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

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Form 20-F

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|o |  | REGISTRATION STATEMENT
  PURSUANT TO SECTION 12(b) or (g)OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | -----------------------------------------------------------------------------------------------
|  |  |                                                                                                
|  |  | OR                                                                                             
|  |  |                                                                                                
|x |  | ANNUAL REPORT PURSUANT
  TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934          
|  |  | For the fiscal year
  ended December 31, 2003                                                  
|  |  |                                                                                                
|  |  | OR                                                                                             
|  |  |                                                                                                
|o |  | TRANSITION REPORT
  PURSUANT TO SECTION 13 or 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934      
|  |  | For the transition
  period from ________ to _________                                         

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Commission File Number 001-14552

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

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

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

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

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

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

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

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

6,120,765 Ordinary Shares

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

Yesx  Noo

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

Item 17o    Item 18x

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TABLE OF CONTENTS

|         |          | Page                                                                          
|-------- | -------- | ------------------------------------------------------------------------------
|         |          |                                                                               
|         |          |                                                                               
|PART I   |          | 1                                                                             
|         |          |                                                                               
|         | ITEM 1.  | IDENTITY OF DIRECTORS, SENIOR
  MANAGEMENT AND ADVISORS                       
|         | ITEM 2.  | OFFER STATISTICS AND EXPECTED
  TIMETABLE                                     
|         | ITEM 3.  | KEY INFORMATION                                                               
|         | ITEM 4.  | INFORMATION ABOUT THE COMPANY                                                 
|         | ITEM 5.  | OPERATING AND FINANCIAL REVIEW AND
  PROSPECTS                                
|         | ITEM 6.  | DIRECTORS, SENIOR MANAGEMENT AND
  EMPLOYEES                                  
|         | ITEM 7.  | MAJOR SHAREHOLDERS AND RELATED PARTY
  TRANSACTIONS                           
|         | ITEM 8.  | FINANCIAL INFORMATION                                                         
|         | ITEM 9.  | LISTING                                                                       
|         | ITEM 10. | ADDITIONAL INFORMATION                                                        
|         | ITEM 11. | QUANTITATIVE AND QUALITATIVE
  DISCLOSURES ABOUT MARKET RISK                  
|         | ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN
  EQUITY SECURITIES                      
|         |          |                                                                               
|PART II  |          | 56                                                                            
|         |          |                                                                               
|         | ITEM 13. | DEFAULTS, DIVIDENDS, ARREARAGES AND
  DELINQUENCIES                           
|         | ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS
  OF SECURITY HOLDERS AND USE OF PROCEEDS
|         |          | NONE                                                                          
|         | ITEM 15. | CONTROLS AND PROCEDURES                                                       
|         | ITEM 16. | [RESERVED]                                                                    
|         |          |                                                                               
|PART III |          | 58                                                                            
|         |          |                                                                               
|         | ITEM 17. | FINANCIAL STATEMENTS                                                          
|         | ITEM 18. | FINANCIAL STATEMENTS                                                          
|         | ITEM 19. | EXHIBITS                                                                      

i

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PART I

Forward
Looking Statements

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

ITEM
1.     IDENTITY OF DIRECTORS,
SENIOR MANAGEMENT AND ADVISORS

Not applicable.

ITEM
2.     OFFER STATISTICS AND
EXPECTED TIMETABLE

Not applicable.

ITEM
3.     KEY INFORMATION

Selected
Financial Data

The
following selected financial data as of, and for the years ended, December
31,  2001, 2002, and 2003 have been
derived from, and should be read in conjunction with, our consolidated
financial statements, related notes and other financial information included
elsewhere in this annual report. The selected financial data as of, and for the
years ended, December 31, 1999 and 2000 have been derived from our audited
consolidated financial statements not appearing in this annual report.  Our consolidated financial statements have
been prepared in accordance with generally accepted accounting principles in
Israel, or Israeli GAAP.  Israeli GAAP
vary in certain significant respects from generally accepted accounting
principles in the United States, or U.S. GAAP. 
Application of U.S. GAAP would have affected our results of operations
and shareholders equity for each of the years in the three-year period ended
December 31, 2003 to the extent summarized in Note 18 to our consolidated
financial statements included elsewhere in this annual report.

1

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|                                                                  |  | Year Ended December 31, |          
|----------------------------------------------------------------- |  | ----------------------- | ---------
|                                                                  |  |                         |          
|                                                                  |  | 1999
  $                |          
|                                                                  |  |                         |          
|                                                                  |  |                         |          
|Revenues                                                          |  |                         | 8,299,774
|Cost of revenues                                                  |  |                         | 1,978,945
|Gross profit                                                      |  |                         | 6,320,829
|Research and 
  development, net                                  |  |                         | 677,624  
|Selling, general and 
  administrative, and other 
  expense      |  |                         | 5,901,405
|Financial expense 
  (income)                                     |  |                         | (47,212  
|Other (income) expense                                            |  |                         | 25,294   
|Taxes on Income                                                   |  |                         |         
|Minority share in loss of 
  a subsidiary                         |  |                         |         
|Net income (loss)                                                 |  |                         | (236,282 
|Israeli GAAP net basic 
  and dilutive income 
  (loss) per share |  |                         | (0.053   
|Israeli GAAP weighted 
  average number of shares 
  outstanding  |  |                         | 4,267,760
|U.S. GAAP net basic 
  income (loss) per share                    |  |                         | (0.061   
|U.S. GAAP weighted 
  average number of shares 
  outstanding     |  |                         | 3,885,188
|U.S. GAAP net dilutive 
  income (loss) per share                 |  |                         | (0.061   
|U.S. GAAP weighted 
  average number of shares 
  outstanding     |  |                         | 3,933,495

Balance Sheet Data:

|                             |  | As of December 31, |          
|---------------------------- |  | ------------------ | ---------
|                             |  |                    |          
|                             |  | 1999
  $           |          
|                             |  |                    |          
|                             |  |                    |          
|Cash and cash 
  equivalents |  |                    | 2,039,519
|Working capital              |  |                    | 6,537,447
|Total Assets                 |  |                    | 8,062,005
|Long Term debt               |  |                    | 9,350    
|Total liabilities            |  |                    | 1,207,582
|Shareholders equity          |  |                    | 6,854,423

2

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Risk
Factors

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

The
market for data capture systems in general, and for automatic form processing
systems in particular, is characterized by intense competition, significant
price erosion over the life of the product, and rapidly changing business
conditions, customer requirements, and technology.  Our products compete with those developed and marketed by
numerous well-established companies including Captiva Software
Corporation, Mitek, Banctec, Dicom, Microsystems Technology, Inc., Datacap,
Inc., SER 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 such as
the present.

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

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

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

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

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

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

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

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.

3

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

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

Since our inception in
March 1991, we have incurred net losses in every year other than in 1995, 1997
and 1998, and our losses may continue. 
For the year ended December 31, 2003, we had a net loss of $604,047, and accumulated deficit of $14,813,830.  We plan to maintain the level of our
aggregate product development expenses and may significantly increase our sales
and marketing and administrative expenses in the near future. Accordingly, to
maintain our current level of financial performance, we will need to increase
or maintain our revenues.  We cannot
assure you that our revenues will grow or
that we will achieve positive profitability in the future.  Failure to increase revenues could result in
a material adverse effect on our business, prospects and financial results.

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

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

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

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

4

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

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

Large customers constitute a significant portion of our
orders and we may have difficulty in expanding our customer base in the future.

While
our customer concentration level has been steadily improving, several large
customers account for a significant part of our sales. For example, Swiss Post
-Finance and Toyo Ink Manufacturing Co., Ltd., a reseller of our products,
accounted for 17% and 19% of our sales in 2003 and 2002, respectively.  The loss of large customers could adversely
impact our business, prospects, and financial results.

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

Our success and financial
results are subject to all of the risks inherent in the development of new
products, including unanticipated delays, expenses, and technical problems or
difficulties, as well as the possible insufficiency of funds to implement our
efforts, which could result in abandonment or substantial change in product
development. The loss of our key employees would hurt our ability to implement
our strategy and could adversely affect our business, results of operations and
financial condition.

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

Our success depends on our proprietary
software technology.

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

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 are exploring the costs and benefits of
applying for patent protection, but have not yet obtained any patents and we
cannot assure you that we will obtain any patents.  In addition, we cannot assure you that:

5

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

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

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

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 18, 2003 (EP 0976092).  We believe that there are legal grounds for
the patent to be revoked or substantially limited and are vigorously pursuing
such ends.  In May 2004, we filed a
Notice of Opposition with the European Patent Office requesting that the said
patent be revoked in its entirety. 
However, there is no assurance that our efforts will be successful.  Although we are not aware that this patent
would affect any of our products, there is some risk that if the patent remains
intact, Readsoft would at some point in the future allege that we infringe on
the patent, requiring us to dedicate time and resources to defend our
intellectual property rights, which could impact our financial results.  If Readsoft were to prevail in such a claim,
there could be a material adverse effect on our business, prospects and
financial condition.

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.

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

Despite our testing
efforts, our products may contain undetected errors or defects, 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:

| | loss of customers;
|- | ------------------

6

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|  |                                                                 
|- | ----------------------------------------------------------------
| | warranty claims;                                                
|  |                                                                 
| | damage to brand reputation;                                     
|  |                                                                 
| | delay in market acceptance of current and future
  products; and
|  |                                                                 
| | diversion of development and engineering resources.             

Defects, errors or
successful product liability claim against us could have a material adverse
effect on our business, prospects and financial results.

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, we are
subject to the risks associated with international sales, including license
requirements, economic and political instability, shipping delays, customs
duties, export quotas and other trade restrictions, any of which could have a
significant impact on our ability to deliver products on a competitive and
timely basis and exacerbate the risks inherent in our business.  While we have not encountered significant difficulties
in connection with the sales of our products in international markets, the
future imposition of, or significant increases in, the level of custom duties,
export quotas or other trade restrictions could have an adverse effect on us. Further, we cannot assure you that the laws
of foreign jurisdictions where we sell and seek to sell our products afford
similar or any protection of our intellectual property rights as may be
available under U.S. laws.  We are directly
impacted by the political, economic, military and other conditions in the
countries where we sell or seek to sell our products.

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

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

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

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

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

Some of our executive
officers and employees in Israel are obligated to perform up to 36 days
of military reserve duty annually. 
Moreover, in light of escalating hostilities and threats of armed
conflict in the Middle East since October 2000, our executive officers and
employees may be called for active military duty for an unlimited period of
time.  Increased military activity could
also result in a reduction of prospective qualified employees available to work
for us to increase our business or replace employees on active military
duty.  Our operations could be disrupted
by the absence for a significant period of our executive officers or key
employees as a result of military service. 
Any disruption in our operations could adversely affect our ability to
develop and market products.

7

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

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

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

Because of our small size
and our business strategy to increase our sales, we anticipate an increased
demand on all of our resources.  If we
do not accurately estimate our need for personnel or marketing and customer
support, we may not be able to support our future growth.  For example, if we are successful in our
efforts to obtain significant orders for our products, we may be required to
install and service, on a timely basis, large numbers of installations at our
customers locations.  We cannot assure
you that we will be able to provide such services on adequate terms and
conditions or at all.  Furthermore, in
order to remain competitive and keep our products up to date, we need to
continue to attract and retain a qualified team of employees.  If we fail to obtain the human resources our
business requires, there could be a material adverse effect on our business,
prospects, and financial results.

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 limit our
ability to develop products and transfer technologies outside of Israel, and require
us to satisfy specified conditions.

In the past, we have
received grants from the government of Israel through the Office of the Chief
Scientist of the Ministry of Industry and Trade, or the OCS, for the financing
of 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, together with interest and penalties.

8

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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. 
The benefits available to an Approved Enterprise program are dependent
upon the fulfillment of conditions stipulated under applicable law and in the
certificate of approval.  If we fail to
comply with these conditions, in whole or in part, benefits from tax exemptions
or reduced tax rates would likely be denied to our shareholders or us in the
future.

Our anticipated sale of 2,563,300 of our Ordinary Shares and
related warrants to purchase up to an additional 1,281,650 of our Ordinary
Shares, as well as the registration of those and other shares could negatively
impact on the market price of our Ordinary Shares.

On
June 10, 2004, we announced that we entered into a definitive agreement for the
private placement of 2,563,300 Ordinary Shares of the Company at a purchase
price of $3.16 per share to institutional investors for gross proceeds to the
Company of approximately $8.1 million. 
The investors also will receive three-year warrants to purchase up to an
additional 1,281,650 Ordinary Shares, with an exercise price of $4.26 per
share. The closing of the financing is
subject to certain conditions, including our receipt of shareholder approval of
the terms of the transaction.  We expect
to hold a special meeting of its shareholders and to seek such approval within
the next 75 days.

In
connection with the private placement, we have agreed to file a resale
registration statement covering the shares purchased in the private placement
(including the shares underlying the warrants) within 30 days following
the closing.  Our failure to timely file
or obtain effectiveness of the registration statement could subject us to
liquidated damages.  In accordance with
prior agreements, we will also be registering the resale all of the Ordinary
Shares held by Charter, Izhak Nakar and their affiliates on the same
registration statement.

After
the registration statement is effective, the investors, Charter and Mr. Nakar
will be able to sell shares  into the
general trading market.  An influx of
additional shares could exert downward pressure on the market price of our
Ordinary Shares and could have a dilutive effect.  Accordingly, there could be material adverse effect on the market
price of our Ordinary Shares.

Our ability to raise capital could be impaired as a result
of our anticipated sale of securities.

Pursuant
to our agreement with the investors in the private placement described in the
preceding risk factor, we are subject to restrictions with respect to the sale
of our securities.  We are restricted
from selling additional securities of the Company until 30 days have elapsed
following the effectiveness of the registration statement registering the
resale of the shares to be issued and issuable to the investors, subject to
certain exceptions.   During the
one-year period that then follows, before we are able to sell our securities,
in most instances we are required to first offer the securities to the
investors pursuant to terms set forth in our agreement with them.  The foregoing terms and right of first offer
could delay our efforts to raise capital and increase transaction costs and
could limit our ability to obtain additional financing.

Our Ordinary Shares are traded on limited markets and 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 SmallCap Market, and have been subject to frequent
significant price fluctuations. Furthermore, 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 SmallCap Market. If our securities
are delisted from the Nasdaq SmallCap market, investors interest in our
securities could be reduced.

On June 22, the last
reported sale price of our Ordinary Shares on the Nasdaq SmallCap Market was
$3.45 per share. If we fail to consistently maintain the price for the periods
required by Nasdaq, our common stock could be delisted pursuant to applicable
rules. Delisting could materially and adversely affect the trading market and
prices for our securities.

9

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In addition, if our
securities were to be delisted from the Nasdaq SmallCap 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.

Additionally, the trading
prices of stocks traded on the Nasdaq SmallCap Market have a tendency to be
more volatile than the prices of stocks traded on other national
exchanges.  Our Ordinary Shares have
been subject to frequent significant price fluctuations, due in part to
speculative activity.

