributable to an Approved
Enterprise or Privileged Enterprise will be subject to tax in Israel at the rate of 15%,
which is withheld and paid by the company paying the dividend, if the dividend is
distributed during the benefits period or within the following 12 years (this limitation
does not apply to a Foreign Investors Company). Any distribution of dividends from income
that is not attributable to an Approved Enterprise or Privileged Enterprise will be
subject to tax in Israel at the rate of 25%, except that dividends distributed to an
individual who is deemed a non-substantial shareholder will be subject to tax
at the rate of 20%.

Under
the United States-Israel tax treaty, the maximum tax on dividends paid to a holder of
ordinary shares who is a United States resident is 25%. Dividends received by a United
States company that holds at least 10% of our voting rights, will be subject to
withholding tax at the rate of 12.5%, provided that certain other conditions in the tax
treaty are met (or at the tax rate of 15% in respect of dividends paid from income
attributable to our Approved Enterprises or Privileged Enterprise). Dividends distributed
to other foreign shareholders may be subject to different withholding tax rates based on
the applicable tax treaty.

Capital
Gains Taxes Applicable to Non-Israeli Shareholders

Capital
gains from the sale of our ordinary shares by non-Israeli shareholders are exempt from
Israeli taxation under the Israeli domestic tax law, provided that the capital gain is
not derived from a permanent establishment in Israel. In addition, the United
States-Israel tax treaty exempts United States residents who hold less than 10% of our
voting rights, and who held less than 10% of our voting rights during the 12 months prior
to a sale of their shares, from Israeli capital gains tax in connection with such sale.

Singapore
tax

As a result of change of control at
Asiasoft Singapore the carry forward 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 carry forwards 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.

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

| |  | 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.

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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.

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, and may further be impacted by the
provisions of the           Treaty. 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.

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Taxation
of the Disposition of Ordinary Shares

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

Tax
Consequences if the Company is a Passive Foreign Investment Company

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.

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

The
Company believes that it was not a PFIC in 2008. 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 generally 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.

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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.

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 furnish 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 did
however, purchase and we currently hold auction rate preferred securities. For information
regarding our auction rate preferred securities, see Operating and Financial Review
and Prospects  Liquidity and Capital Resources.

In
addition, our financial expenses are materially affected by fluctuations in fair value of
our convertible debentures. As a result of the adoption of SFAS No. 159 the entire
instrument is marked to market at every reporting period, and any change in the market
price of our convertible debentures, as quoted in TASE, affects our financial income
(expenses). As a result of applying SFAS No. 159 we have recorded financial income in the
amount of $4,784 for the year ended December 31, 2008.

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, British Pound,
Singapore 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.

- 67 -

---

---

# 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 our interim Chief Financial Officer, the effectiveness of our disclosure
          controls and procedures as of December 31, 2008. Based on this evaluation, our
          Chief Executive Officer and our Interim 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 our Interim Chief
          Financial Officer, as appropriate to allow timely decisions regarding required
          disclosure.

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

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, 2008 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, 2008 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, 2008, 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  Elie Housman, a member of our audit
committee, is an audit committee financial expert and is independent pursuant to the rules
of the NASDAQ Stock Market. Mr. Housman is an independent director as defined Nasdaq Rule
4200(15).

- 68 -

---

---

|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

Since
2003 we have been engaging the services of Kost Forer Gabbay and Kasierer, an independent
registered accounting firm (a member of Ernst & Young Global) (EY) to
audit our financial statements. Our subsidiary,Top Image Systems (Asia Pacific)
Pte. Ltd is 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,
2008 and 2007 were $115,000 and $136,000, respectively.

# Tax Fees

For
the fiscal years ended December 31, 2008 and 2007 the aggregate fees billed for tax
compliance, tax advice and tax planning by EY were $15,000 and $30,000, respectively.

# Non-Audit services

For
the fiscal year ended December 31, 2008 no fees were paid to EY for non-audit services.
For the fiscal year ended December 31, 2007 the aggregate fees billed by EY for other
non-audit professional services, other than those services listed above, were $35,000.
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.

- 69 -

---

---

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

Not applicable.

|ITEM 16F. |  | CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANTS
|--------- |  | ---------------------------------------------

Not applicable.

|ITEM 16G. |  | CORPORATE GOVERNANCE
|--------- |  | --------------------

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

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

- 70 -

---

---

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

|4.7 |  | Value-Added
Reseller Agreement for ODT Document Technologies Products between the Company and Océ Document
Technologies dated August 2, 2001 (incorporated by reference to exhibit 3.39 to the
Companys annual report on Form 20-F for the fiscal year ended December 31, 2001).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.8 |  | 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 (incorporated by
reference as Exhibit 4.13 to the Companys annual report on Form 20-F for the year
ended December 31, 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 June 12, 2007
(incorporated by reference as Exhibit                      4.14 to the Company's annual
report on Form 20-F for the year ended December 31, 2007).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.15 |  | Sale
and Purchase of Asiasoft Solutions (GZ) Limited, between Tai Kin Chung and Asiasoft
Global                      Pte. Ltd., dated as of June 12, 2007 (incorporated by
reference as Exhibit 4.15 to the                      Company's annual report on Form
20-F for the year ended December 31, 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(incorporated by reference as Exhibit                      4.16 to the Company's
annual report on Form 20-F for the year ended December 31, 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
(incorporated by reference as Exhibit                      4.17 to the Company's annual
report on Form 20-F for the year ended December 31, 2007).
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.18 |  | Call
Option Amendment Agreement dated January 4, 2009 by and among Mr. Toh Kian Hong and Top
                     Image Systems Ltd.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------

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

- 71 -

---

---

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

|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 Financial Statements of Top Image Systems (Asia
                     Pacific) Pte. Ltd. as of December 31, 2008, and Consent of KPMG
(incorporated by reference as                      Exhibit 15.3 to the Company's annual
report for the year ended December 31, 2008.)
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 72 -

---

---

# 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 Schechter Chief Executive Officer
| |  | ------------------------------------------------------------------------------------------------

Date: April 26, 2009



---

---

TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008
U.S. DOLLARS IN THOUSANDS

INDEX

|                                                          | Page           
|--------------------------------------------------------- | ---------------
|
|
|
|
|Reports of Independent Registered Public Accounting Firms | F - 2 - F - 3  
|Consolidated Balance Sheets                               | F - 4 - F - 5  
|Consolidated Statements of Operations                     | F - 6          
|Statements of Changes in Shareholders' Equity             | F - 7          
|Consolidated Statements of Cash Flows                     | F - 8 - F - 9  
|Notes to Consolidated Financial Statements                | F - 10 - F - 42



---

---

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, 2007 and 2008, 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, 2008. 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 Top Image Systems (Asia Pacific) Pte. Ltd.
(ASG, formerly known as Asiasoft Global Pte. Ltd.), whose assets constitute
approximately 11% and 8% of total consolidated assets as of December 31, 2007 and
2008, respectively, and whose revenues constitute approximately 22% and 25% of total
consolidated revenues for the six months ended December 31, 2007 and for the year ended
December 31, 2008, respectively. The financial statements of those companies were audited
by other auditors, whose report has been furnished to us, and our opinion, insofar as it
relates to amounts included for those companies, is based on the reports 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 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, 2007 and 2008,
and the related consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2008, in conformity with U.S. generally
accepted accounting principles.