ITEM
4.     INFORMATION ABOUT THE
COMPANY

History
and Development

Our
legal and commercial name is Top Image Systems Ltd. We changed our name from
T.i.S.-Top Image Systems (1991) Ltd. to its present name in July 1996.  We were incorporated on March 26, 1991.

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

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

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

Business
Overview

General

We
develop and market automated data capture solutions for managing and validating content gathered from
customers, trading partners and employees. 
Whether originating from electronic, paper, mobile or other sources, our
solutions deliver digital content to the applications that drive an enterprise
by using advanced technologies including wireless communications, servers, form
processing and information recognition systems.  Our software improves business processes by integrating different
types of data from multiple sources. 
Our products integrate information regardless of the source and format
of the data, whether structured, as in the case of application forms or
surveys, or semi-structured, such as invoices, purchase orders, checks, freight
and shipping bills and others.  Our
solutions seamlessly deliver the extracted data to applications such as
document and content management, enterprise resource planning, or customer
relationship management.  Our solutions
minimize the need for manual data entry by automatically reading, identifying,
interpreting and processing information, thereby increasing data capture
accuracy and the rate of information processing.  The platform solution we offer replaces traditional means of
extracting information from paper-based documents and integrates multiple
information sources into a single enterprise-level solution that increases
speed and efficiency.

Products

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

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

TiS
eFLOW
provides enterprise-wide solutions for every data capture and content delivery
need, all on a single platform, using one set of business rules. eFLOW
allows a customer to integrate data 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. 
Top Image Systems technology can manage these tasks without the need to
pre-design a working template.

In
addition, eFLOW may integrate with a customers financial systems, enterprise resource planning
(ERP) and other relevant applications to provide an end-to-end solution for
managing invoices and payments.  eFLOW  therefore 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 and Microsoft Visual Basic 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
2.0 and future version, based on the Microsoft .NET technology ensures its
compatibility to future Microsoft technologies and other technology partners,
as well as its usability to our customers. 
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.

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.

Integrafor Structured Content

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

Freedom
for Semi-Structured Content

Freedom,the 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, Freedomis 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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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.

AFPSPro

AFPSPro
had been our flagship product until the introduction of the eFLOW
Unified Content Platform.  The company is at the end of the process of upgrading AFPSPro
customers to eFLOW and plans to gradually phase out AFPSPro.

Principal
Markets

As
of December 31, 2003, we operated branch offices in the United States, the
United Kingdom and Germany through subsidiaries.  During 2004, we began to modify our corporate structure in Europe
(See Organizational Structure in Item 4). 
However, we do not believe that these changes will have a material
effect on our business, prospects and financial condition.

Our
U.S. branch is responsible for sales, marketing and support activities in the
United States, Canada, and Latin America. 
These three territories, together with Japan, define our principal
markets. In addition, we believe that there exist significant
opportunities in France, South Africa, the Czech Republic, Spain, Australia,
Belgium, the Netherlands and Luxembourg. 
During 2004, the Company plans to change this structure and establish
major sales centers in several locations worldwide.  These centers will manage the Companys sales, marketing and
operational activity in their locations, providing integration and
implementation services, as well as marketing support.  As part of our previously announced
strategic plan, we will be seeking to expand our already strong presence and
market position in Japan.  We intend to
utilize a portion of the proceeds from the pending private placement (see also
Liquidity and capital resources in Item 5) to finance that expansion.  The Company is currently exploring various
options of how to proceed with its expansion plans.  We continuously review opportunities for expansion in both
new and our existing markets.

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

|                                 |  | Year Ended December 31, |          
|-------------------------------- |  | ----------------------- | ---------
|                                 |  |                         |          
|                                 |  | 2001                    |          
|                                 |  |                         |          
|                                 |  | $                       |          
|                                 |  |                         |          
|Product Revenues by
  Region     |  |                         |          
|                                 |  |                         |          
|Europe                           |  |                         | 1,744,447
|Far East (excluding
  Japan)     |  |                         | 895,702  
|South America                    |  |                         | 2,631,506
|Africa                           |  |                         | 640,867  
|North America                    |  |                         | 1,109,005
|Israel                           |  |                         | 65,434   
|Middle East (excluding
  Israel) |  |                         | 219,709  
|Japan                            |  |                         | 2,607,181
|Other                            |  |                         |         
|                                 |  |                         |          
|Total                            |  |                         | 9,913,851
|                                 |  |                         |          
|                                 |  |                         |          
|Service Revenues by
  Region     |  |                         |          
|                                 |  |                         |          
|Europe                           |  |                         | 1,108,266
|North America                    |  |                         | 210,378  
|Far East (excluding
  Japan)     |  |                         | 164,044  
|Africa                           |  |                         | 50,800   
|Japan                            |  |                         | 106,929  
|Israel                           |  |                         | 113,595  
|South America                    |  |                         | 67,417   
|Middle East (excluding
  Israel) |  |                         | 217,456  
|Other                            |  |                         | 6,513    
|                                 |  |                         |          
|Total                            |  |                         | 2,045,398
|                                 |  |                         |          

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Seasonality

Our
business significantly depends upon the requirements of large corporations and
governmental agencies.  Because many of
these entities operate according to annual budgets, their tendency is to
approve budgets in the beginning of the fiscal year and release the
budgets toward the end of the fiscal year. 
This mode of operation affects our results of operations throughout the
year.  See the section entitled Quarterly Results; Seasonality in Item 5 of
this annual report for additional detail.

Marketing
Strategy

Over
the past few years, we have shifted our marketing emphasis from a time and
labor intensive orientation, which required us to provide technical support and
customization for our customers, to eFLOW, which is marketed as
an enterprise solution.  We now market
eFLOW
to value added resellers, distributors and systems integrators to assist them
in building form processing systems more quickly, easily, and economically at
their customers locations.  This change
in our marketing strategy has freed us from having to expend resources in
providing support and services to the end-user since value added resellers,
distributors and systems integrators increasingly perform these functions.  As we have shifted our marketing strategy
from  project-oriented to
solution-oriented, we have increasingly sought strategic alliances with value
added resellers, distributors and systems integrators.  This has also enabled us to expand our
market share in new geographic markets by partnering with the top-tier value
added resellers, distributors and systems integrators located in or selling
products in each country.  This enables
us, together with each partner, to initiate common marketing and sales
strategies and thereby, to generate sales. 
This strategy is based on our belief that value added resellers,
distributors, systems integrators and Original Equipment Manufacturers, or
OEMs, generally
have better access to end-users in their respective markets than we do.  By engaging 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.

It
is essential while working in remote territories to provide an efficient
platform for marketing eFLOW across the globe.  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. While cooperating with
partners in these territories, we can offer an expanded solution.  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.  Currently, we sell
through a network of value added resellers, distributors and systems
integrators in approximately 30 countries worldwide.  The system integrators are managed via our sales and marketing
force located in our sales centers 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.

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In
September 2003, we announced a partnership agreement with Xerox France, which,
through its  Xerox Global Services
division, markets a comprehensive range of digital document solutions and
services. Its offerings are focused on three main areas: consulting, systems
integration, and document process outsourcing. The agreement covers the
integration of the TiS eFLOW Unified Content Platform in Europe.  The
agreement reflects a natural extension of previous successful cooperation
between Xerox and Top Image Systems in Latin America.

In
July 2003, we announced a global partnership with Documentum, a leading
provider of Enterprise Content Management solutions (ECM). Becoming a
technology partner of Documentum fits well with TiS long-term strategy, to
achieve connectivity between the eFLOWplatform
and leading enterprise management applications such as CRM, ERP, ECM, and
workflow.  In June 2003, we signed a
sales and marketing partnership agreement with Carla bella, a leading editor and
integrator of Internet / Intranet applications and company software packages.
According to the terms of this agreement, Carla bella acts as Top Image
Systems distributor, integrator and a local support provider (Level 1 and 2)
in France, leveraging its strong presence across various industry sectors.

In
May 2003, we announced a partnership with SAP, after the successful SAP®
Certified Integration of  eFLOW.  In order to ensure ongoing technical support
for this integration with mySAP Financials, TiS has based the integration on
the SAP .NET connector available within SAP NetWeaver.  The connectivity, via special interface, has
been thoroughly tested from the architectural, implementational, and run-time
aspects, and was certified by SAP AG.  Like
the partnership with Documentum, this integration fits well with TiS long-term
strategy, to achieve connectivity between the eFLOWplatform and leading enterprise management applications such as CRM,
ERP, ECM, and workflow.

Also
in May 2003, we announced a partnership with OptoSweden AB, a leading
Scandinavian developer and integrator of Electronic Document Management
solutions (EDM), ICR and Scanning Environment. 
The partnership is our first in the Scandinavian Market.

In
April 2003, we announced the integration of A2iAs FieldReader recognition
engine into our eFLOWplatform,
through partnership with A2iA Corp., a world-leader and developer of
Intelligent Word Recognition (IWR) software applications for cursive
handwriting recognition and machine-print documents. This integration was part
of TiS constant efforts to broaden the capabilities of the eFLOW Unified
Content Platform to ensure superior data recognition
levels

Also
in April 2003, we announced a partnership agreement with Aurovision, a global
technology consulting and services organization headquartered in India. This
partnership followed the successful implementation of the Indian population
census.

In
March 2003, we became an Independent Software Vendor (ISV) of the Oracle Partner
Network.  As such, TiS gained access to
the services provided by Oracle 9i solutions and the eBusiness Suite, as well
as many other web-based resources designed to enhance its value proposition,
broaden opportunities, and extend its reach into the marketplace.

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

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

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

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

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 18, 2003 (EP 0976092).  We believe that there are legal grounds for
the patent to be revoked or substantially limited and are vigorously pursuing
such ends.  In May 2004, we filed a
Notice of Opposition with the European Patent Office requesting that the said
patent be revoked in its entirety.  However,
there is no assurance that our efforts will be successful.  Although we are not aware that this patent
would affect any of our products, there is some risk that if the patent remains
intact, Readsoft would at some point in the future allege that we infringe on
the patent, requiring us to dedicate time and resources to defend our intellectual
property rights, which could impact our financial results.  If Readsoft were to prevail in such a claim,
there could be a material adverse effect on our business, prospects and
financial condition.

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

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

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Competition

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

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

Among
our major competitors providing form processing systems and software are:  Captiva Software Corporation, Mitek,
Banctec, Dicom (Kofax), Microsystems Technology, Inc. (AnyDoc), DocuTech,
Datacap, Inc., SER, SWT, and ReadSoft.

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

| | During 2002, Captiva Software Corporation merged
  with ActionPoint, a provider of enterprise information capture software. The
  merger created the largest provider of input management software solutions
  under the name Captiva Software Corporation. Towards the end of 2003, Captiva
  Software announced the acquisition of Context Inc. from the financial service
  outsourcing giant ADP. Context Inc. develops software that improves the
  processing of healthcare claims. Vignette, a leading web content management
  provider, acquired Australian-based document imaging specialist Tower
  Technology to strengthen its position in the rapidly consolidating ECM space.
  Stellent, a web content management specialist, recently acquired Optika, an
  imaging and workflow vendor.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

IBM
acquired Green Pasture, an electronic document management specialist.

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

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

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

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Customers

Our
customers consist of both governmental and other enterprises. During 2003, we
demonstrated our solutions compatibility to large-scale projects, enhancing
our competitive position in the industry. We were awarded a
multi-million-dollar data-capture project for Swiss Post - Finance, rendering
it the largest contract in our  history.

In
addition, we have further strengthened our position in the automated data
collection for national population census projects, with the successful
completion of the population census projects of the Republic of Cyprus, Italy
and India.  The Indian census is the
largest census project in the world, and included the processing of
approximately 6 million forms per week. 
All projects were completed on time, beating extremely aggressive
deadlines.  Other market solutions
provided by us include integrated systems for complicated semi-structured
applications, including automating the capture and process of data from
hundreds of different form formats of 3M facilities across Europe, and Business
Transformation Outsourcing (BTO), a subsidiary of IBM that was established in order to provide automated
outsourcing services to manage accounts payable and accounts receivable
activities.

We
have also strengthened our competitive position with the release of eFLOWVersion 2.0, the latest version of the Companys
signature software, eFLOW Unified
Content Platform.  This version of the
product dramatically reinforces our ability to successfully compete and
implement complicated projects involving processing documents of
semi-structured formats.  In addition, eFLOWs Smartextends beyond classical form processing and recognition to include
a unique capability that allows sophisticated collection and understanding of
unstructured forms, thus providing the possibility to handle projects in a
mixed environment.

Warranty
and Service

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

We
may be exposed to potential product liability claims by our customers and users
of our products.  Currently, we hold a
world-wide product liability insurance policy that provides coverage limited to
$2,000,000 in aggregate for the policy period ending on September 30,
2004.    Despite this coverage, a
successful claim against us for product liability could have a material adverse
effect on our financial condition. 
While we have not experienced material warranty liability in the past,
we cannot assure you that future warranty expense will not have an adverse
effect on us.

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

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

Governmental
Regulation

The
government of Israel encourages research and development projects oriented
towards products for export through its Office of the Chief Scientist Office,
or OCS, pursuant to the Law for the Encouragement of Industrial Research and
Development, 1984, commonly referred to as the Research Law.  In exchange for assistance provided by the
Israeli government in connection with research and development cost, we are
committed to pay to the Israeli government royalties at the rate of 2% to 3.5%
of revenues from sale of our FormOut!   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.  The Companys total outstanding obligation
in respect of royalty-bearing government participation received or accrued, net
of royalties paid or accrued, amounted to $ 15,985 as of December 31,
2003.

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

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

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

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

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

Organizational Structure

We
have three operating subsidiaries.  In
August 1991, we established TiS America, Inc. to provide sales, marketing and
technical support to our customers.  TiS
America is incorporated under the laws of Delaware and is a wholly owned
subsidiary of the Company.  In January
2000, we, together with others, established e-Mobilis.  e-Mobilis was incorporated in Israel, and we
initially held 80.2% of its issued shares. 
During 2001, we acquired the remaining 19.8% interest in e-Mobilis, and
e-Mobilis operations were integrated into ours.  For additional information, see the section entitled Related
Party Transactions in Item 7 of this annual report.  In July 2000, we established TiS B.V., a wholly-owned subsidiary
incorporated under the laws of the Netherlands, with operating branches in the
United Kingdom and Germany. Currently, we are in the process of modifying our
corporate structure in Europe, and have established a new fully owned
subsidiary in the United Kingdom, which shall fully own a subsidiary in Germany.
The activity and assets of our existing European branches will be transferred
to the new entities. We do not believe that these changes will have a material
effect on our business, prospects and financial condition.