As
discussed in Note 2 to the consolidated financial statements, the Company has adopted the
provisions of Statement of Financial Accounting Standards No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities, as of January 1, 2008.

|                 |                                 
|---------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|April 26, 2009   | A Member of Ernst & Young Global

F - 2

---

---

# Report of Independent
Registered Public Accounting Firm

The Board of Directors
and Shareholders

Top Image Systems (Asia Pacific) Pte. Ltd. (formerly known as Asiasoft Global Pte Ltd)

We have audited the accompanying
consolidated balance sheets of Top Image Systems (Asia Pacific) Pte. Ltd. (the
Company, formerly known as Asiasoft Global Pte Ltd) and its subsidiaries as of
December 31, 2008 and December 31, 2007, and the related consolidated statements of
operations, changes in shareholders equity, and cash flows for the year ended
December 31, 2008 and the six months ended December 31, 2007. These financial statements
are the responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our 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, 2008
and December 31, 2007, and the consolidated results of their operations and the changes in
shareholders equity and cash flows for the year ended December 31, 2008 and the six
months ended December 31, 2007, in conformity with U.S. generally accepted accounting
principles.

KPMG LLP
Singapore

April 21, 2009

F - 3

---

---

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

|                                                                                | December 31,
|------------------------------------------------------------------------------- | ------------
|
|
|
|
|ASSETS                                                                          |             
|                                                                                |             
|CURRENT ASSETS:                                                                 |             
|Cash and cash equivalents                                                       |             
|Restricted cash (Note 12d)                                                      |             
|Short-term deposits                                                             |             
|Marketable securities (Note 3)                                                  |             
|Trade receivables (net of allowance for doubtful accounts of $ 790 and $ 719 at |             
|December 31, 2007 and 2008, respectively)                                       |             
|Other accounts receivable and prepaid expenses (Note 5)                         |             
|                                                                                |             
|                                                                                |             
|Total current assets                                                            |             
|                                                                                |             
|                                                                                |             
|LONG-TERM ASSETS:                                                               |             
|Severance pay fund                                                              |             
|Long-term deposits and long-term assets                                         |             
|Property and equipment, net (Note 6)                                            |             
|Investments in affiliates                                                       |             
|Intangible assets and deferred finance costs, net (Note 7)                      |             
|Goodwill (Note 8)                                                               |             
|                                                                                |             
|                                                                                |             
|Total long-term assets                                                          |             
|                                                                                |             
|                                                                                |             
|Total assets                                                                    |             
|                                                                                |             

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

F - 4

---

---

|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 9)                                             |             
|Current maturity of convertible debentures (Note 11)                       |             
|Trade payables                                                             |             
|Deferred revenues                                                          |             
|Accrued expenses and other accounts payable (Note 10)                      |             
|                                                                           |             
|                                                                           |             
|Total current liabilities                                                  |             
|                                                                           |             
|                                                                           |             
|LONG-TERM LIABILITIES:                                                     |             
|Convertible debentures (Note 11)                                           |             
|Embedded derivative of convertible debentures  (Note 11)                   |             
|Accrued severance pay                                                      |             
|                                                                           |             
|                                                                           |             
|Total long-term liabilities                                                |             
|                                                                           |             
|                                                                           |             
|COMMITMENTS, CONTINGENCIES AND CHARGES (Note 12)                           |             
|                                                                           |             
|SHAREHOLDERS' EQUITY (Note 14):                                            |             
|Share capital -                                                            |             
|Ordinary shares of NIS 0.04 par value -                                    |             
|Authorized: 125,000,000 shares at December 31, 2007 and 2008; Issued and   |             
|outstanding: 8,909,138 and 8,925,638 shares at December 31, 2007 and 2008, |             
|respectively                                                               |             
|Additional paid-in capital                                                 |             
|Accumulated other comprehensive income (loss)                              |             
|Accumulated deficit                                                        |             
|                                                                           |             
|                                                                           |             
|Total shareholders' equity                                                 |             
|                                                                           |             
|                                                                           |             
|Total liabilities and shareholders' equity                                 |             
|                                                                           |             

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

F - 5

---

---

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

|                                                                  | Year ended December 31,
|----------------------------------------------------------------- | -----------------------
|
|
|
|
|Revenues (Note 15):                                               |                        
|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 18)                                   |                        
|Impairment of goodwill and other intangible assets                |                        
|                                                                  |                        
|                                                                  |                        
|Total operating costs and expenses                                |                        
|                                                                  |                        
|                                                                  |                        
|Operating income (loss)                                           |                        
|Financial income, net (Note 17)                                   |                        
|Other income, net                                                 |                        
|                                                                  |                        
|                                                                  |                        
|Income (loss) from continuing operations before taxes on income   |                        
|                                                                  |                        
|Taxes on income                                                   |                        
|                                                                  |                        
|                                                                  |                        
|Income (loss) from continuing operation after taxes on income     |                        
|                                                                  |                        
|Equity in profits of affiliated companies                         |                        
|                                                                  |                        
|                                                                  |                        
|Net income (loss) from continuing operations                      |                        
|                                                                  |                        
|Loss from discontinued operations, net of tax (Note 20)           |                        
|                                                                  |                        
|                                                                  |                        
|Net income (loss)                                                 |                        
|                                                                  |                        
|                                                                  |                        
|Earnings (loss) per share (Note 16):                              |                        
|Basic and diluted net earnings (loss) per share from continuing   |                        
|operations                                                        |                        
|Basic and diluted net loss per share from discontinued operations |                        
|                                                                  |                        
|                                                                  |                        
|                                                                  |                        
|                                                                  |                        
|                                                                  |                        

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

F - 6

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES      
|-------------------------------------------------
|                                                 
|STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY    
|                                                 
|U.S. dollars in thousands (except per share data)

|                                | Ordinary shares | Additional
paid-in
capital | Accumulated
other
comprehensive
income
(loss) | Accumulated
deficit | Comprehensive
income
(loss) | Total
|------------------------------- | --------------- | -------------------------- | --------------------------------------------- | ------------------- | --------------------------- | -----
|
|
|
|
|Balance at January 1, 2006      |                 |                            |                                               | 8,777,366           |                             | $    
|                                |                 |                           
|Net income                      |                 |                            |                                               | -                   |                             |      
|                                |                 |                            |                                               |                     |                             |      
|                                |                 |                           
|Comprehensive income            |                 |                            |                                               | -                   |                             |      
|                                |                 |                            |                                               |                     |                             |      
|Exercise of stock options       |                 |                            |                                               | 67,875              |                             |      
|Equity-based compensation       |                 |                           
|expenses resulting from         |                 |                           
|SFAS 123(R)                     |                 |                            |                                               | -                   |                             |      
|                                |                 |                            |                                               |                     |                             |      
|                                |                 |                           
|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              |                             |      
|Equity-based compensation       |                 |                           
|expenses resulting from         |                 |                           
|SFAS 123(R)                     |                 |                            |                                               | -                   |                             |      
|                                |                 |                            |                                               |                     |                             |      
|                                |                 |                           
|Balance at December 31, 2007    |                 |                            |                                               | 8,909,138           |                             |      
|                                |                 |                           
|Net adjustments on adoption of  |                 |                           
|FAS 159 (Note 11)               |                 |                            |                                               | -                   |                             |      
|Net unrealized loss on foreign  |                 |                           
|currency translation adjustment |                 |                            |                                               | -                   |                             |      
|Net income                      |                 |                            |                                               | -                   |                             |      
|                                |                 |                            |                                               |                     |                             |      
|                                |                 |                           
|Comprehensive loss              |                 |                            |                                               |                     |                             |      
|                                |                 |                            |                                               |                     |                             |      
|Exercise of stock options       |                 |                            |                                               | 16,500              |                             |      
|                                |                 |                           
|Equity-based compensation       |                 |                           
|expenses resulting from         |                 |                           
|SFAS 123(R)                     |                 |                            |                                               | -                   |                             |      
|                                |                 |                            |                                               |                     |                             |      
|                                |                 |                           
|Balance at December 31, 2008    |                 |                            |                                               | 8,925,638           |                             | $    
|                                |                 |                            |                                               |                     |                             |      

*)    
          Represents an amount lower than $ 1.

The accompanying notes 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,
|------------------------------------------------------------------ | -----------------------
|
|
|
|
|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                         |                        
|Depreciation and amortization                                      |                        
|Amortization of deferred issuance costs                            |                        
|Impairment of goodwill and other intangible assets                 |                        
|Write-off of long-term assets                                      |                        
|Accrued severance pay, net                                         |                        
|Equity in profit of affiliated companies                           |                        
|Gain from sale of marketable securities, net                       |                        
|Interest and accretion of discount on convertible debentures       |                        
|Loss from other-than-temporary impairment on marketable            |                        
|securities                                                         |                        
|Decrease (increase) in trade receivables, net                      |                        
|Decrease in fair value of embedded derivative of convertible       |                        
|debentures                                                         |                        
|Decrease in fair value of convertible debentures                   |                        
|Decrease (increase) in other accounts receivable and prepaid       |                        
|expenses                                                           |                        
|Decrease in trade payables                                         |                        
|Increase (decrease) 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)                               |                        
|Investment in restricted cash                                      |                        
|Increase in investment in CPL                                      |                        
|Payment of accrued expenses on account of acquisitions             |                        
|Purchase of property and equipment                                 |                        
|Proceeds from sale of marketable securities                        |                        
|Decrease (increase) in short term deposits                         |                        
|Purchase of marketable securities                                  |                        
|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 for convertible debenture repurchase                       |                        
|Payment of accrued issuance expenses                               |                        
|                                                                   |                        
|Net cash provided by financing activities                          |                        
|                                                                   |                        
|Effect of exchange rate on cash and cash equivalent                |                        
|                                                                   |                        
|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 are an integral
part of the consolidated financial statements.

F - 8

---

---

|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           |                        
|                                                             |                        
|Net adjustments on adoption of FAS 159 (Note 2l)             |                        
|                                                             |                        
|                                                             |                        
|(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 are an
integral part of the consolidated financial statements.

F - 9

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED 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
Capital Market (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 15b.
| | ----------------------------------------------------------------------------------

| | b. | The
Companys main marketing and sales activities are conducted through           its
subsidiaries in the United States, the United Kingdom, Germany, Japan,
          Singapore and China.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 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           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 7 for expected amortization expenses.
| | ----------------------------------------------

| | 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 expand 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      | 
| |                           | 

F - 10

---

---

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

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

| | 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 the statement of operations
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,                | 
| | Customer relations                     | 
| | Brand name and domain name             | 
| | Goodwill                               | 
| |                                        | 
|
| | Total purchase price                   | 
| |                                        | 

| | See
Note 7 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 |        |                               
| |                            |        |                               
| |                            |        |                               
| |                            |        |                               
| |                            |        |                               

| | As
of December 31, 2008, the net amount of customer relations intangible assets was impaired
to $ 136. The brand name intangible asset was impaired in full. As a result, a total
impairment loss in the amount of $ 423 was recorded.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Goodwill
in the amount 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
August 2007, CPL changed its name to Top Image Systems (2007) UK Ltd.
| | ------------------------------------------------------------------------

| | 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 is to be paid on or before December 31,
          2007 and $ 245 upon the conclusion of a 12 month period commencing 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. On January
          4, 2009, the Company signed an amendment agreement with the minority
shareholder           in ASG and acquired the remaining 49% of ASG for 400,000 TIS shares
(see Note           21b)
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---

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

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

| | 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 expand 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 (1) | 
| |                                                                        | 
| |                                                                        | 
| | Net purchase consideration                                             | 
| |                                                                        | 

| | (1) | As
of December 31, 2008 the option was written-off in full against financial
          expenses.
| | --- | ------------------------------------------------------------------------------------------------

| | 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 7 and Note 8 for expected amortization expenses and changes in Goodwill.
| | ---------------------------------------------------------------------------------