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Property,
Plant and Equipment

We
lease approximately 707 square meters in Ramat Hahayal, Tel Aviv, Israel, for
which we pay a monthly rent of approximately $18,000.  The lease expires in November 2007.  Our branch in Germany leases approximately 241 square meters of
office space in Cologne, Germany for a monthly sum of $2,750 and our English
branch leases approximately 35 square meters of office space in Uxbridge for
the amount of $5,500 per month.  All
lease agreements other than for our Israeli headquarters will either expire or
be renewed during 2004.

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ITEM 5.     OPERATING
AND FINANCIAL REVIEW AND PROSPECTS

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

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

General

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

Our
sales to resellers, value added resellers, distributors and system integrators
are made on credit terms and we do not hold collateral to secure payment.  The terms of the agreements with these
resellers, value added resellers, distributors and system integrators do not
provide the resellers, value added resellers, distributors and system
integrators with the right to return the purchased products or solutions.  Payment with respect to such sales is
generally due within 30 to 150 days following receipt of an invoice.  A default in payment by one or more of our
resellers, value added resellers, distributors and system integrators could
adversely affect our business, results of operations, and financial
condition.  We cannot assure you that
uncollectible receivables will not exceed our reserves.  Any significant increase in uncollected
accounts receivable beyond reserves could have a material adverse effect on our
business, results of operation, and financial condition.

As
a result of our strategy of pursuing strategic alliances with value added
resellers, distributors and system integrators, most of our revenues are
derived from such alliances.  During the
years ended December 31, 2001, 2002 and 2003, revenues deriving from value
added resellers, distributors and system integrators accounted for
approximately 76%, 72% and 51%, respectively, of our revenues, mainly because
our direct sale to the Swiss Post - Finance.

Historically,
we have recognized a substantial portion of our revenues from product
sales.  During the years ended December
31, 2001, 2002 and 2003, product revenues accounted for approximately 83%, 82%,
and 75%  respectively, of revenues,
while service revenues accounted for approximately 17%, 18%, and 25%
respectively, of revenues.    In 2001,
sales of AFPSPro accounted for 42% of our product sales and for approximately 35% of our
revenue; sales of eFLOW accounted for 54% of our product sales
and for approximately 45% of our revenue. 
In 2002, sales of AFPSPro accounted for 25% of
our product sales and for approximately 21% of our revenue; sales of eFLOW
accounted for 69% of our product sales and for approximately 57% of our
revenue. In 2003, sales of AFPSPro accounted for 1% of
our product sales and for approximately 1% of our revenue; sales of eFLOW
accounted for 95% of our product sales and for approximately 71% of our
revenue.

Quarterly
Results; Seasonality

Our
sales cycle for AFPSPro as well as eFLOW ranges
from 9 to 12 months.  These sales cycles
vary by customer and could extend for longer periods depending on the time
required by the customer to evaluate the utility of the applicable product to
its operations.  Our operating results
could vary between periods as a result of this fluctuation in the length of our
sales cycles, the purchasing patterns of potential customers, the timing of
introduction of new products and product enhancements introduced by us and our
competitors, technological factors, variations in sales by distribution
channels, competitive pricing and generally non-recurring product sales.  Consequently, our product revenues may vary
significantly by quarter.    During
2001, 25% of our revenues in the second quarter were from Politec, a system
integrator in Brazil, and 28% of our revenues in the third quarter were from
Unisys, another system integrator in Brazil, while each of the above accounted
for only 8% of our revenues on an annualized basis.  During 2002, 30% of our revenues in the first quarter were from
Schneider Logistics, a customer in the United States, while it only accounted
for 10% of our annual revenues. During 2003, 32% of our revenues in the third
quarter were from Swiss Post - Finance, a customer in Switzerland, which
accounted for 17% of our 2003 annual revenues.

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Geographical
Considerations

Revenues
from the sale of products, solutions and services outside of Israel accounted
for approximately 98%, 99%, and 99% of our revenues during the years ended
December 31, 2001, 2002 and 2003 respectively. 
More specifically, the percentage of our product sales occurring in
various geographic regions has fluctuated significantly in the past and is
likely to continue to do so in the future. 
During the years ended December 31, 2001, 2002 and 2003 the percentage
of our product sales in the Far East (including Japan) was 35%, 34%, and 21%
respectively.  During those same years,
our product sales in North America were 11%, 15%, and 1% respectively of total
sales.  During those same years, product
sales revenues from Europe represented 18%, 41%, and 69% respectively of total
sales.  As a result of the fluctuation
in product sales in various geographic regions, we are subject to the risks
associated with international sales, including economic and political
instability, shipping delays, customs duties, export quotas and other trade
restrictions, any of which could have a significant impact on our ability to
deliver products on a competitive and timely basis and exacerbate the risks
inherent in our business.  While we have
not encountered significant difficulties in connection with the sales of our
products in international markets, the future imposition of, or significant
increases in, the level of custom duties, export quotas or other trade
restrictions could have an adverse effect on us.

Critical
Accounting Policies and Estimates

Our
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in Israel, or Israeli GAAP.  Israeli GAAP vary in certain significant
respects from generally accepted accounting principles in the United States, or
U.S. GAAP.  Application of U.S. GAAP
would have affected our results of operations and shareholders equity for each
of the years in the three-year period ended December 31, 2003 to the extent
summarized in Note 18 to our consolidated financial statements included
elsewhere in this annual report.

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

Revenue
Recognition

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

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

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

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

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

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Our
criteria for revenue recognition are as follows:

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

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

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

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

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

Trade
Receivables

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

The
balance sheet allowance for doubtful debts for all the periods through December
31, 2003 is determined as a specific amount for those accounts the collection
of which is uncertain.

In
2003, an allowance for doubtful accounts in the amount of $339,495 was made for
specific trade receivables as compared to $468,525 in 2002.  The decrease in the allowance for doubtful
accounts derives mainly from amounts stemming from the United Kingdom and
India, against which we were fully reserved by the end of 2002, and which were
written off during 2003.

Government
Grants

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

Research
and development costs:

Research
and development costs, net of participations and grants received, are charged
to statement of operations as incurred.

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Recently Enacted Accounting Pronouncements

In
January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN
46). The objective of FIN 46 is to improve financial reporting by companies
involved with variable interest entities. A variable interest entity is a corporation,
partnership, trust, or any other legal structure used for business purposes
that either (a) does not have equity investors with voting rights or (b) has
equity investors that do not provide sufficient financial resources for the
entity to support its activities. FIN 46 requires a variable interest entity to
be consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entitys activities or entitled to
receive a majority of the entitys residual returns or both. FIN 46 also
requires disclosures about variable interest entities that the company is not
required to consolidate but in which it has a significant variable interest.
The consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply
to older entities in the first fiscal year or interim period ending after March
15, 2004. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. As of December 31, 2003, the Company does not
expect the adoption of FIN 46 to have a material impact on its consolidated
financial statements.

In
November 2002, Emerging Issues Task Force (EITF) reached a consensus on Issue
No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No.
00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 applied to revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. Additionally,
companies will be permitted to apply the consensus guidance in this issue to
all existing arrangements as the cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20, Accounting Changes. The
adoption of EITF Issue No. 00-21 did not have a material impact upon the Companys
financial position, cash flows or results of operations.

In
December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104,
Revenue Recognition,  which revises or
rescinds certain sections of SAB No. 101, Revenue Recognition, in order to
make this interpretive guidance consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations. The changes
noted in SAB No. 104 did not have a material effect on the Companys
consolidated results of operations, consolidated financial position or
consolidated cash flows.

Results of Operations

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

Year
Ended December 31, 2003 Compared to Year Ended December 31, 2002

Revenues.  Total revenues for the year ended December
31, 2003 amounted to $8,319,002 compared to $7,799,093 for the year ended
December 31, 2002.   Product sales
decreased by $212,822, or 3%, from $6,423,348 in 2002 to $6,210,526 in 2003,
mainly because of no product revenues in Japan during 2003.

Cost
of Revenues.  Cost of
revenues decreased 22% from $3,005,463 in 2002 to $2,339,790 in 2003 primarily
as a result of the cost cutting measures that took effect during 2002, as well
as the material reduction in payments to the Office of the Chief Scientist. As
a percentage of our revenues, cost of revenues decreased from 39% in 2002 to
28% in 2003.

Research
and Development. 
During 2003, our development efforts were concentrated on the
semi-structurd module capabilities, and its different applications. Gross
research and development expenses aggregated $863,209 for 2003 compared to
$1,340,408 for 2002. The decrease is mainly due to a decrease in salary
expenses resulting from the cost cutting measures implemented during 2002.

Selling,
General and Administrative Expenses.Selling,
general and administrative expenses decreased from  $7,150,617 in 2002 to $5,818,426 in 2003.  This decrease was primarily due to a
material decrease of salary expenses, and marketing expenses. During the fourth
quarter of 2002, the Company implemented several cost cutting measures targeted
at reducing staff and other expenses during coming years, which had only a
partial effect during 2002, but had a noticeable impact during 2003.

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Financing
Income.  Financing
income for the year ended December 31, 2003 was $98,376, compared with $187,318
in the year ended December 31, 2002. 
This decrease is primarily attributable to the combination of the
decrease of interest rates in the United States and Israel and the increase in
our line of credit.

Net
Loss.  As a result of
the foregoing, our loss was $604,047 in the year ended December 31, 2003,
compared to a loss of $3,827,788 in the year ended December 31, 2002.

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

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

Cost
of Revenues.  Cost of
revenues decreased 2% from $3,072,333 in 2001 to $3,005,463 in 2002 primarily
as a result of lower sales. As a percentage of our revenues, cost of revenues
increased from 26% in 2001 to 39% in 2002. 
This decrease in our margins is primarily a result of the inflexible
nature of certain expenses such as salaries and third partys license expenses
that do not decrease materially as revenues decrease.

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

Selling,
General and Administrative Expenses.Selling,
general and administrative expenses decreased from  $9,094,622 in 2001 to $7,150,617 in 2002.  This decrease was primarily due to a
material decrease of marketing expenses, the provision for bad and doubtful
debts, and commissions for third parties. During the fourth quarter of 2002,
the Company implemented several cost cutting measures targeted at reducing
staff and other expenses during coming years, which had a partial effect during
2002, and will have a greater impact during future years.

Restructuring
costs and other special charges.During October 2002, we
adopted and began the execution of a restructuring plan.  Pursuant to such plan, our personnel was
reduced in size.  Furthermore, certain
positions were eliminated, while the job descriptions of other positions were
altered.  In accordance with the plan,
we implemented lay-offs mainly in our headquarters located in Israel that
included, among others, four employees in management positions. Costs related
to the restructuring plan consist mainly of employee salaries and vehicle
expenses during the advance notice period. 
Expenses amounted to approximately $314,000 in 2002 and $706,000 in 2001
in the aggregate, which include approximately $53,000 related to benefits to
which an officer of the Company is entitled following the termination of his
employment. Such benefits are detailed in the section entitled Compensation
in Item 6 of this annual report.

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

Net
Loss.  As a result of
the foregoing, our loss was $3,827,788 in the year ended December 31, 2002,
compared to a loss of $2,791,429 for the year ended December 31, 2001.

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Impact
Of Currency Fluctuation And Inflation

Most
of our product and service revenues from transactions outside of Israel are
denominated in U.S. dollars, and revenues from transactions in Israel are
denominated in NIS but are linked to the U.S. dollar exchange rate.  In the early to mid 1980s, Israels economy
was subject to a period of very high inflation.  However, inflation was significantly reduced by the late 1980s
due primarily to government intervention. 
The annual rate of inflation in Israel was 1.3%, 0%, 1.4%, 6.5%, and
1.9% in 1999, 2000, 2001, 2002 and 2003, respectively. The dollar cost of our
operations in Israel is influenced by the extent to which any increase in the
rate of inflation in Israel is not offset (or is offset on a lagging basis) by
devaluation of the NIS in relation to the dollar.  For example, during the years 2001 and 2002, the devaluation of
the NIS against the dollar, which amounted to 9.28% and 7.27% accordingly,
exceeded the inflation rate for the same periods. On the other hand, the
negative inflation rate for 2003 of 1.9% exceeded the devaluation of the
dollar against the NIS, which amounted to 7.56%.  The increase in the dollar cost of our operations in Israel
relates primarily to the costs of salaries in Israel, which constitute a
substantial portion of our expenses and are paid in NIS.  In addition, inflation in Israel will have a
negative effect on the profitability to our contracts under which the Company
is to receive payment in dollars or other non-Israeli currencies while
incurring expenses in NIS (some of which are linked to the Israeli consumer
price index), unless such inflation is offset by a devaluation of the NIS.  Inflation in Israel and currency
fluctuations will also have a negative effect on the profitability to our fixed
price contracts under which the Company is to receive payment in NIS.  A devaluation of the NIS in relation to the
dollar will have the effect of decreasing the dollar value of any assets of the
Company, which consist of receivables payable in NIS (unless such receivables
are linked to the dollar).  Such a
devaluation would also have the effect of reducing the dollar amount of
liabilities of the Company which are payable in NIS (unless such payables are
linked to the dollar). Conversely, any increase in the value of the NIS in
relation to the dollar will have the effect of increasing the dollar value of
any unlinked NIS assets of the Company and the dollar amounts of any unlinked
NIS liabilities of the Company.

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

Political
and Economic Conditions in Israel Affecting our Business

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

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

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Economic Conditions

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

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

Trade
Relations

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

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

Trends

Strategy
Partners, an independent research firm, anticipates that growth will continue
in the data capture market.  However,
they anticipate that there will be a move toward integrated software solutions
instead of individual data capture products. 
They also predict that the need for applications will increase
substantially.  Outsourcing with respect
to documents solutions is expected to increase.  The industry is also expected to continue to move toward
consolidation.  We are addressing this
trend by solidifying our relationships with our existing partners and seeking
to become the preferred data capture solution provider for many large integrated
system providers.

Liquidity
and Capital Resources

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

As
of December 31, 2003, we had current assets of $11,150,921, cash and cash
equivalents of $5,854,436, accounts receivable of $4,606,254, other receivables
of $413,716 and aggregate current liabilities of $3,797,808.  We had working capital of $7,353,113 at
December 31, 2003 compared to working capital of $7,739,509 at December 31,
2002.

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On
June 10, 2004, we announced that we entered into a definitive agreement for the
private placement of 2,563,300 Ordinary Shares of the Company at a purchase
price of $3.16 per share to institutional investors for gross proceeds to the
Company of approximately $8.1 million.  
The investors also will receive three-year warrants to purchase up to an
additional 1,281,650 Ordinary Shares, with an exercise price of $4.26 per
share.

The
closing of the financing is subject to certain conditions, including our
receipt of shareholder approval of the terms of the transaction. We agreed to
use commercially reasonable efforts to call a meeting of shareholders to be
held within 75 days after the date of the signing the Share Purchase
Agreement.  In connection with the
private placement, we have agreed to file a resale registration statement covering
the shares purchased in the private placement (including the shares underlying
the warrants) within 30 days following the closing.  Our failure to timely file or obtain
effectiveness of the registration statement could subject us to liquidated damages.