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

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

F - 12

---

---

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

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

| | As
of December 31, 2008, the net amount of ASGs customer relations intangible asset
was impaired in full and as a result, impairment loss in the amount of $ 74 was recorded.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. As of December 31, 2008, the goodwill was
impaired to $ 1,567, and as a result, impairment loss in the amount of $ 1,342 was
recorded.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
August 2008, all operative companies of ASG changed their names to Top Image Systemsbrand
name, therefore Asiasoft Global Pte. Ltd. is called Top Image Systems (Asia Pacific) Pte
Ltd.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 loss for each period
presented includes amortization of intangible assets related to the acquisitions of $ 174
and $ 88 for 2006 and 2007, respectively. The unaudited pro forma information is as
follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | f. | Discontinued
Operations:
| | -- | ------------------------

| | In
December 2008, the Company decided to shut down and terminate its facilities and the
business activities in Southern China of Guangzhou (TIS GZ). Pursuant to this
decision, the Company stopped market and deploys capture solutions development projects
in one Southern China region, and therefore, terminated all the employment contracts of
Guangzhou team and closed its facilities. The results of operations of this business for
each of the two years ended December 31, 2007 and 2008 are reflected in statements of
operations in the line item called Loss from discontinued operations, net of tax.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has accounted for discontinued operations, in accordance with Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets (SFAS No. 144). As such, the results of
operations, including revenues, cost of revenues, operating expenses, and other income
and expenses related to the prior periods of the discontinued operation, have been
reclassified in the accompanying statements of operations as discontinued operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
disposal of the TIS GZ business meets the criteria of discontinued operations under EITF
03-13, Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in
Determining Whether to Report Discontinued Operations, because, among other things,
no significant cash outflow or cash inflow are expected to be generated or paid by the
Company in respect of the discontinued operation and the Company will not have
significant continuing involvement in the operations of the TIS GZ business after its
closure (see also Note 20).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

|TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED 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 statement 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 are presented at cost, including accrued interest. The deposits are
in Euro and bear interest at an annual rate of 2.25% for the year ended December 31, 2008.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

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

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

| | f. | Doubtful
accounts
| | -- | -----------------

| | The
Company maintains an allowance for doubtful accounts for estimated losses inherent in its
accounts receivable portfolio. In establishing the required allowance, management bases
its determination, among other factors, on information available about the debtorsfinancial
situation, the volume of their operations and evaluation of the security received from
them. Account balances are charged against the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | FASB
Staff Position (FSP) No. 115-1, The Meaning of Other-Than- Temporary
Impairment and Its Application to Certain Investments (FSP 115-1)
provides guidance for determining when an investment is considered impaired, whether
impairment is other-than-temporary, and measurement of an impairment loss. An investment
is considered impaired if the fair value of the investment is less than its cost. The
Company considers various factors to determine whether to recognize an impairment charge,
including the Companys intent and ability to hold the investment for a period of
time sufficient to allow for any anticipated recovery in market value, the length of time
and extent to which the fair value has been less than the cost basis, the credit ratings
of the securities and the financial condition and near-term prospects of the issuers. If,
after consideration of all available evidence to evaluate the realizable value of its
marketable securities, impairment is determined to be other-than-temporary, then an
impairment loss should be recognized equal to the difference between the marketable
securitiescarrying amount and its fair value. For the year ended December 31, 2008,
the Company recorded an other-than-temporary impairment loss in the amount of $ 420 as
financial expenses (See also Note 3).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | Long-term
assets:
| | -- | -----------------

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

| | i. | 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 - 15

---

---

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

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

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

| | The
Companys long-lived assets are reviewed for impairment in accordance with 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, 2008, 2007 and 2006 no
impairment losses have been identified for property and equipment.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Intangible
assets are comprised of acquired technology, customer relations, brand name, domain name
and deferred finance costs. Definite-lived intangible assets are amortized using the
straight-line method over their estimated useful life. Acquired technology, customer
relations, brand name and domain name are amortized on a straight-line basis 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 (see also note 2l below).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2007 and 2006, no impairment losses were identified. During 2008, the Company recorded an
impairment loss for intangible assets assigned to ASG and CPL acquisitions in the amount
of $ 497.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | k. | 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 Company
operates in one operating segment, and this segment comprises two reporting units, the
ASG and the rest of the Group (all companies in the Group except for ASG).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, or more frequently if
impairment indicators are present. During 2006 and 2007, no impairment losses were
identified. In 2008, the Company recorded an impairment loss for goodwill assigned to ASG
in the amount of $ 1,342.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

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

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

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

| | The
Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 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 159, a net unrealized loss of $ 58 was recorded as adjustment to the
accumulated deficit on January 1, 2008:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                | Historical
cost as
December 31,
2007 | Fair value
at date of
adoption | Cumulative
effect
adjustment
| | ---------------------------------------------- | ------------------------------------ | ------------------------------ | ----------------------------
|
|
|
|
| | Convertible debentures, including discount net |                                      |                                |                             
| | of accumulated amortization                    |                                      |                                | $                           
| | Embedded derivative of convertible debentures  |                                      |                                |                             
| | Deferred issuance costs, net of accumulated    |                                      |                               
| | amortization                                   |                                      |                                |                             
| |                                                |                                      |                                |                             
| |                                                |                                      |                               
| | Total cumulative effect adjustment             |                                      |                               
| | reclassified to accumulated deficit            |                                      |                                | $                           
| |                                                |                                      |                                |                             

| | Prior
to the adoption of SFAS 159, the Company accounted for convertible debt 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 to the U.S. dollar with a floor on the NIS/ U.S. dollar exchange
rate (see also Note 11), 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. Prior to the adoption of
SFAS 159, the fair value assigned to the embedded derivative instrument was marked to
market in each reporting period and was included in long-term liabilities on the balance
sheet. During 2007, the Company recorded financial income in the amount of $ 3,439
related to these debt features.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | m. | 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 in
                     and  earnings  or losses of  affiliates  that it does not  control  but over which it
                     exerts significant influence.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

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

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

| | The
Company  uses the cost method of  accounting  for its  investments  in  investees
                     over  which it does not  exert  significant  influence.  Under  the
 cost  method  of                      accounting,   investments   are   carried   at
 cost  and  are  only   adjusted   for                      other-than-temporary declines
in fair value and distributions of earnings.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 FSP 115-1. During 2007 and 2008, based on managements assessment,
no impairment losses have been identified.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 or 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 - 18

---

---

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

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

| | Revenues
from contracts requiring significant design, development, modification and customization
are recognized using the percentage of completion method, which is in accordance with SOP
81-1, Accounting for Performance of Construction-Type and Certain Production Type
Contracts. The percentage of completion is determined as a ratio of the extent of
the progress toward completion of the contract, using an input measure method of labor
hours performed. In the event that management anticipates a loss on a particular
contract, such anticipated loss is provided for in full in the period when the loss is
first anticipated. As of December 31, 2008, 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company and its subsidiaries generally do not grant a right of return to their customers.
| | ---------------------------------------------------------------------------------------------

| | 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 from the government of Israel during the
years 2002 through 2008.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the six months ended December 31, 2007 and during the year ended December 31, 2008 the
Company recognized $ 57 and $ 19, respectively, 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 in research and
development costs since, when received, it is not probable that the grants will be repaid.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company records grant income as a reduction in the research and development expenses that
the grants are intended to reimburse.
| | -----------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