In
our opinion, our working capital is sufficient for our present operating
requirements and capital expenditures at least over the next 12 months,
although we cannot assure you that this will remain true in the future.

Cash
used in operating activities in 2003 was $2,516,369, compared to cash used in
operating in 2002 of $1,983,285.  During
2003, we decreased our trade payables by $46,644, decreased our accrued
liabilities and other payables by $536,910, increased our accounts receivable
by $1,457,473 and increased our other receivables by $114,552.  Cash provided by investing activities in
2003 was $185,250, compared to cash used in investing activities in 2002 of
$199,028.  Cash provided by financing
activities in 2003 was $784,666, compared to cash provided by financing
activities in 2002 of $164,037.

We
currently have a short-term line of credit with First International Bank of
Israel.  The total amount available
under this line of credit is the lesser of $1,500,000 and 75% of certain
eligible trade receivables. 
The revolving line of credit in NIS bears interest at a rate of prime +
0.30% to 1% (As of December 31, 2003, prime rate was 6.7%).  The line of credit in US dollars bears
interest at a rate of Libor + 2% (As of December 31, 2003, Libor rate was
1.125%).  Any indebtedness under this
credit line is payable on demand and secured by a floating charge on our
assets.  We are required to maintain
certain financial ratios and our ability to issue securities is
restricted.  In the event that we
default under the line of credit, the bank could declare our indebtedness
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.

Contractual
Obligations and Commitments

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

|Contractual Obligation                                                                 |  | Total |           | Less Than
  1 Year |  | 1-3 Years |  | 3-5 Years |         | More than
  5 Years | 
|-------------------------------------------------------------------------------------- |  | ----- | --------- | ------------------ |  | --------- |  | --------- | ------- | ------------------- | 
|                                                                                       |  |       |           |                    |  |           |  |           |         |                     | 
|Long-Term Debt Obligation                                                              |  |       |           |                    |  |           |  |           |         |                     | 
|Capital Lease Obligation                                                               |  |       |           |                    |  |           |  |           |         |                     | 
|Operating Lease Obligation                                                             |  |       | 1,327,124 |                    |  | 454,576   |  |           | 669,724 |                     | 
|Purchase Obligation                                                                    |  |       | 300,000   |                    |  | 300,000   |  |           |         |                     | 
|Other Long-Term Liabilities
  Reflected on the Registrants
  Balance Sheet Under GAAP |  |       |           |                    |  |           |  |           |         |                     | 
|Total                                                                                  |  |       | 1,627,124 |                    |  | 754,576   |  |           | 669,724 |                     | 

We
also have a long-term liability on our balance sheet as of December 31, 2003 in
the amount of $190,916 related to employee severance obligations mandated by
Israeli law.  As we cannot determine the period, if any, during which we
will be required to make any payments in respect of that liability, it is not
reflected in the table above.

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Our
contractual obligations and commitments at December 31, 2003 principally include
obligations associated with our outstanding indebtedness, future minimum
operating lease obligations and contractual and legal obligations to employees
and officers severance expense. Such obligations are detailed in Notes 9, 10,
and 12 to the consolidated financial statements included elsewhere in this
annual report, as well as the section entitled Compensation in Item 6 of
this annual report.  We expect to
finance these contractual commitments from cash on hand and cash generated from
operations.

Research and Development, Patents and Licenses, etc.

During
the previous year, we gradually and substantially increased our investment in
research and development in order to develop new solutions and products.  During 2002, subsequent to the integration
of e-Mobilis activity, efforts toward developing a mobile solution decreased
materially, until finally totally halted during the fourth quarter of 2002
after our determination that concentrating on semi structured and other
solutions would prove more profitable.Due to the above and the decision
to focus on the structured and semi-structured forms solution, our research and
development headcount decreased significantly. As a result, gross research and
development expenses for 2003 were $863,209 compared to $1,340,408 for
2002.  We intend to continue various
research and development efforts to satisfy the needs of our customers and
potential customers. These efforts include refinements of and enhancements to our
products, such as improvements in image enhancement, automatic forms
recognition, automatic forms removal, machine print and handwritten character
recognition, as well as special purpose algorithms.

Our
research and development efforts have led to the development of our current
solutions technology, eFLOW Unified Content Platform.  Our latest research and development efforts
have concentrated on the semi-structured forms processing, resulting in the
development of our Freedom product.   These developments are enhancing, and we believe they will
continue to enhance, our ability to compete in complicated projects as a
solution provider for all kind of forms and all types of information.  Freedom and its different applications fit well with our plans to
keep pace with the trend towards the ultimate integration of all forms and
formats of information entering the organization.

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ITEM 6.     DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES

Directors and Senior Management

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

| | Name               |  | Age |  | Position with Company                                
| | ------------------ |  | --- |  | -----------------------------------------------------
| |                    |  |     |  |                                                      
| | Thomas
  C. Lavey  |  | 60  |  | Chairman
  of the Board of Directors                 
| |                    |  |     |  |                                                      
| | Ido
  Schechter    |  | 42  |  | Chief Executive Officer                              
| |                    |  |     |  |                                                      
| | Arie Rand          |  | 44  |  | Chief Financial Officer                              
| |                    |  |     |  |                                                      
| | Gideon Shmuel      |  | 32  |  | Vice
  President of Sales Europe Middle East and Asia
| |                    |  |     |  |                                                      
| | Oded
  Leiba       |  | 33  |  | Vice
  President of Engineering                      
| |                    |  |     |  |                                                      
| | Ofir Shalev        |  | 32  |  | Vice President of Research and
  Development         
| |                    |  |     |  |                                                      
| | Victor Halpert     |  | 43  |  | External Director                                    
| |                    |  |     |  |                                                      
| | Zamir Bar Zion     |  | 46  |  | External Director                                    
| |                    |  |     |  |                                                      
| | Izhak
  Nakar      |  | 52  |  | Director                                             
| |                    |  |     |  |                                                      
| | William
  Landuyt  |  | 48  |  | Director                                             
| |                    |  |     |  |                                                      
| | Elie
  Housman     |  | 67  |  | Director                                             
| |                    |  |     |  |                                                      
| | Phyllis
  Haberman |  | 55  |  | Director                                             

Thomas
C. Lavey became a Director of the Company in August 2002 and
the Board elected him as non-Executive Chairman at the same meeting. Since
September 2003, Mr. Lavey has served as Executive Vice President at Taleo Inc. Previously
Mr. Lavey served as Executive Vice President, Worldwide Field Operations of
MS2, Inc, which provides product life cycle automation software. Prior to joining MS2, Mr. Lavey was
senior vice president of worldwide operations at Extricity, which became part
of Peregrine Systems and provided B2B relationship management software. Mr.
Lavey also served as senior vice president at i2 Technologies and, from 1994
through 1999, he served as vice president of application sales at Oracle
Corporation. Mr. Lavey has a bachelors degree in mathematics from Penn State
University and an MBA from the University of Southern California.

Ido
Schechterhas been the CEO of the Company since January
2002.  From January 2001 until he became
CEO, Dr. Schechter was Vice President of TiS ASP2 , an initiative
of TiS to offer data collection services via the Internet, using the eFLOWplatform
solution.  Prior to that Dr. Schechter
had been the Companys Vice President of Sales since August 1996.  From January 1995 until August 1996, Dr.
Schechter served as General Manager of Super Image, a former affiliate of the
Company, which 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.

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

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Gideon Shmuel joined us as our Vice President of Sales for Europe, Middle East and
Asia during 2001 from Pangea Ltd (UK), where he was a Senior Vice President.
Pangea provides telecommunications infrastructure throughout Europe. Prior to
that, Mr. Shmuel was Managing Director of LCR Telecom UK, a company that
provides aggregated data, voice, Internet and mobile communications services to
the corporate market during the years 1998 to 2000. Mr. Shmuel holds an MA in
Marketing Management from Middlesex University Business School in London.

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

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

Victor
Halpert was elected to serve as an external director of the
Company at the shareholders meeting in December 2003. Mr. Halpert has served
in various positions in the field of equity research. From June 1999 through
January 2003 Mr. Halpert served as director for Salomon Smith Barney in New
York, NY. From January 1998 through May 1999 Mr. Halpert served as vice
president (equity research, telecommunications and technology) for Robertson
Stephens, New York, NY.  From January
1995 through December 1997, Mr. Halpert served as vice president for Salomon
Brothers Inc. New York, New York. Mr. Halpert has a bachelors of science
degree in Accounting from State University of New York, College at New Paltz,
NY, a Master of Science in Accounting from the University of Illinois at Chicago,
Graduate Business School and an MBA from the University of Chicago Graduate
Business School.

Zamir
Bar-Zion was elected to serve as an external director of the
Company at the shareholders meeting that took place in December 2003. Mr.
Bar-Zion served as Managing Director for Nessuah Zannex & Co./USBancorp
Piper Jaffray from 1998 through 2001. From 1995 to 1998 Mr. Bar-Zion served as
a private financial consultant. Mr. Bar-Zion received his B.Sc. in Computer
Science and Finance from New York Institute of Technology, an MA from the
Department of Finance from Pace University, New York, and a PMD from the
Program Management Development Program at Harvard University. Currently, Mr.
Zamir represents Piper Jaffrey in Israel.

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

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

Elie
Housman has been a director of the Company since May
2000.  Mr. Housman joined InkSure in
February 2002 as Chairman and also serves as a director of InkSure. Mr. Housman
was a Principal at Charterhouse from 1989 until June 2001. At Charterhouse, Mr.
Housman was involved in the acquisition of a number of companies with total
sales of several hundred million dollars. Prior to Charterhouse, he was
co-owner of AP Parts, a $250 million automotive parts manufacturer. Mr. Housman
was also the Chairman of Novo Plc. in London, a leading company in the
broadcast storage and services industry. Mr Housman served sa a director of deltathree, Inc., at
public company untill 31, December 2003. At present, Mr. Housman is a director
of two public companies, 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.

Phyllis
Haberman has been a director of the Company since May
2000.  She has been a partner of
Charterhouse since 2002 and a Senior Vice President since January 1997.  From 1988 through December 1996, Ms.
Haberman was a Vice President of Charterhouse.

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

Compensation

For
the year ended December 31, 2003, the compensation paid, and value of benefits
in kind granted, to Ido Schechter, our Chief Executive Officer, was $189,689.
The compensation paid to all other persons, as a group, who were, at December
31, 2003, directors or members of our administrative, supervisory or management
bodies during that time was $637,842. 
In addition, in 2003 members of that group were granted an aggregate of
options to purchase 37,500 Ordinary Shares under our ESOP 2003 with an exercise
price of $1.31 per share.  For further
details, see Item 6 of this annual report. 
The compensation paid does not include (i) reimbursement of
directors expenses, (ii) $138,007, which has been accrued to provide
pension, retirement, severance, vacation or similar benefits, and (iii) amounts
expended by us for automobiles made available to our officers ($62,551) and
other expenses (including business travel, and professional and business
association dues and expenses) reimbursed to officers.

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

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

For
so long as we did not default on our obligations set forth in paragraph 2
above, Mr. Nakar wasl subject to certain restrictions on competition contained
in his employment agreement.  Those
restrictions lapsed in May 2004.

In
accordance with the foregoing and as a result of Mr. Nakars resignation of his
employment, we recorded a non-recurring severance provision, the expenses in
our financial statements for which were in the amount of approximately $759,000
during prior years.  See the immediately
following section for a description of a consulting arrangement with Mr. Nakar.

Board Practices

Board
of Directors

All
directors (other than external directors) currently hold office until the next
annual meeting of shareholders and until their successors are duly elected and
qualified.  External directors currently
hold office for three years from their appointment (in December 2003) and until
their successors are duly elected and qualified at the relevant annual meeting.
The external directors may be elected for one additional three-year
period.  The Company, in its
shareholders meeting held on December 18, 2003, approved a monthly payment to
Mr. Thomas C. Lavey in the amount of $2,000 as compensation for his service as
a director and Chairman of the Board, and that Mr. Victor Halpert, Mr. Zamir
Bar-Zion for their service as external directors, members of Audit Committee
and the Board of Directors and Mr. Elie Houseman for his service as member of
the Audit Committee and Board of Directors receive as compensation a payment in
the amount of 15,750 NIS per annum. In addition each of the above directors
shall receive an amount of 3,000 NIS for each Board and/or Audit committee
meeting attended. Mr. Izhak Nakar receives compensation for his service as
member of the Board of Directors, in the amount of 19,841 NIS per annum and 993
NIS for each Board and/or committee meeting attended. Ms. Phyllis Haberman and
Mr. William Landuyt waived their right for compensation for their service as
directors.  We reimburse all of the
directors for reasonable travel expenses incurred in connection with their
activities on our behalf.

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

In
addition to any compensation received by Mr. Nakar for his service as a
director, the Company is obligated to compensate Mr. Nakar for the consulting
services in the amount of $1,000 plus reimbursement of expenses for every
business day invested by him with regard to the business of the Company in
which his active involvement shall be required. Further, should a certain
transaction for which Mr. Nakar provided consulting services be consummated,
Mr. Nakar shall receive a one time payment of $100,000 upon the signing of an
agreement consummating the transaction, and, in addition, an annual fee of
$100,000 as consideration for consulting services to be provided for one week
per month. At the conclusion of 6 months from the commencement of operation of
the transaction, discussions shall be conducted regarding the possibility of
the company paying Mr. Nakar a percentage of the income received by the Company
from the operations of the transaction and, if so resolved at that time, what
percentage of such income shall be paid.

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Audit
Committee; Remuneration Committee

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

Our
audit committee is governed by an audit committee charter which is attached as
an exhibit to this filing.

We
are also required by the rules of the NASDAQ Stock Market to establish an audit
committee, all of whose members are independent of management, and to adopt an
audit committee charter.  Our two
external directors, Victor Halpert and Zamir Bar-Zion, serve on the audit
committee of the board of directors, along with Elie Housman.

We
do not have a remuneration or compensation committee.

Employees

As
of June 23 2004, we employed 41 full-time employees and one part time employee
in our headquarters.  Five are employed
in administration and three in finance, seven in marketing and sales, and 27 in
product development and production.  In
addition, our North American subsidiary employs three full-time persons and one
half time person.  Our German branch
employs five full-time persons and one half time person, and our English branch
employs five full-time persons. 
Management believes that its relations with its employees are good.

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

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

33

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Share Ownership

Board
of Directors, Senior Management and Certain Employees

Mr.
Izhak Nakar currently holds in his name 59,174 Ordinary Shares.  These shares represent 0.96% (0.89% on a
fully diluted basis) of our outstanding share capital.  In addition, Mr. Nakar and members of his
immediate family own Nir 4 You Technologies Ltd., an Israeli company that holds
280,000 Ordinary Shares amounting to 4.53% (4.23% on a fully diluted basis) of
our outstanding share capital.  Mr.
Nakar also holds options to purchase 25,000 Ordinary Shares (0.38% of our
outstanding share capital on a fully diluted basis) at an exercise price of  $2 per share.  These options expire three years from the date they were
granted.  None of the Ordinary Shares
discussed in this section have different voting rights than those of other
outstanding Ordinary Shares.