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

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

| | q. | Accounting
for share-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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, 2007 and 2008, 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 (that carry no
market or performance conditions), 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 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 pay
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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

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

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

| | The
fair value of the Companys stock options granted to employees and directors was
estimated 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                   

| | During
the years ended December 31, 2006, 2007 and 2008, the Company recognized share-based
compensation expense related to employee stock options in the amount of $ 243, $ 883
and $ 89 respectively, as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | Basic
net earnings (loss) per share are computed based on the weighted average number of
Ordinary shares outstanding during each year. Diluted net earnings (loss) per share are
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 has been excluded from the calculation of the diluted
net earnings (loss) per share because such securities are anti-dilutive for 2006, 2007
and 2008. The weighted average number of shares related to the outstanding options and
convertible debentures excluded from the calculations of diluted net earnings (loss) per
share was, 1,408,999, 3,066,502 and 2,765,900 for the years ended December 31, 2006, 2007
and 2008, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 21

---

---

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

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

| | 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. Prior to the issuance of FIN 48,
the Company used the guidelines of FAS 5 to account for uncertain tax positions. The
adoption of FIN 48 did not have a material impact on the Companys consolidated
Financial Statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, low credit risk exists with respect to these investments.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys marketable securities include investments in auction rate securities
guaranteed by the U.S. government. See also Note 3.
| | --------------------------------------------------------------------------------------------------------------------------------------

| | Trade
receivables of the Company and its subsidiaries are derived from sales to customers
located primarily in the U.S., Europe, Japan, and the Far East. 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, 2006, 2007 and 2008, the Company recorded
expenses for doubtful accounts in the amounts of $ 436, $ 872 and $ 5,
respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

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

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

| | 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, 2006, 2007 and 2008 amounted to approximately $ 266,
$ 297 and $ 384, 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 (see also Notes 3
and 4).
| | -----------------------------------------------------------------------------------------------------

| | Effective
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements(SFAS
No. 157) and, effective October 10, 2008, adopted FASB Staff Position (FSP)
No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That
Asset Is Not Active (FSP 157-3), except as it applies to the
nonfinancial assets and liabilities subject to FSP No. 157-2, Effective Date of
FASB Statement No. 157 (FSP 157-2). SFAS No. 157 clarifies that fair
value is an exit price, representing the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants. As
such, fair value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or a liability.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

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

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

| | As
a basis for considering such assumptions, SFAS No. 157 establishes a three-tier value
hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring
fair value:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Level
1  Observable inputs that reflect quoted prices (unadjusted) for identical assets
or liabilities in active markets.
| | --------------------------------------------------------------------------------------------------------------------------

| | Level
2  Valuations based on one or more quoted prices in markets that are not active or
for which all significant inputs are observable, either directly or indirectly.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Level
3  Unobservable inputs which are supported by little or no market activity and
significant to the overall fair value measurement.
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, 2006, 2007 and 2008 were $ 189, $ 580 and $
94, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Certain
2007 and 2006 figures have been reclassified to conform to the 2008 presentation. The
reclassification had no effect on previously reported net income or shareholdersequity.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 1. | In
April 2008, the FASB issued FSP SFAS No. 142-3,           Determination
of the Useful Life of Intangible Assets. FSP SFAS           No. 142-3 amends
the factors that should be considered in developing           renewal or extension
assumptions used to determine the useful life of a           recognized intangible asset
under FASB Statement No. 142, Goodwill           and Other Intangible Assets. The
intent of this FSP is to improve the           consistency between the useful life of a
recognized intangible asset under           Statement 142 and the period of expected cash
flows used to measure the fair           value of the asset under FASB Statement No.
141(revised 2007), Business           Combinations which will be effective
for business combinations occurring           in periods beginning after December 15,
2008. This FSP is effective for           financial statements issued for fiscal years
beginning after December 15,           2008, and interim periods within those fiscal
years. The Company is currently           evaluating the impact of FSP 142-3. The
Company does not expect the           adoption of FSP SFAS No. 142-3 to have a
material impact on its           consolidated financial statements.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---

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

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

| | 2. | In
December 2007 the FASB issued SFAS No. 160, Noncontrolling
          Interests in Consolidated Financial Statements  an Amendment of
Accounting           Research Bulletin No. 51 (SFAS 160). SFAS 160
          addresses the accounting and reporting standards for ownership interests in
          subsidiaries held by parties other than the parent, the amount of consolidated
          net income attributable to the parent and to the noncontrolling interest,
          changes in a parents ownership interest, and the valuation of retained
          noncontrolling equity investments when a subsidiary is deconsolidated.
          SFAS 160 also establishes disclosure requirements that clearly identify
and           distinguish between the interests of the parent and the interests of the
          noncontrolling owners. SFAS 160 is effective for fiscal years beginning
          after December 15, 2008. The Company is currently evaluating the impact of
          SFAS 160 on its consolidated financial statements as it relates to
          acquisition of additional 49% in ASG.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | In
February 2008, the FASB issued FSP No. FAS 157-2, Effective Date           of
FASB Statement No. 157". The Staff Positions defer the effective           date
of Statement 157 to fiscal years beginning after November 15, 2008 for
          nonfinancial assets and nonfinancial liabilities except for items that are
          recognized or disclosed at fair value on a recurring basis at least annually,
          and amend the scope of Statement 157. As described in Note 4, the Company
          adopted Statement 157 and the related FASB staff positions except for those
          items specifically deferred under FSP No. FAS 157-2.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | In
November 2008, the FASB ratified EITF Issue No. 08-6, Equity Method
          Investment Accounting Considerations (EITF 08-6). EITF 08-6
          clarifies the accounting for certain transactions and impairment considerations
          involving equity method investments. This issue is effective for fiscal years
          beginning after December 15, 2008, and interim periods within those fiscal
          years. Earlier application by an entity that has previously adopted an
          alternative accounting policy is not permitted. The adoption of EITF 08-6 is
not           expected to have a material impact on the Companys consolidated
financial           statements.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In 2007, the Company invested in
marketable securities, with contractual maturities of up to 38 years, which were
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. As of December 2007, the
Companys investments in marketable securities are amounted to $ 5,050, out of which
$ 2,700 were invested in auction rates securities. The securities were recorded as of
December 31, 2007 at amortized cost that equals their market value. During 2008, the
Company sold $ 4,000 of the amount invested held as of December 31, 2007. As of December
31, 2008 the Companys investments in auction rates securities are amounted to
$1,050, before a write off, as discussed below. These securities have contractual
maturities of up to 38 years, are collateralized by student loans guaranteed by the U.S.
Department of Education. Those securities AAA rated, as rated by Standard &
Poors and Moodys rating services. Due to events in credit markets starting
February 2008, the auction events for these instruments failed and therefore they are not
currently trading and as a result do not currently have a readily determinable market
value. However, the Company continues to earn interest on its auction rate securities at
the maximum contractual rate (which was a blended rate of 1.961% at December 31, 2008) and
there has been no payment default with respect to such securities. Accordingly, the
estimated fair value of these auction rate securities no longer approximates par value. As
of December 31, 2008 the outstanding investment in marketable securities were impaired and
are recorded at 60% of their par value (see also Note 4).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
other than temporary impairment of available-for-sale securities totaled $ 420 for the
year ended December 31, 2008, and such losses were recorded in the financial income, net.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