Charter
owns 2,000,000 Ordinary Shares.  Mr.
Landuyt and Ms. Haberman disclaim
beneficial ownership of the Ordinary Shares owned by Charter.

Stock
Options

We
have reserved 115,000 Ordinary Shares for issuance upon exercise of outstanding
non-plan share options granted to certain executive officers and key employees
all of which have exercise prices of between $2.77 and $5.00 per share.  Pursuant to the terms of the option grant
letters, of the options granted to two employees, options to purchase 25% of
the shares became exercisable upon our 
initial public offering, and options to purchase 25% of the shares are
to become exercisable upon each of the first three anniversary dates of the
issuance of the options provided that the employees continue to be employed by
us on such dates.  Of the options
granted to these employees, options to purchase 50,000 shares expired when the
employees employment with us ended. 
Pursuant to the terms of the option grant letters, the options granted
to three other employees were to become exercisable in four equal parts upon
each of the first four anniversary dates of the issuance of the options
provided that the employees continue to be employed by us on such dates.  Of the options granted to two of the said
employees, options to purchase 12,250 shares expired when their employment with
us ended. In order to attract, retain and motivate employees (including
officers) who perform services for or on behalf of us, we have three Employee
Share Option Plans.  The first was
established in 1996, the second during the year 2000 and the third was approved
during 2003.

Employee
Share Option Plan (1996)

In
September 1996, the Board of Directors adopted, and our shareholders approved,
the Employee Share Option Plan (1996). 
ESOP 1996 authorizes the granting of options to purchase up to 250,000
Ordinary Shares, consisting of options intended to qualify as incentive stock
options within the meaning of Section 422 of the United States Internal
Revenue Code of 1986, as amended, and options not intended to satisfy the
requirements for incentive stock options. 
At June 20 2004, options to purchase 114,375 Ordinary Shares were
outstanding under the plan at exercise prices between $0.52 and $5.00 per
share.  All of the outstanding options
under the plan become exercisable in four equal parts upon each of the first
four anniversaries of the option grant dates. 
No exercises of options took place during 2003. During 2004, 17,000
options had been exercised and 12,500 had been forfeited through June 23.

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.

34

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

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

Upon
adoption of the Employee Share Option Plan (2003) all shares previously
available for grant under ESOP 1996 that were not the subject of outstanding
options, were transferred to such new plan (see below).

Employee
Share Option Plan (2000)

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

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

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

A
total of 240,000 of authorized but unissued shares were reserved for issuance
upon the exercise of options granted pursuant to ESOP 2000 and, as of June 23
2004, options to purchase an aggregate of 143,500 shares were outstanding  All of the granted options vest over a
three-year period and have exercise prices between $0.99 and $4.125 per
share  The number of shares covered by
an option granted under ESOP 2000 is subject to adjustment for stock splits,
mergers, consolidations, reorganizations and recapitalizations.  During 2004, 5,000 options were exercised
and 9,500 had been forfeited through June 23.

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

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

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

Upon
adoption of the Employee Share Option Plan (2003) all shares previously
available for grant under ESOP 2000 that were not the subject of outstanding
options, were transferred to such new plan (see below).

35

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Employee
Share Option Plan (2003)

An
additional stock 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.  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 option under such old plans
that expire prior to their exercise according to the conditions detailed
therein, will be transferred into the new plan.  We intend to file a registration statement on Form S-8 to
register these shares. We filed the necessary documents with the Israeli tax
authorities for the approval of the new option plan on June 4th,
2003. Such approval shall provide the grantees the eligibility for certain
benefits under Section 102 as revised by the Israeli tax reform.

As
of June 23, 2004, option to purchase an aggregate of 211,500 shares was
outstanding at exercise prices between $1.31 and $2.67 per share. At that time,
options to purchase 40,000 Ordinary Shares were available for future grant.

The
Board of directors approved the issuance of options to purchase an additional
650,000 Ordinary Shares pursuant to ESOP 2003, subject to shareholder approval.

Issuance of Options to Certain Persons

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

During
2003 and in 2004 through June 20, Mr. Yeshurun and Mr. Nakar  had exercised 35,000 options and 25,000
options, respectively.

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

36

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ITEM 7.     MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

As
of June 23, 2004, Charter held 2,000,000 Ordinary Shares, or 32.32% (30.22% on
a fully diluted basis) of our outstanding share capital.  At that time, Izhak Nakar held in his name
59,174 Ordinary Shares, or 0.96% (0.89% on a fully diluted basis) of the
outstanding share capital, and Nir 4 You Technologies Ltd., a company owned by
Mr. Nakar and his immediate family, held 280,000 Ordinary Shares, or 4.53%
(4.23% on a fully diluted basis) of our outstanding share capital.  Except as provided in the Share Purchase
Agreement described below, none of these shares have special voting rights
attached to them.

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

In
connection with the investment by Charter, certain rights were granted to Mr.
Nakar, our then Chief Executive Officer. 
These included the modification of Mr. Nakars compensation, as
described in the section entitled Compensation in Item 6 of this annual
report, as well as the granting to Mr. Nakar of the right to demand
registration of any or all of the shares held by him in the event that his employment
was terminated under certain specific conditions.  These rights to demand registration have come into effect
following the termination of Mr. Nakars employment.  The grant of these rights was approved by our Board of Directors,
Audit Committee and shareholders. 
Charter and Mr. Nakar have requested the registration of the resale of
the Ordinary Shares held by them or their affiliates.  The Company intends to include those shares on the registration
statement it will file in connection with the private placement which is
described in Item 5 under the heading Liquidity and Capital Resources..

In
accordance with the foregoing and as a result of Mr. Nakars resignation from
employment, we recorded a non-recurring severance expense in our financial
statements in the amount of approximately $759,000 during prior years.  For additional information, see the section
entitled Compensation in Item 6 of this annual report, and Note 12 to the
consolidated financial statements included in Item 18 in this annual report.

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

Twenty
record holders of Ordinary Shares have declared postal addresses in the United
States.  These twenty record holders
hold, between them, 94% of our outstanding share capital.  There are no arrangements known to us  that may at a subsequent date result in a
change in control of us.

37

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ITEM
8.     FINANCIAL INFORMATION

Consolidated
statements and other financial information

Consolidated
Financial Statements

See
Item 18.

Other
Financial Information

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

|                             |  | 2001       |   | 2002      |   | 2003      |  
|---------------------------- |  | ---------- | - | --------- | - | --------- | -
|                             |  |            |   |           |   |           |  
|Export
  Revenues            |  |            |   |           |   |           |  
|Export Revenues              |  | 11,773,707 |   | 7,753,019 |   | 8,288,344 |  
|                             |  |            |   |           |   |           |  
|Total Revenues               |  | 11,959,249 |   | 7,799,093 |   | 8,319,002 |  
|                             |  |            |   |           |   |           |  
|Percentage of Total Revenues |  | 98         | % | 99        | % | 99        | %
|                             |  |            |   |           |   |           |  
|Breakdown
  of Revenues      |  |            |   |           |   |           |  
|Product Revenues             |  | 83         | % | 82        | % | 75        | %
|                             |  |            |   |           |   |           |  
|Service Revenues             |  | 17         | % | 18        | % | 25        | %

Legal
Proceedings

In December 2002 we were sued in the United
States District Court for the Southern District of New York by Millennium L.P.
for allegedly infringing five U.S. patents purportedly owned by Millennium,
L.P.  Our subsidiary, TiS America, Inc.
was also named as a defendant in the suit.  
We have reached a settlement with Millennium pursuant to which the
parties release all claims. In connection with the suit, we paid Millennium
$100,000 and agreed to pay an additional $150,000 over the next two years.

Dividend
Policy

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

Significant
Changes

There
has been no material change in our financial position since December 31,
2003, other than respect to the private placement for consideration of
approximately $8.1 million described in Item 5 under the heading Liquidity and
Capital Resources.

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ITEM
9.     LISTING

Stock price history

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

|Year
  Ending     |  |    |  | Boston
  Stock
  Exchange |  | Nasdaq
  SmallCap
  Market
|----------------- |  | -- |  | ------------------------- |  | --------------------------
|                  |  |    |  |                           |  |                           
|                  |  |    |  |                           |  |                           
|December 31, 2003 |  | Hi |  | 3.14                      |  |                           
|                  |  | Lo |  | 0.42                      |  |                           
|                  |  |    |  |                           |  |                           
|December 31, 2002 |  | Hi |  | 3.92                      |  |                           
|                  |  | Lo |  | 0.42                      |  |                           
|                  |  |    |  |                           |  |                           
|December 31, 2001 |  | Hi |  | 4.04                      |  |                           
|                  |  | Lo |  | 0.99                      |  |                           
|                  |  |    |  |                           |  |                           
|December 31, 2000 |  | Hi |  | 16.0                      |  |                           
|                  |  | Lo |  | 1.87                      |  |                           
|                  |  |    |  |                           |  |                           
|December 31, 1999 |  | Hi |  | 9.75                      |  |                           
|                  |  | Lo |  | 2.50                      |  |                           

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

|Quarter Ending     |  |    |  | Boston Stock
  Exchange |  | Nasdaq SmallCap
  Market
|------------------ |  | -- |  | ----------------------- |  | ------------------------
|                   |  |    |  |                         |  |                         
|                   |  |    |  |                         |  |                         
|May 31, 2004       |  | Hi |  | 5.00                    |  | 5.00                    
|                   |  | Lo |  | 3.27                    |  | 3.27                    
|                   |  |    |  |                         |  |                         
|March 31, 2004     |  | Hi |  | 4.44                    |  | 4.44                    
|                   |  | Lo |  | 2.36                    |  | 2.36                    
|                   |  |    |  |                         |  |                         
|December 31, 2003  |  | Hi |  | 3.14                    |  | 3.14                    
|                   |  | Lo |  | 1.90                    |  | 1.90                    
|                   |  |    |  |                         |  |                         
|September 30, 2003 |  | Hi |  | 2.20                    |  | 2.20                    
|                   |  | Lo |  | 1.15                    |  | 1.15                    
|                   |  |    |  |                         |  |                         
|June 30, 2003      |  | Hi |  | 1.49                    |  | 1.49                    
|                   |  | Lo |  | 0.61                    |  | 0.61                    
|                   |  |    |  |                         |  |                         
|March 31, 2003     |  | Hi |  | 0.77                    |  | 0.77                    
|                   |  | Lo |  | 0.42                    |  | 0.42                    
|                   |  |    |  |                         |  |                         
|December 31, 2002  |  | Hi |  | 0.99                    |  | 0.99                    
|                   |  | Lo |  | 0.42                    |  | 0.42                    
|                   |  |    |  |                         |  |                         
|September 30, 2002 |  | Hi |  | 2.63                    |  | 2.63                    
|                   |  | Lo |  | 0.95                    |  | 0.95                    
|                   |  |    |  |                         |  |                         
|June 30, 2002      |  | Hi |  | 3.20                    |  | 3.20                    
|                   |  | Lo |  | 2.20                    |  | 2.20                    
|                   |  |    |  |                         |  |                         
|March 31, 2002     |  | Hi |  | 3.92                    |  | 4.05                    
|                   |  | Lo |  | 2.61                    |  | 2.31                    

39

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

|Month
  Ending    |  |    |  | Boston
  Stock
  Exchange |  | Nasdaq
  SmallCap
  Market
|----------------- |  | -- |  | ------------------------- |  | --------------------------
|                  |  |    |  |                           |  |                           
|May 28, 2004      |  | Hi |  | 4.34*                     |  | 4.34                      
|                  |  | Lo |  | 3.27*                     |  | 3.27                      
|                  |  |    |  |                           |  |                           
|April 30, 2004    |  | Hi |  | 5.00*                     |  | 5.00                      
|                  |  | Lo |  | 3.53*                     |  | 3.53                      
|                  |  |    |  |                           |  |                           
|March 31, 2004    |  | Hi |  | 4.44*                     |  | 4.44                      
|                  |  | Lo |  | 2.47*                     |  | 2.47                      
|                  |  |    |  |                           |  |                           
|February 29, 2004 |  | Hi |  | 2.88*                     |  | 2.88                      
|                  |  | Lo |  | 2.36*                     |  | 2.36                      
|                  |  |    |  |                           |  |                           
|January 31, 2004  |  | Hi |  | 2.98*                     |  | 2.98                      
|                  |  | Lo |  | 2.66*                     |  | 2.66                      
|                  |  |    |  |                           |  |                           
|December 31, 2003 |  | Hi |  | 2.96*                     |  | 2.96                      
|                  |  | Lo |  | 2.57*                     |  | 2.57                      
|                  |  |    |  |                           |  |                           
|November 30, 2003 |  | Hi |  | 3.14*                     |  | 3.14                      
|                  |  | Lo |  | 2.50*                     |  | 2.50                      
|                  |  |    |  |                           |  |                           

---

*  See
Markets below

Markets

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

40

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ITEM
10.   ADDITIONAL INFORMATION

Memorandum
and articles of association

General

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

Directors
and other Office Holders

General

A
directors ability to vote on a proposal, arrangement or contract in which the
director is materially interested is codified, along with the fiduciary duties
of all office holders, in the Israeli Companies Law.  Under the Israeli Companies Law, the term
office holders, is defined to mean, a director, chief executive officer,
president, chief business manager, deputy chief executive officer, vice chief
executive officer, executive vice president, vice president, another manager
directly subordinate to the managing director or any other person assuming the
responsibilities of any of the forgoing positions without regard to such persons
title.  An office holders fiduciary
duties consist of a duty of care and a duty of loyalty.  The duty of care includes avoiding negligent
acts and acting skillfully as a reasonable office holder would act.  The duty of loyalty includes avoiding any conflict
of interest between the office holders position in the company and his
personal affairs, avoiding any competition with the company, avoiding
exploiting any business opportunity of the company in order to receive personal
advantage for himself or others, and revealing to the company any information
or documents relating to the companys affairs which the office holder has
received due to his position as an office holder of the company.

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

In
the case of a transaction in which an office holder has a personal interest,
that is not an extraordinary transaction, as defined under Israeli law, and
after the office holder complies with the above disclosure requirement, only
board approval is required unless the Articles of Association of the company
provide otherwise.  Members of the board
having a personal interest should not be present at the vote or exercise their
vote unless a majority of the board has a personal interest.  The transaction must not be adverse to the
companys interest.  If such transaction
is an extraordinary transaction or if the company intends 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.

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

41

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External
Directors

Under
the Israeli Companies Law, which took effect on February 1, 2000, companies
registered under the laws of Israel whose shares have been offered to the
public in or outside of Israel are required to appoint two external
directors.  Any committee having the
power to act on behalf of a companys board (as opposed to an advisory committee)
must have at least one external director as a member. All of the external
directors must be members of the Audit Committee. An external director must be
an individual resident of Israel, who is qualified to serve as a director.
However, companies such as ours whose shares have been offered to the public
outside of Israel may appoint external directors who are not residents of
Israel according to special easements provided in relevant regulations.  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 current law is three years and
may be extended for an additional term of three years.  External directors may be removed only by
the same percentage of shareholders as is required for their election, or by a
court, and then only if the external directors cease to meet the statutory
qualifications for their appointment or if they violate their duty of loyalty
to the company.

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

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

Alternate
Directors

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

42

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

Internal
Auditor and Certified Public Accountant

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

In
addition, under the Israeli Companies Law, all companies must appoint a
certified public accountant to audit the companys financial statements and to
report to the chairman of the board of directors any material improprieties
that it may discover with respect to the accounting control of the
company.  In our last shareholders
meeting, on December 18, 2003 we appointed Kost, Forrer, Gabbay and Kasierer, a
member firm of  Ernst and Young and
certified public accountants in Israel, as our certified public accountant for
auditing services.

Indemnification
of Directors and Officers

The
Israeli Companies Law provides that an Israeli company cannot exempt an officer
from liability with respect to a breach of his fiduciary responsibilities.  While the Companies Ordinance, in effect
through 1999, provided that an Israeli company could not exempt an officer from
liability with respect to a breach of his duty of care or his duty of loyalty,
the Israeli Companies Law now permits such exemption if formulated in
accordance with such law. The Israeli Companies Law also permits entitling  an office holder to indemnification subject
to certain conditions.  In the last
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, in the form
described herein.

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

Currently,
we hold an insurance policy for our office holders that provide coverage
limited to $5,000,000 in aggregate for the policy period, ending on December
31, 2004.

Rights,
Preferences, Restrictions of Shares

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

43

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

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

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

Meetings
of Shareholders

An
annual general meeting must be held once in each year and not later than
fifteen months after the preceding annual general meeting.  All shareholders are entitled to attend and
vote 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
they see fit.  In addition the Board
must, according to statute, convene an extraordinary general meeting if it
receives a demand to do so from either (i) at least two directors, (ii) at
least one quarter of the directors of the Board or (iii) one or more
shareholders who hold (A) an aggregate of at least five percent of our issued
share capital and one percent of all voting rights, or (B) at least five
percent of all voting rights.  Any
demand by a person or persons, as described in (i), (ii) and/or (iii) of this
paragraph, who wish to demand that an extraordinary general meeting be convened
must be made in writing and sent to our registered office.  The demand must detail the objects of the
meeting and must be signed by all those making the demand.

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

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

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Limitations
of Shareholders

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

Limitations
on a Change of Control

There
are no provisions in our Articles or other constituent documents other than as
required by law that would have an effect of delaying, deferring or preventing
a change in control of us.  The holders
of the warrants to be issued in connection with the private placement which is
described in Item 5 under the heading Liquidity and Capital Resources, have
certain rights upon certain types of transactions that could make consummating
such a transaction more expensive.

Provisions
Relating to Major Shareholders

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

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

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

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

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

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

Contracts

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

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Israeli
Exchange Control Laws

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

Taxation

Israeli
Tax Considerations

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

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

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

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

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| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | Introduction of a new regime for the taxation of
  shares and options issued to employees and officers (including directors).

The
discussion is not intended, and should not be construed, as legal or
professional tax advice and is not exhaustive of all possible tax
considerations.

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

As
of December 31, 2003, we had net operating loss carryforwards of approximately
$15,362,351, available to utilize against our taxable business income in future
tax years.  A portion of such losses
expires over a period from 2005 through 2017 and the rest remains available
indefinitely.

Law for the Encouragement of Capital
Investments, 1959

General

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

Tax Benefits

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

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

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

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For
a company with foreign investment of:

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

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

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

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

Law for the
Encouragement of Industry (Taxes), 1969

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

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

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

Taxation under Inflationary
Conditions

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

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

Tax Benefits and Government Support
for Research and Development

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

Capital Gains Tax

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

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

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

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

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

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

Taxation of Non-Residents of Israel

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

United
States Federal Income Tax Considerations

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

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

50

---

---

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

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

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

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

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

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

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

Taxation of Ordinary Shares

Taxation of
Dividends Paid On Ordinary Shares

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

51

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

Taxation of
the Disposition of Ordinary Shares

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

Tax
Consequences if the Company is a Passive Foreign Investment Company

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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

52

---

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

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

The
Company believes that it was not a PFIC in 2003.  However, the tests for determining PFIC status are applied
annually, and it is difficult to make accurate predictions of future income and
assets which are relevant to this determination.  Accordingly, we cannot assure you that the Company will not
become a PFIC.  If the company determines
that it has become a PFIC, it will notify its U.S. Holders and provide them
with the information necessary to comply with the QEF rules.  U.S. Holders who hold Ordinary Shares during
a period when the Company is a PFIC will be subject to the foregoing rules,
even if the Company ceases to be a PFIC, subject to certain exceptions for U.S.
Holders who made a QEF election.  U.S.
Holders are urged to consult their tax advisors about the PFIC rules, including
the consequences to them of making a mark-to-market or QEF election with
respect to the Companys Ordinary Shares in the event that the Company
qualifies as a PFIC.

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

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

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

Information Reporting and Back-up Withholding

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

53

---

---

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

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

Documents
on display

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

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

54

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ITEM
11.   QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

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

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

The
Company does not utilize financial instruments for trading purposes and holds
no derivative financial instruments that could expose it to significant market
risk.

Based
upon historical US dollar currency movement, the Company does not believe that
reasonably possible near-term changes in the US dollar currency of 10% will
result in a material effect on future earnings, financial position or cash
flows of the company.

ITEM
12.   DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES

Not applicable.

55

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PART II

ITEM
13.   DEFAULTS, DIVIDENDS, ARREARAGES AND
DELINQUENCIES

None.

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

None.

ITEM
15.   CONTROLS AND PROCEDURES

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

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

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

ITEM
16.   [RESERVED]

ITEM
16A.  AUDIT COMMITTEE FINANCIAL EXPERT

The Board of Directors
has determined that Victor Halpert, a member of our audit committee, is an
audit committee financial expert.  See
Mr. Halperts biography in Item 6.

ITEM
16B. CODE OF ETHICS

We believe that our
corporate conduct is consistent with or exceeds industry ethical standards.  However, we are in the process of considering
the adoption of a Code of Ethics to formalize existing practice.

ITEM
16C PRINCIPAL ACCOUNTANT FEE AND SERVICES

Audit
Fees

Our Board of Directors
appointed Somekh Chaikin (A member firm of KPMG International) (KPMG)
Certified Public Accountants (Isr.)  as
independent auditors audited our financial statements for the fiscal year
ended December 31, 2002.

56

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During 2003, the Board of
Directors appointed Kost, Forer and Gabbay and Kasierer (A member of Ernst
& Young Global) (EY) Certified Public Accountants (Isr.) as independent
auditors to audit our financial statements for the fiscal year ended December
31, 2003.

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, 2003 were $22,000.

The aggregate fees billed
by KPMG 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, 2003 and December 31, 2002 were $45,898 and $85,820
respectively.

Tax Fees

For the fiscal year ended
December 31, 2003 and 2002 the aggregate fees billed for tax compliance, tax
advice and tax planning by EY were $50,500 and $6,300 respectively

For the fiscal years
ended December 31, 2003 and 2002 the aggregate fees billed for tax compliance
KPMG were $0 and $2,500, respectively

Non-Audit services

For the fiscal year ended
December 31, 2003 the aggregate fees billed by EY for other non-audit
professional services, other than those services listed above, were
$5,000.  Such services were comprised of
accounting and other consultation. For the fiscal years ended December 31, 2003
and 2002 the aggregate fees billed by 
KPMG for other non-audit professional services, other than those
services listed above, were $0 and $3,100.

Effective May 6, 2003,
the Securities and Exchange Commission adopted rules that require that before
KPMG and EY are engaged by our subsidiaries or us to render any auditing or
permitted non-audit related service, the engagement 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, the Securities and Exchange
  Commission does not require pre-approval.                                                                                                                                                                                                                                                                   

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

ITEM 16D
EXEMPTIONS FROM THE LISTING STANDARDS OF AUDIT COMMITTEES

Not
applicable.

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

Not applicable.

57

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PART III

ITEM
17.   FINANCIAL STATEMENTS

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

ITEM
18.   FINANCIAL STATEMENTS

See pages 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.                                                                                                                                                                                                                               | 
|       |  |                                                                                                                                                                                                                                                                                                                       | 
|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 Public Warrant Agreement between the
  Company, the Warrant Agent and the Underwriter (incorporated by reference to
  exhibit 4.2 to the Companys Registration Statement on Form F-1 (registration
  number 333-05718)).                                                                                     | 
|       |  |                                                                                                                                                                                                                                                                                                                       | 
|2.2    |  | Form of Public Warrant Certificate (incorporated by
  reference to exhibit 4.3 to the Companys Registration Statement on Form F-1
  (registration number 333-05718)).                                                                                                                                                | 
|       |  |                                                                                                                                                                                                                                                                                                                       | 
|2.3    |  | Form of Underwriters Warrant Agreement
  (incorporated by reference to exhibit 4.4 to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                                                                                                                           | 
|       |  |                                                                                                                                                                                                                                                                                                                       | 
|4.1    |  | Top Image Systems, Ltd. Employee Stock Option Plan
  (1996) (incorporated by reference to exhibit 10.1 to the Companys
  Registration Statement on Form S-8 (registration number 333-11560)).                                                                                                                        | 
|       |  |                                                                                                                                                                                                                                                                                                                       | 
|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    |  | Top Image Systems Ltd. Employee Share Option Plan (2000) (incorporated by reference to
exhibit 4.1 to the Company's registration statement on Form S-8 filed December 19, 2002).                                                                                                                                      | 
|       |  |                                                                                                                                                                                                                                                                                                                       | 
|4.4    |  | Contract between the Company and JCC Payments
  Systems, Ltd. for the Supply, Installation and Development of Bespoke
  Software of the JCC Image System, dated June 24, 1996 (incorporated by
  reference to exhibit 10.1(a) to the Companys Registration Statement on Form
  F-1 (registration number 333-05718)). | 
|       |  |                                                                                                                                                                                                                                                                                                                       | 
|4.5    |  | Contract for the Support & Maintenance of
  Software of the JCC Image System, between the Company and JCC Payments
  Systems, Ltd., dated June 24, 1996 (incorporated by reference to exhibit
  10.1(b) to the Companys Registration Statement on Form F-1 (registration
  number 333-05718)).                       | 
|       |  |                                                                                                                                                                                                                                                                                                                       | 
|4.6    |  | Contract between the Company and Unicre, Cartao
  Internacional de Credito, SA., for the Supply, Installation and Development
  of Software System, dated June 20, 1994 (incorporated by reference to
  exhibit 10.1(c) to the Companys Registration Statement on Form F-1
  (registration number 333-05718)).       | 

58

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|     |  |                                                                                                                                                                                                                                                                                                                       | 
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.7  |  | Software Maintenance Agreement between the Company
  and Unicre, Cartao Internacional de Credito, SA., dated July 20, 1994
  (incorporated by reference to exhibit 10.1(d) to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                                   
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.8  |  | English translation of Agreement between the Company
  and Isracard Ltd. for the Supply, Installation and Development of Software
  System, dated November 4, 1993 (incorporated by reference to exhibit 10.1(e)
  to the Companys Registration Statement on Form F-1 (registration number
  333-05718)).           
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.9  |  | Agreement between the Company and Isracard Ltd. for
  the Supply, Installation and Development of Software System, dated November
  4, 1993 (incorporated by reference to exhibit 10.1(f) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                    
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.10 |  | English translation of Agreement between the Company
  and Israel Credit Card, Ltd. for the Supply, Installation and Development of
  Software System, dated December 4, 1991 (incorporated by reference to exhibit
  10.1(g) to the Companys Registration Statement on Form F-1 (registration
  number 333-05718)).
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.11 |  | Agreement between the Company and Israel Credit
  Card, Ltd. for the Supply, Installation and Development of Software System,
  dated December 4, 1991 (incorporated by reference to exhibit 10.1(h) to the
  Companys Registration Statement on Form F-1 (registration number
  333-05718)).                       
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.12 |  | Exclusive Software Distribution Agreement between
  the Company and Hasso Corporation, dated June 28, 1996 (incorporated by
  reference to exhibit 10.1(i) to the Companys Registration Statement on Form
  F-1 (registration number 333-05718)).                                                                   
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.13 |  | Second Amendment, dated March 27, 2001, to the
  Exclusive Software Distribution Agreement between the Company and Hasso
  Corporation, dated June 28, 1996.                                                                                                                                                         
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.14 |  | Memorandum Agreement between the Company and Hasso
  Corporation, dated March 13, 1996 (incorporated by reference to exhibit 10.1(j)
  to the Companys Registration Statement on Form F-1 (registration number
  333-05718)).                                                                                       
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.15 |  | Exclusive Software Distribution Agreement between
  the Company and Daewoo Information Systems Co., Ltd. dated January 29, 1994
  (incorporated by reference to exhibit 10.1(k) to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                              
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.16 |  | English translation of Entrepreneur Agreement among
  the Company, Micro Daf Industries 80, Ltd. and Israeli Credit Card, Ltd.
  dated October 31, 1995 (incorporated by reference to exhibit 10.2(a) to the
  Companys Registration Statement on Form F-1 (registration number
  333-05718)).                      
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.17 |  | Entrepreneur Agreement among the Company, Micro Daf
  Industries 80, Ltd. and Israeli Credit Card, Ltd. dated October 31, 1995
  (incorporated by reference to exhibit 10.2(b) to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                               
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.18 |  | Employee Agreement between the Company and Ofer
  Comay (incorporated by reference to exhibit 10.4(a) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.19 |  | Employee Agreement between the Company and Yossi
  Karchi (incorporated by reference to exhibit 10.4(b) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                                                      
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.20 |  | Employee Agreement between the Company and Ziv Koren
  (incorporated by reference to exhibit 10.4(c) to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                                                                                                         