---

---

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

|NOTE 4: |  | FAIR VALUE MEASUREMENTS
|------- | - | -----------------------

| | In
accordance with SFAS 157, the Company measures its marketable securities and convertible
debt at fair value. Marketable securities are classified within Level 2, because the
valuation inputs are based on unadjusted quoted prices and market observable data of
similar instruments in inactive markets. Convertible debt is classified within Level 1,
since this asset is valued using quoted market price in an active market.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys investments in marketable securities consist primarily of investments in
student loan ARS. The Companys ability and intent to hold these investments for a
reasonable period of time is no longer sufficient for a forecasted recovery of fair
value. Therefore, the Company impaired these investments to its fair value as at December
31, 2008.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys financial assets and liabilities measured at fair value on a recurring
basis, excluding accrued interest components; consisted of the following types of
instruments as of December 31, 2008:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                              | As of December 31, 2008
| | ---------------------------- | -----------------------
|
|
|
|
| | Marketable securities        |                        
| | Convertible debt *           |                        
| |                              |                        
| |                              |                        
| | Total financials assets      |                        
| | Total financials liabilities |                        
| |                              |                        

| | *
Out of which $ 1,155 is presented in current maturities and $ 3,464 is presented in
long-term liabilities.
| | ------------------------------------------------------------------------------------------------------------

|NOTE 5: |  | 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 CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 6: |  | PROPERTY AND EQUIPMENT
|------- | - | ----------------------

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

| | Depreciation
expenses amounted to $ 241, $ 402 and $ 420 for the years ended December 31,
2006, 2007 and 2008, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------

| | As
to charges, see Note 12c(1).
| | -------------------------------

|NOTE 7: |  | 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 debt
deferred finance costs.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |                    | December 31,
| | ------------------ | ------------
|
|
|
|
| | Customer relations |             
| | Brand name and     |             
| | domain name        |             
| | Acquired           |             
| | technology         |             
| |                    |             
| |                    |             
| |                    |             
| |                    |             
| |                    |             
| | Deferred issuance  |             
| | costs, net *)      |             
| |                    |             
| |                    |             
| | Total intangible   |             
| | assets and         |             
| | deferred           |             
| | issuance cost,     |             
| | net                |             
| |                    |             

| | *) | See
Notes 2l and 11
| | -- | -------------------

F - 27

---

---

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

|NOTE 7: |  | INTANGIBLE ASSETS AND DEFERRED FINANCE COSTS, NET (cont.)
|------- | - | ---------------------------------------------------------

| | b. | Amortization
expenses amounted to $ 300, $ 657 and $ 560 for the           years ended
December 31, 2006, 2007 and 2008, respectively.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------

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

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

|NOTE 8: |  | GOODWILL
|------- | - | --------

| | The
changes in the carrying amount of goodwill for the year ended December 31, 2008 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 carry forwards at the acquisition date | 
| | Foreign currency translation adjustments                                     | 
| |                                                                              | 
| |                                                                              | 
| | Balance as of December 31, 2007                                              | 
| |                                                                              | 
| | Goodwill additions, net                                                      | 
| | Goodwill impairment during the year 2008                                     | 
| | Foreign currency translation adjustments                                     | 
| |                                                                              | 
| |                                                                              | 
| | Balance as of December 31, 2008                                              | 
| |                                                                              | 

| | In
February 2008, goodwill increased by approximately $ 240 primarily due to additional
payments to the seller in regard to the Capture Projects Ltd. (CPL)
acquisition. The additional payment was payable upon achievement of certain milestone and
according to stock purchase agreement (see Note 1d).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with Statement of Financial Accounting Standards No. 142, (SFAS 142),
Goodwill and Other Intangible Assets, goodwill is not amortized, but instead
is reviewed and tested for impairment at least annually and whenever events or
circumstances occur which indicate that goodwill might be impaired. Impairment of
goodwill is tested at the Companys reporting unit level by comparing the carrying
amount, including goodwill, to the fair value. In performing the analysis, the Company
uses the best information available, including reasonable and supportable assumptions and
projections. If the carrying amount of the Company exceeds its implied fair value,
goodwill is considered impaired and a second step is performed to measure the amount of
impairment loss, if any.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2008, due to the overall global economic conditions and changes in the Companys
business operations, it was determined that goodwill has been impaired. The Company
obtained an independent appraisal to assess whether goodwill carried on the books needs
to be written down.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 28

---

---

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

|NOTE 8: |  | GOODWILL (cont.)
|------- | - | ----------------

| | The
Company followed the guidance set forth in paragraphs 19-22 of SFAS 142, which requires a
two-step analysis. The first step used the Discounted Cash flow approach to measure the
fair value of ROW and ASG reporting units of the Company, the result of which indicated
that the carrying amount of ASG reporting unit, including goodwill, exceeded its fair
value. No impairment indicators were indentified in connection with ROW reporting unit.
The second step was then conducted in connection with ASG in order to measure the amount
of impairment loss, by means of a comparison between the implied fair value of the
goodwill and the carrying amount of the goodwill. In the second step, fair value of ASG
reporting unit of the Company, as determined in the first step, was assigned to the
reporting units individual assets and liabilities. The excess of the fair value of
the reporting unit over the amounts assigned to its assets and liabilities represented
the amount of the implied fair value of the goodwill. The excess of the current amount of
goodwill over the implied fair value of goodwill was identified as the amount of the
impairment loss.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 9: |  | 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, 2008, the prime rate is 4.00% (2007- 5.75%).
| | --- | ---------------------------------------------------------------

| | (2) | As
of December 31, 2008, the LIBOR rate is 0.135%.
| | --- | --------------------------------------------------

| | (3) | As
of December 31, 2008, the PLR (Prime Lending Rate) rate is 3% (2007-3%).
| | --- | ---------------------------------------------------------------------------

| | (4) | As
of December 31, 2008, the LIBOR rate is 2.059% (2007- 5.835%).
| | --- | -----------------------------------------------------------------

| | As
of December 31, 2008 the Company has a revolving line of credit with banks for total
borrowings of up to $ 1,000, based on 60% of its certain eligible trade receivables.
The line of credit is secured by a charge (see Note 12c(2)). As of December 31,
2008, the credit line was not utilized.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Interest
expenses amounted to $ 121, $ 122 and $ 170 for the years           ended 2006,
2007 and 2008, respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------