59

---

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|     |  |                                                                                                                                                                                                                                                                                                          | 
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|     |  |                                                                                                                                                                                                                                                                                                          | 
|     |  |                                                                                                                                                                                                                                                                                                         
|4.21 |  | Employee Agreement between the Company and Stuart
  Melnick (incorporated by reference to exhibit 10.4(d) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                                         
|4.22 |  | Employee Agreement between the Company and Izhak
  Nakar (incorporated by reference to exhibit 10.4(e) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                                          
|     |  |                                                                                                                                                                                                                                                                                                         
|4.23 |  | Employee Agreement between the Company and Ido
  Schechter (incorporated by reference to exhibit 10.4(f) to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                         
|4.24 |  | Employee Agreement between the Company and Yehezkel
  Yeshurun (incorporated by reference to exhibit 10.4(g) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                                    
|     |  |                                                                                                                                                                                                                                                                                                         
|4.25 |  | English translation of an Employment Agreement
  between the Company and Arie Rand (incorporated by reference to exhibit 3.25
  to the Companys annual report on Form 20-F (registration number 001-14552)).                                                                                           
|     |  |                                                                                                                                                                                                                                                                                                         
|4.26 |  | English translation of a Personal Employment
  Agreement between the Company and Tal Marom (incorporated by reference to
  exhibit 3.26 to the Companys annual report on Form 20-F (registration number
  001-14552)).                                                                                 
|     |  |                                                                                                                                                                                                                                                                                                         
|4.27 |  | English translation of an Amendment to Employment Agreement
  between the Company and Tal Marom (re: updating of compensation and position
  for 2001) (incorporated by reference to exhibit 3.27 to the Companys annual
  report on Form 20-F (registration number 001-14552)).                       
|     |  |                                                                                                                                                                                                                                                                                                         
|4.28 |  | English translation of a Personal Employment
  Agreement between the Company and Norman Kreger (incorporated by reference to
  exhibit 3.28 to the Companys annual report on Form 20-F (registration number
  001-14552)).                                                                             
|     |  |                                                                                                                                                                                                                                                                                                         
|4.29 |  | English translation of a Salary Adjustment letter
  for Norman Kreger (incorporated by reference to exhibit 3.29 to the Companys
  annual report on Form 20-F (registration number 001-14552)).                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                         
|4.30 |  | English translation of a Personal Employment
  Agreement between the Company and Amos Eliav (incorporated by reference to
  exhibit 3.30 to the Companys annual report on Form 20-F (registration number
  001-14552)).                                                                                
|     |  |                                                                                                                                                                                                                                                                                                         
|4.31 |  | English translation of a Salary Adjustment letter
  for Amos Eliav (incorporated by reference to exhibit 3.31 to the Companys
  annual report on Form 20-F (registration number 001-14552)).                                                                                                           
|     |  |                                                                                                                                                                                                                                                                                                         
|4.32 |  | Share Purchase Agreement, dated as of February 11,
  2000, by and between Charter-TIS LLC and the Company, as amended by Amendment
  #1 thereto, dated as of April 28, 2000 (incorporated by reference to exhibit
  3.32 to the Companys annual report on Form 20-F (registration number
  001-14552)).
|     |  |                                                                                                                                                                                                                                                                                                         
|4.33 |  | Registration Rights Agreement, dated as of May 8,
  2000, among the Company, Charter-TIS LLC and Izhak Nakar (incorporated by
  reference to exhibit 3.33 to the Companys annual report on Form 20-F
  (registration number 001-14552)).                                                               
|     |  |                                                                                                                                                                                                                                                                                                         
|4.34 |  | Preemptive Rights Agreement, dated as of May 8,
  2000, between the Company and Izhak Nakar (incorporated by reference to
  exhibit 3.34 to the Companys annual report on Form 20-F (registration number
  001-14552)).                                                                                
|     |  |                                                                                                                                                                                                                                                                                                         
|4.35 |  | English translation of Employment Agreement between
  the Company and Jonathan Heller dated December 24, 2001 (incorporated by
  reference to exhibit 3.35 to the Companys annual report on Form 20-F for the
  fiscal year ended December 31, 2001).                                                  

60

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|     |  |                                                                                                                                                                                                                                                                                                                                                                                 | 
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.36 |  | English translation of Update to Employment
  Agreement between the Company and Jonathan Heller dated February 28, 2002
  (incorporated by reference to exhibit 3.36 to the Companys annual report on
  Form 20-F for the fiscal year ended December 31, 2001).                                                                                                               
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.37 |  | English translation of Employment Agreement between
  the Company and Oded Leiba dated March 19, 2001 (incorporated by reference to
  exhibit 3.37 to the Companys annual report on Form 20-F for the fiscal year
  ended December 31, 2001).                                                                                                                                 
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.38 |  | English translation of Employment Agreement between
  the Company and Dan Inbar dated December 31, 2001 (incorporated by reference
  to exhibit 3.38 to the Companys annual report on Form 20-F for the fiscal
  year ended December 31, 2001).                                                                                                                               
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.39 |  | Value-Added Reseller Agreement for ODT Document
  Technologies Products between the Company and Océ Document Technologies
  dated August 2, 2001 (incorporated by reference to exhibit 3.39 to the
  Companys annual report on Form 20-F for the fiscal year ended December 31,
  2001).                                                                                     
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.40 |  | OEM License Agreement between the Company and
  CharacTell Ltd. dated July 16, 2001 (incorporated by reference to exhibit
  3.40 to the Companys annual report on Form 20-F for the fiscal year ended
  December 31, 2001).                                                                                                                                                   
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.41 |  | Second Amendment to the Exclusive Software
  Distribution Agreement Dated June 28, 1996, as amended, between the Company
  and Hasso Corporation (as a predecessor entity to Toyo Ink Manufacturing Co.,
  Ltd.) dated March 27, 2001. (incorporated by reference to exhibit 3.41 to the
  Companys annual report on Form 20-F for the fiscal year ended December 31,
  2001).
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.42 |  | Agreement between the Company and Elsag spa
  regarding software and services for the population census of Italy dated March
  18, 2002 (incorporated by reference to exhibit 3.42 to the Companys annual
  report on Form 20-F for the fiscal year ended December 31, 2001).                                                                                                 
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.43 |  | Statement of Work to Subcontractor Agreement between
  the Company and NCR (Cyprus) Ltd. regarding software and services for the
  population census of Italy dated June 22, 2001 (incorporated by reference to
  exhibit 3.43 to the Companys annual report on Form 20-F for the fiscal year
  ended December 31, 2001).                                                     
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.44 |  | Agreement between the Company and CMC Ltd. regarding
  software and services for the population census of India dated December 12,
  2001 (incorporated by reference to exhibit 3.44 to the Companys annual
  report on Form 20-F for the fiscal year ended December 31, 2001).                                                                                               
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.45 |  | Separation Agreement between the Company and Mr.
  Peter Nowak dated May 15, 2002 (incorporated by reference to exhibit 3.45 to
  the Companys annual report on Form 20-F for the fiscal year ended December
  31, 2001).                                                                                                                                                     
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.46 |  | 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).                                                                                                                                               
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.47 |  | 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).                                                                                               
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.48 |  | Top Image Systems Ltd. Israeli Share Option Plan
  (2003).                                                                                                                                                                                                                                                                                                                     
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|8    |  | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                          

61

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|     |  |                                                                                                                                                            | 
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|     |  |                                                                                                                                                           
|12.1 |  | Certification of the Chief Executive Officer
  pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the
  Sarbanes-Oxley Act of 2002.
|     |  |                                                                                                                                                           
|12.2 |  | Certification of the Chief Financial Officer
  pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the
  Sarbanes-Oxley Act of 2002.
|     |  |                                                                                                                                                           
|13.1 |  | Certification of the Chief Executive Officer
  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.
|     |  |                                                                                                                                                           
|13.2 |  | Certification of the Chief Financial Officer
  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.
|     |  |                                                                                                                                                           
|14.1 |  | Consent of Somekh Chaikin  member firm of KPMG
  International.                                                                                          
|     |  |                                                                                                                                                           
|14.2 |  | Consent of Kost, Forer Gabbay and Kasierer  member
  of Ernst & Young Global.                                                                            
|     |  |                                                                                                                                                           
|14.3 |  | Audit Committee Charter.                                                                                                                                  

62

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---

SIGNATURES

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

|                       | TOP IMAGE SYSTEMS LTD.
|---------------------- | ----------------------
|                       |                       
|                       |                       
|                       | By:                   
|                       |                       
|                       |                       
|                       |                       
|                       |                       
|Date:  June
  23, 2004 |                       

63

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---

EXHIBIT 12.1

CERTIFICATION
of the Chief Executive Officer

|   | I, Ido Schechter, Chief Executive Officer of Top
  Image Systems Ltd., certify that:                                                                                                                                                                                                                                                      
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                           
|1. | I have reviewed this annual report on Form 20-F of
  Top Image Systems Ltd. (the Registrant);                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                           
|2. | Based on my knowledge, this report does not contain
  any untrue statement of a material fact or omit to state a material fact
  necessary to make the statements made, in light of the circumstances under
  which such statements were made, not misleading with respect to the period
  covered by this report;                        
|   |                                                                                                                                                                                                                                                                                                                                           
|3. | Based on my knowledge, the financial statements and
  other financial information included in this report fairly present in all
  material respects the financial condition, results of operations and cash
  flows of the registrant as of, and for, the period presented in this report;                                                
|   |                                                                                                                                                                                                                                                                                                                                           
|4. | The registrants other certifying officer and I are
  responsible for establishing and maintaining disclosure controls and
  procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and
  internal control over financial reporting (as defined in Exchange Act Rules
  13a-15(f) and 15d-15(f) for the registrant and have:
|   |                                                                                                                                                                                                                                                                                                                                           
|   | a)                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                           
|   | b)                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                           
|   | c)                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                           
|   | d)                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                           
|5. | The registrants other certifying officers and I
  have disclosed, based on our most recent evaluation of internal control over
  financial reporting, to the registrants auditors and audit committee of the
  board of directors (or persons performing the equivalent function):                                                      
|   |                                                                                                                                                                                                                                                                                                                                           
|   | a)                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                           
|   | b)                                                                                                                                                                                                                                                                                                                                        

Date: June 23, 2004

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

64

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---

EXHIBIT 12.2

CERTIFICATION
of the Chief Financial Officer

|   | I, Arie Rand, Chief Financial Officer of Top Image
  Systems Ltd., certify that:                                                                                                                                                                                                                                                          
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                           
|1. | I have reviewed this annual report on Form 20-F of
  Top Image Systems Ltd. (the Registrant);                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                           
|2. | Based on my knowledge, this report does not contain
  any untrue statement of a material fact or omit to state a material fact
  necessary to make the statements made, in light of the circumstances under
  which such statements were made, not misleading with respect to the period
  covered by this report;                        
|   |                                                                                                                                                                                                                                                                                                                                           
|3. | Based on my knowledge, the financial statements and
  other financial information included in this report fairly present in all
  material respects the financial condition, results of operations and cash
  flows of the registrant as of, and for, the period presented in this report;                                                
|   |                                                                                                                                                                                                                                                                                                                                           
|4. | The registrants other certifying officer and I are
  responsible for establishing and maintaining disclosure controls and
  procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and
  internal control over financial reporting (as defined in Exchange Act Rules
  13a-15(f) and 15d-15(f) for the registrant and have:
|   |                                                                                                                                                                                                                                                                                                                                           
|   | a)                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                           
|   | b)                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                           
|   | c)                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                           
|   | d)                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                           
|5. | The registrants other certifying officers and I
  have disclosed, based on our most recent evaluation of internal control over
  financial reporting, to the registrants auditors and audit committee of the
  board of directors (or persons performing the equivalent function):                                                      
|   |                                                                                                                                                                                                                                                                                                                                           
|   | a)                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                           
|   | b)                                                                                                                                                                                                                                                                                                                                        

Date: June 23, 2004

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

65

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EXHIBIT INDEX

|Number |  | Description                                                                                                                                                                                                                                                                                                           | Page No.
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------
|       |  |                                                                                                                                                                                                                                                                                                                       |         
|       |  |                                                                                                                                                                                                                                                                                                                       |         
|1.1    |  | Amended and restated Articles of Association
     of the Company dated October 27,2003.                                                                                                                                                                                                                               | 71      
|       |  |                                                                                                                                                                                                                                                                                                                       |         
|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 Public Warrant Agreement between the
  Company, the Warrant Agent and the Underwriter (incorporated by reference to
  exhibit 4.2 to the Companys Registration Statement on Form F-1 (registration
  number 333-05718)).                                                                                     |         
|       |  |                                                                                                                                                                                                                                                                                                                       |         
|2.2    |  | Form of Public Warrant Certificate (incorporated by
  reference to exhibit 4.3 to the Companys Registration Statement on Form F-1
  (registration number 333-05718)).                                                                                                                                                |         
|       |  |                                                                                                                                                                                                                                                                                                                       |         
|2.3    |  | Form of Underwriters Warrant Agreement
  (incorporated by reference to exhibit 4.4 to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                                                                                                                           |         
|       |  |                                                                                                                                                                                                                                                                                                                       |         
|4.1    |  | Top Image Systems, Ltd. Employee Stock Option Plan
  (1996) (incorporated by reference to exhibit 10.1 to the Companys
  Registration Statement on Form S-8 (registration number 333-11560)).                                                                                                                        |         
|       |  |                                                                                                                                                                                                                                                                                                                       |         
|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    |  | Top Image Systems Ltd. Employee Share Option Plan (2000) (incorporated by reference to
exhibit 4.1 to the Company's registration statement on Form S-8 filed December 19, 2002).                                                                                                                                      |         
|       |  |                                                                                                                                                                                                                                                                                                                       |         
|4.4    |  | Contract between the Company and JCC Payments
  Systems, Ltd. for the Supply, Installation and Development of Bespoke
  Software of the JCC Image System, dated June 24, 1996 (incorporated by
  reference to exhibit 10.1(a) to the Companys Registration Statement on Form
  F-1 (registration number 333-05718)). |         
|       |  |                                                                                                                                                                                                                                                                                                                       |         
|4.5    |  | Contract for the Support & Maintenance of
  Software of the JCC Image System, between the Company and JCC Payments
  Systems, Ltd., dated June 24, 1996 (incorporated by reference to exhibit
  10.1(b) to the Companys Registration Statement on Form F-1 (registration
  number 333-05718)).                       |         
|       |  |                                                                                                                                                                                                                                                                                                                       |         
|4.6    |  | Contract between the Company and Unicre, Cartao
  Internacional de Credito, SA., for the Supply, Installation and Development
  of Software System, dated June 20, 1994 (incorporated by reference to
  exhibit 10.1(c) to the Companys Registration Statement on Form F-1
  (registration number 333-05718)).       |         