F - 29

---

---

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

|NOTE 10: |  | ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE
|-------- | - | -------------------------------------------

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

|NOTE 11: |  | CONVERTIBLE DEBENTURES
|-------- | - | ----------------------

| | In
December 2006, the Company issued an aggregate amount of $ 14,780 in convertible
debentures at a discount of 4% by way of public offering on the Tel-Aviv Stock Exchange (TASE).
The convertible debenture terms include an offering of 112,500 units of NIS 528 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 December 31, 2009, and the interest is payable semi-annually
commencing June 30, 2007.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
debentures may be converted into Ordinary shares of the Company at ratio of NIS 20.3 par
value 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 NIS 25.5 in the last 30 trading on the TASE on or after October 1, 2009.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
difference between the fair value and the unpaid balance of the convertible debentures as
of December 31, 2008 is as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------

|                         | 
|------------------------ | 
|
|
|
|
|Fair value               | 
|Unpaid principal balance | 
|                         | 
|                         | 
|                         | 
|                         | 

| | The
Company elected to apply the fair value option to convertible debentures, as such the
entire instrument is marked to market at every reporting period and there is no further
need to bifurcate the embedded derivative.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of applying SFAS No. 159 the Company has recorded financial income in the amount
of $4,784 for the year ended December 31, 2008.
| | --------------------------------------------------------------------------------------------------------------------------------------------

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

| | In
2008, the Company purchased $ 2,650 par value (NIS 10,076 par value) of its outstanding
convertible debentures for $ 1,376. The total outstanding par value as of December 31,
2008, is $ 13,624 (NIS 51,799).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | See
also Note 21a for subsequent convertible debentures buyback in 2009.
| | ------------------------------------------------------------------------

| | See
also Note 2l for the Companys accounting policy.
| | -----------------------------------------------------

F - 30

---

---

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

|NOTE 12: |  | 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 counsel, does not believe that the liability
is probable and cannot 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 and
$ 80 as of December 31, 2007 and 2008, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. As of
          December 31, 2008, commitments are as follows:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      | 
|----- | 
|
|
|
|
|2009  | 
|2010  | 
|2011  | 
|      | 
|      | 
|Total | 
|      | 

| | 3. | The
Companys facilities and its subsidiaries facilities are leased
          under operating lease agreements, which expire on various dates, the latest of
          which is in 2013.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|      | 
|----- | 
|
|
|
|
|2009  | 
|2010  | 
|2011  | 
|2012  | 
|2013  | 
|      | 
|      | 
|Total | 
|      | 

F - 31

---

---

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

|NOTE 12: |  | COMMITMENTS, CONTINGENCIES AND CHARGES (Cont.)
|-------- | - | ----------------------------------------------

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

| | 1. | To
secure compliance with the conditions related to the Companys           Approved
Enterprise status, the Company registered a floating charge           on 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
and guarantees from a bank, the Company recorded a floating charge on its plant, assets
and rights and fixed charges on its unpaid share capital and its goodwill in favor of this
bank.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 1. | The
Company has secured some of its lease agreement by bank guarantee in the           amount
of $ 66.
| | -- | ------------------------------------------------------------------------------------------------------

| | 2. | The
Company has obtained other guarantees in amount of $ 653 from a bank           in
Israel, which will expired on August 2009 and an amount of $ 292 from a bank           in
Israel which will expire in June 2009, in favor of its subsidiaries          overdrafts.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | The
Company provided a certain vendor with a $ 220 bank guarantee that will           expire
in May 2009.
| | -- | ---------------------------------------------------------------------------------------------------------

|NOTE 13: |  | 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. This 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 third and forth expansions have not yet commenced.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---

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

|NOTE 13: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | 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 in whole
or in part and the Company may be required to refund the amount of the canceled benefits,
with the addition of linkage differences and interest. As of the date of these financial
statements 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, 2008, 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------

| | 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 Beneficiary Enterprise, such as
provisions generally requiring that at least 25% of the Beneficiary 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 letter 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 a deferred tax liability with respect to such tax-exempt income. As of December
31, 2008, the Company did not generate income under the provisions of the Amendment.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 2. | 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 33

---

---

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

|NOTE 13: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | 3. | 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 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, which derives
income from an Approved Enterprise, may be considerably less. See the section
entitled Law for the Encouragement of Capital Investments, 1959 in these
financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | The
Company has received final tax assessments through the year 2002.
| | -- | ---------------------------------------------------------------------

| | 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 2006, 2007 and 2008 in the amount of $ 45, $ 228 and $ 74,
respectively, in the financial statements are a result of taxes expenses on income of
certain subsidiaries.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | As
of December 31, 2008, the Company had operating losses carryforward for tax purposes in
the amount of $ 8,829. The amount of the Companys carryforward operating
losses will be offset against future taxable income for an indefinite period.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the subsidiaries had an operating losses carryforward for tax
purposes in the amount of $ 12,657.
| | --------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the U.S. subsidiary had U.S. Federal and State net operating loss
carryforward of approximately $2,392, which can be carried forward and offset against
taxable income for 15 to 20 years. Utilization of U.S. net operating losses may be
subject to substantial annual limitations due to the change in ownership provisions
of the Internal Revenue Code of 1986 and similar state law provisions. The annual
limitations may result in the expiration of net operating losses before utilization.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, ASG and its subsidiaries had an operating losses carryforward for
tax purposes in the total amount of $ 7,153. $ 2,117 expires over a period from 2008
through 2013, and the rest can be carried forward indefinitely.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Operating
losses carryforward of Japan and UK subsidiaries as of December 31, 2008 can be carried
forward indefinitely.
| | -----------------------------------------------------------------------------------------------------------------------

F - 34

---

---

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

|NOTE 13: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

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

| | 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                            |             
| |                                                    |             

| | 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 a consideration of these factors, the Company has established a valuation allowance of
$ 4,859 and $ 5,892 at December 31, 2007 and 2008, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | 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
provisions under                FIN 48 and the Companys provision under FAS 5,
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, 2007 and 2008.
| | ------------------------------------------------------------------------------------------

F - 35

---

---

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

|NOTE 13: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | h. | 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 14: |  | 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). 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, 2008, options to purchase 60,250 Ordinary shares are outstanding under
the plan at an 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 (see also section c below).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 36

---

---

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

|NOTE 14: |  | 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 thereunder (Section 102).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
total of 240,000 shares have been reserved for the purposes of the ESOP 2000. As of
December 31, 2008, 93,000 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 (see also section c below).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 additional 650,000 and 700,000
Ordinary shares, respectively, pursuant to the ESOP 2003.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, 1,014,053 options are outstanding. All the options have an exercise
price between $ 1.31 and $ 3.84 per share.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | 4. | As
of December 31, 2008, an aggregate amount of 345,923 options is still           available
for future grant under all of the above mentioned plans.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | No
options were granted during 2008.
| | ------------------------------------

| | c. | 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 in
2007 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 exercise price between $ 2.20 and $ 3.84, with a vesting term of 2
          years.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 37

---

---

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

|NOTE 14: |  | SHAREHOLDERS EQUITY (Cont.)
|-------- | - | ----------------------------

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

| |                                    | Year ended December 31, 2008
| | ---------------------------------- | ----------------------------
|
|
|
|
| | 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 2008 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, 2008. This amount changes based on
the fair market value of the Companys stock. As of December 2008, there were no
in-the-money options, therefore no intrinsic value exists. As of December 31, 2008, there
was approximately $ 7 of total unrecognized compensation costs related to non-vested
share-based compensation arrangements granted under the Companys stock option
plans. That total unrecognized compensation cost is expected to be recognized over a
weighted-average period of 0.63 years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
weighted average grant date fair values of options granted during 2006 and 2007 were
$1.84 and $ 1.02, respectively. No options were granted during 2008.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
options outstanding as of December 31, 2008, have been separated into ranges of exercise
price as follows:
| | --------------------------------------------------------------------------------------------------------------

| | Range of
exercise
price | Options
outstanding
as of
December 31,
2008 | Weighted
average
remaining
contractual
life (years) | Weighted
average
exercise
price | Options
exercisable
as of
December 31,
2008 | Weighted
average
exercise
price of
options
exercisable
| | ----------------------- | ------------------------------------------- | --------------------------------------------------- | ------------------------------- | ------------------------------------------- | ------------------------------------------------------
|
|
|
|
| | $  0.99 - $  1.46       |                                             |                                                     |                                 | 69,500                                      |                                                       
| | $  2.08 - $  2.92       |                                             |                                                     |                                 | 677,850                                     |                                                       
| | $  3.27 - $  4.13       |                                             |                                                     |                                 | 665,003                                     |                                                       
| |                         |                                             |                                                     |                                 |                                             |                                                       
| |                         |                                             |                                                    
| |                         |                                             |                                                     |                                 | 1,412,353                                   |                                                       
| |                         |                                             |                                                     |                                 |                                             |                                                       

F - 38

---

---

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

|NOTE 14: |  | SHAREHOLDERS EQUITY (Cont.)
|-------- | - | ----------------------------

| | e. | 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 15: |  | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Geographical
information:
| | -- | -------------------------

| | 1. | Revenues:
| | -- | ---------

| |                            | Year ended December 31,
| | -------------------------- | -----------------------
|
|
|
|
| | 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 *)          |                        
| |                            |                        

| | *) | In
the years 2006, 2007 and 2008 there were no sales to a single customer
          exceeding more than 10% of revenues.
| | -- | ------------------------------------------------------------------------------------------------------------------------

F - 39

---

---

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

|NOTE 15: |  | GEOGRAPHICAL INFORMATION (Cont.)
|-------- | - | --------------------------------

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

|NOTE 16: |  | 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.
| | -- | --------------

F - 40

---

---

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

|NOTE 17: |  | FINANCIAL INCOME, NET
|-------- | - | ---------------------

| |                                                | Year ended December 31,
| | ---------------------------------------------- | -----------------------
|
|
|
|
| | Interest income                                |                        
| | Interest expenses                              |                        
| | Exchange rate gain (loss) and bank charges *)  |                        
| | Income (expenses) in respect of convertible    |                        
| | debentures **)                                 |                        
| | Income from decrease in fair value of embedded |                        
| | derivative of convertible debenture **)        |                        
| | Gain (loss) from marketable securities         |                        
| |                                                |                        
| |                                                |                        
| |                                                |                        
| |                                                |                        

| | *) | Includes
income (expense) from forward transactions in the amount of           $ (61), $ 33
and $ (39) for the years ended December 31, 2006, 2007           and 2008, respectively.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | **) | See
also Note 2l
| | --- | ----------------

|NOTE 18: |  | 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,
which was paid in 2008. 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 19: |  | 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, which
was paid during 2008. 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 of
his active involvement in the Company throughout 2007 and 2008 (consulting fees).
During 2007 and 2008, Mr. Nakar received compensation of $ 166 and $ 189
respectively, for his service as a Board member and for consulting fees.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 41

---

---

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

|NOTE 20: |  | DISCONTINUED OPERATIONS
|-------- | - | -----------------------

| | On
December 2008, the Company decided to discontinue operations of TIS GZ business that was
mainly engaged in projects development in areas of capture solutions in Southern China
region. Employment of the entire Guangzhou team was terminated during December 2008. Full
cessation of activities was consummated during January 2009. The Company does not expect
any significant involvement or effect to its remaining business as a result of such
discontinuation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Set
forth below are the results of operations of the discontinued operations:
| | -----------------------------------------------------------------------------

| |                   | Six months
ended | Year ended
| | ----------------- | ---------------- | ----------
|
|
|
|
| | Revenues          |                  |           
| |                   |                  |           
| |                   |                  |           
| | Loss before taxes |                  |           
| | Income taxes      |                  |           
| |                   |                  |           
| |                   |                  |           
| | Net loss          |                  |           
| |                   |                  |           

|NOTE 21: |  | SUBSEQUENT EVENTS (UNAUDITED)
|-------- | - | -----------------------------

| | a. | During
January and February 2009, the Company purchased $ 1,843 par value           (NIS 7,435
par value) of its outstanding convertible debentures for $ 852.           The total
outstanding par value as of March 31, 2009 is $ 10,670           (NIS 44,363).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | On
January 4, 2009, the Company signed an agreement amendment with the minority           in
ASG and acquired the remaining 49% of the shares in Top Image Systems (Asia
          Pacific) Pte Ltd. (formerly known as ASG), as a result of this transaction, TIS
          Asia Pacific became a wholly-owned subsidiary of TIS. The acquisition was made
          by issuance of 400,000 of the Companys shares to the seller.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Repricing
of options to employees and directors:
| | -- | ------------------------------------------------

| | On
January 1, 2009, following the approval by the Companys Board of Directors, the
Company had repriced the exercise price of employees and directors outstanding
options. Employees and directors that agreed to the repricing proposal were granted new
amounts of options carrying an exercise price of $ 1.3 in a value per valueformula,
such that the total fair value of the new options is equal to the fair value of their old
options. The repricing was accounted as a modification during 2009.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 42

---

---