66

---

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|     |  |                                                                                                                                                                                                                                                                                                                       | 
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.7  |  | Software Maintenance Agreement between the Company
  and Unicre, Cartao Internacional de Credito, SA., dated July 20, 1994
  (incorporated by reference to exhibit 10.1(d) to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                                   
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.8  |  | English translation of Agreement between the Company
  and Isracard Ltd. for the Supply, Installation and Development of Software
  System, dated November 4, 1993 (incorporated by reference to exhibit 10.1(e)
  to the Companys Registration Statement on Form F-1 (registration number
  333-05718)).           
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.9  |  | Agreement between the Company and Isracard Ltd. for
  the Supply, Installation and Development of Software System, dated November
  4, 1993 (incorporated by reference to exhibit 10.1(f) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                    
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.10 |  | English translation of Agreement between the Company
  and Israel Credit Card, Ltd. for the Supply, Installation and Development of
  Software System, dated December 4, 1991 (incorporated by reference to exhibit
  10.1(g) to the Companys Registration Statement on Form F-1 (registration
  number 333-05718)).
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.11 |  | Agreement between the Company and Israel Credit
  Card, Ltd. for the Supply, Installation and Development of Software System,
  dated December 4, 1991 (incorporated by reference to exhibit 10.1(h) to the
  Companys Registration Statement on Form F-1 (registration number
  333-05718)).                       
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.12 |  | Exclusive Software Distribution Agreement between
  the Company and Hasso Corporation, dated June 28, 1996 (incorporated by
  reference to exhibit 10.1(i) to the Companys Registration Statement on Form
  F-1 (registration number 333-05718)).                                                                   
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.13 |  | Second Amendment, dated March 27, 2001, to the
  Exclusive Software Distribution Agreement between the Company and Hasso
  Corporation, dated June 28, 1996.                                                                                                                                                         
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.14 |  | Memorandum Agreement between the Company and Hasso
  Corporation, dated March 13, 1996 (incorporated by reference to exhibit 10.1(j)
  to the Companys Registration Statement on Form F-1 (registration number
  333-05718)).                                                                                       
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.15 |  | Exclusive Software Distribution Agreement between
  the Company and Daewoo Information Systems Co., Ltd. dated January 29, 1994
  (incorporated by reference to exhibit 10.1(k) to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                              
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.16 |  | English translation of Entrepreneur Agreement among
  the Company, Micro Daf Industries 80, Ltd. and Israeli Credit Card, Ltd.
  dated October 31, 1995 (incorporated by reference to exhibit 10.2(a) to the
  Companys Registration Statement on Form F-1 (registration number
  333-05718)).                      
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.17 |  | Entrepreneur Agreement among the Company, Micro Daf
  Industries 80, Ltd. and Israeli Credit Card, Ltd. dated October 31, 1995
  (incorporated by reference to exhibit 10.2(b) to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                               
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.18 |  | Employee Agreement between the Company and Ofer
  Comay (incorporated by reference to exhibit 10.4(a) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.19 |  | Employee Agreement between the Company and Yossi
  Karchi (incorporated by reference to exhibit 10.4(b) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                                                      
|     |  |                                                                                                                                                                                                                                                                                                                      
|4.20 |  | Employee Agreement between the Company and Ziv Koren
  (incorporated by reference to exhibit 10.4(c) to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                                                                                                         

67

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|     |  |                                                                                                                                                                                                                                                                                                          | 
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|     |  |                                                                                                                                                                                                                                                                                                          | 
|     |  |                                                                                                                                                                                                                                                                                                         
|4.21 |  | Employee Agreement between the Company and Stuart
  Melnick (incorporated by reference to exhibit 10.4(d) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                                         
|4.22 |  | Employee Agreement between the Company and Izhak
  Nakar (incorporated by reference to exhibit 10.4(e) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                                          
|     |  |                                                                                                                                                                                                                                                                                                         
|4.23 |  | Employee Agreement between the Company and Ido
  Schechter (incorporated by reference to exhibit 10.4(f) to the Companys Registration
  Statement on Form F-1 (registration number 333-05718)).                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                         
|4.24 |  | Employee Agreement between the Company and Yehezkel
  Yeshurun (incorporated by reference to exhibit 10.4(g) to the Companys
  Registration Statement on Form F-1 (registration number 333-05718)).                                                                                                    
|     |  |                                                                                                                                                                                                                                                                                                         
|4.25 |  | English translation of an Employment Agreement
  between the Company and Arie Rand (incorporated by reference to exhibit 3.25
  to the Companys annual report on Form 20-F (registration number 001-14552)).                                                                                           
|     |  |                                                                                                                                                                                                                                                                                                         
|4.26 |  | English translation of a Personal Employment
  Agreement between the Company and Tal Marom (incorporated by reference to
  exhibit 3.26 to the Companys annual report on Form 20-F (registration number
  001-14552)).                                                                                 
|     |  |                                                                                                                                                                                                                                                                                                         
|4.27 |  | English translation of an Amendment to Employment Agreement
  between the Company and Tal Marom (re: updating of compensation and position
  for 2001) (incorporated by reference to exhibit 3.27 to the Companys annual
  report on Form 20-F (registration number 001-14552)).                       
|     |  |                                                                                                                                                                                                                                                                                                         
|4.28 |  | English translation of a Personal Employment
  Agreement between the Company and Norman Kreger (incorporated by reference to
  exhibit 3.28 to the Companys annual report on Form 20-F (registration number
  001-14552)).                                                                             
|     |  |                                                                                                                                                                                                                                                                                                         
|4.29 |  | English translation of a Salary Adjustment letter
  for Norman Kreger (incorporated by reference to exhibit 3.29 to the Companys
  annual report on Form 20-F (registration number 001-14552)).                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                         
|4.30 |  | English translation of a Personal Employment
  Agreement between the Company and Amos Eliav (incorporated by reference to
  exhibit 3.30 to the Companys annual report on Form 20-F (registration number
  001-14552)).                                                                                
|     |  |                                                                                                                                                                                                                                                                                                         
|4.31 |  | English translation of a Salary Adjustment letter
  for Amos Eliav (incorporated by reference to exhibit 3.31 to the Companys
  annual report on Form 20-F (registration number 001-14552)).                                                                                                           
|     |  |                                                                                                                                                                                                                                                                                                         
|4.32 |  | Share Purchase Agreement, dated as of February 11,
  2000, by and between Charter-TIS LLC and the Company, as amended by Amendment
  #1 thereto, dated as of April 28, 2000 (incorporated by reference to exhibit
  3.32 to the Companys annual report on Form 20-F (registration number
  001-14552)).
|     |  |                                                                                                                                                                                                                                                                                                         
|4.33 |  | Registration Rights Agreement, dated as of May 8,
  2000, among the Company, Charter-TIS LLC and Izhak Nakar (incorporated by
  reference to exhibit 3.33 to the Companys annual report on Form 20-F
  (registration number 001-14552)).                                                               
|     |  |                                                                                                                                                                                                                                                                                                         
|4.34 |  | Preemptive Rights Agreement, dated as of May 8,
  2000, between the Company and Izhak Nakar (incorporated by reference to
  exhibit 3.34 to the Companys annual report on Form 20-F (registration number
  001-14552)).                                                                                
|     |  |                                                                                                                                                                                                                                                                                                         
|4.35 |  | English translation of Employment Agreement between
  the Company and Jonathan Heller dated December 24, 2001 (incorporated by
  reference to exhibit 3.35 to the Companys annual report on Form 20-F for the
  fiscal year ended December 31, 2001).                                                  

68

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|     |  |                                                                                                                                                                                                                                                                                                                                                                                 |    
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.36 |  | English translation of Update to Employment
  Agreement between the Company and Jonathan Heller dated February 28, 2002
  (incorporated by reference to exhibit 3.36 to the Companys annual report on
  Form 20-F for the fiscal year ended December 31, 2001).                                                                                                               
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.37 |  | English translation of Employment Agreement between
  the Company and Oded Leiba dated March 19, 2001 (incorporated by reference to
  exhibit 3.37 to the Companys annual report on Form 20-F for the fiscal year
  ended December 31, 2001).                                                                                                                                 
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.38 |  | English translation of Employment Agreement between
  the Company and Dan Inbar dated December 31, 2001 (incorporated by reference
  to exhibit 3.38 to the Companys annual report on Form 20-F for the fiscal
  year ended December 31, 2001).                                                                                                                               
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.39 |  | Value-Added Reseller Agreement for ODT Document
  Technologies Products between the Company and Océ Document Technologies
  dated August 2, 2001 (incorporated by reference to exhibit 3.39 to the
  Companys annual report on Form 20-F for the fiscal year ended December 31,
  2001).                                                                                     
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.40 |  | OEM License Agreement between the Company and
  CharacTell Ltd. dated July 16, 2001 (incorporated by reference to exhibit
  3.40 to the Companys annual report on Form 20-F for the fiscal year ended
  December 31, 2001).                                                                                                                                                   
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.41 |  | Second Amendment to the Exclusive Software
  Distribution Agreement Dated June 28, 1996, as amended, between the Company
  and Hasso Corporation (as a predecessor entity to Toyo Ink Manufacturing Co.,
  Ltd.) dated March 27, 2001. (incorporated by reference to exhibit 3.41 to the
  Companys annual report on Form 20-F for the fiscal year ended December 31,
  2001).
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.42 |  | Agreement between the Company and Elsag spa
  regarding software and services for the population census of Italy dated March
  18, 2002 (incorporated by reference to exhibit 3.42 to the Companys annual
  report on Form 20-F for the fiscal year ended December 31, 2001).                                                                                                 
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.43 |  | Statement of Work to Subcontractor Agreement between
  the Company and NCR (Cyprus) Ltd. regarding software and services for the
  population census of Italy dated June 22, 2001 (incorporated by reference to
  exhibit 3.43 to the Companys annual report on Form 20-F for the fiscal year
  ended December 31, 2001).                                                     
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.44 |  | Agreement between the Company and CMC Ltd. regarding
  software and services for the population census of India dated December 12,
  2001 (incorporated by reference to exhibit 3.44 to the Companys annual
  report on Form 20-F for the fiscal year ended December 31, 2001).                                                                                               
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.45 |  | Separation Agreement between the Company and Mr.
  Peter Nowak dated May 15, 2002 (incorporated by reference to exhibit 3.45 to
  the Companys annual report on Form 20-F for the fiscal year ended December
  31, 2001).                                                                                                                                                     
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.46 |  | 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).                                                                                                                                               
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.47 |  | 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).                                                                                               
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|4.48 |  | Top Image Systems Ltd. Israeli Share Option Plan
  (2003).                                                                                                                                                                                                                                                                                                                      | 100
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|     |  |                                                                                                                                                                                                                                                                                                                                                                                
|8    |  | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                           | 114

69

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|     |  |                                                                                                                                                            |    
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | ---
|     |  |                                                                                                                                                           
|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. | 64 
|     |  |                                                                                                                                                           
|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. | 65 
|     |  |                                                                                                                                                           
|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. | 115
|     |  |                                                                                                                                                           
|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. | 116
|     |  |                                                                                                                                                           
|14.1 |  | Consent of Somekh Chaikin  member firm of KPMG
  International.                                                                                           | 117
|     |  |                                                                                                                                                           
|14.2 |  | Consent of Kost, Forer Gabbay and Kasierer  member
  of Ernst & Young Global.                                                                             | 118
|     |  |                                                                                                                                                           
|14.3 |  | Audit Committee Charter.                                                                                                                                   | 119

70

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EXHIBIT 1.1

# Top Image Systems Ltd.
Articles of Association

Contents

|Chapter A | Introduction and Interpretation                                  
|--------- | -----------------------------------------------------------------
|Chapter B | The Company, its Capital and Purposes                            
|Chapter C | The Shares                                                       
|Chapter D | General Meetings                                                 
|Chapter E | The Board of Directors                                           
|Chapter F | The Chief Executive Officer and other Officers                   
|Chapter H | Audit                                                            
|Chapter I | Capital Funds, Distribution, Bonus Shares and Decrease of Capital
|Chapter J | Winding up, Merger and Reorganization                            

71

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# Chapter A: Introduction
and Interpretation

|1. | In
these Articles, unless the wording requires another construction, the following words
shall have the meanings appearing alongside them:
|-- | ------------------------------------------------------------------------------------------------------------------------------------------

|"Director" or |  | Member or members of the Board of Directors, elected
|------------- | - | ----------------------------------------------------

|"Directors" | in
accordance with the provisions of these Articles, and serving at the same time;
|----------- | ----------------------------------------------------------------------------------

|AlternateDirector |  | as
defined in Article 99 below.
|------------------- | - | -------------------------------

|The Exchange |  | Every stock exchange or trading forum, in Israel or abroad, in
which Company shares, or any securities issued by the Company which may be converted or
realized by Company shares, are registered, listed or quoted for trading;
|-------------- | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The Board of Directors |  | The Board of Directors of the Company, duly elected or
appointed in accordance with the provisions of these Articles, and every Board Committee
to which and to the extent powers of the Board have been delegated, to the extent that
such powers may be delegated according to the law;
|------------------------ | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|"The Company" |  | Top Image Systems Ltd.
|------------- | - | ----------------------

|The Register |  | Register of shareholders maintained in Israel and additional
register of shareholders which the Company shall maintain (if it so maintains) outside
Israel, in accordance with the Companies Law, provided that shares registered in the
Register kept in Israel and in the additional register shall not be counted twice;
|-------------- | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Substantial Register |  | The Register of substantial shareholders (as defined in the
Companies Law) that must be maintained under the Companies Law;
|---------------------- | - | ---------------------------------------------------------------------------------------------------------------------------

|"The Office" |  | The registered office of the Company at the time in question;
|------------ | - | -------------------------------------------------------------

|Reduction in Capital |  | A distribution which does not meet the profit test
(Distribution and Profit test  as defined in the Companies
Law);
|---------------------- | - | ------------------------------------------------------------------------------------------------------------------------

|Companies Law |  | The Companies Law, 5759-1999, as amended from time to time, or any
other statute, as amended, that shall replace it;
|--------------- | - | --------------------------------------------------------------------------------------------------------------------

|Securities Law |  | The Securities Law, 5728-1968, as amended from time to time, or any
other statute, as amended, that shall replace it;
|---------------- | - | ---------------------------------------------------------------------------------------------------------------------

|"Surplus Accounts" |  | The net profit account in the Company's books;
|------------------ | - | ----------------------------------------------

72

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|Business Day |  | A day on which services are given to the public by most of the
commercial banks both in Israel and USA, except Friday, which shall not be deemed a
business day;
|-------------- | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|Writing |  | Any written communication or other notation, including a
printed document, photocopy, telegram, facsimile, electronic mail, internet site, and any
other form of work or imprinting of words in a visible form, as well as any other graphic
sign or symbol stored in a computer or in any other means of storage;
|--------- | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Information |  | All information in any format, including know-how, data, technology, financial
reports, accounting documents, documents including drafts, computer files, computer
printouts, agreements, minutes, memoranda, business plans, forecasts, client lists,
prices, costs, market surveys, and other such information related directly or indirectly
to the activity of the Company;
|------------- | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Chief Executive Officer |  | A person who holds said title, as well as one who holds the
powers of the chief executive officer in practice;
|------------------------- |  | --------------------------------------------------------------------------------------------------------------

|Officer or
Office Holder | Every Director and every
officer of the Company,
including, without limitation, each of the persons defined as Nosei
Misra in the Companies Law.
|---------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------

|"Securities in the Company" |  | Including:  (a) shares in the Company; or (b) debentures,
commercial securities or capital deeds issued by the Company; or (c) options, warrants,
certificates, contracts, bills and other documents of any sort whatsoever which grant,
directly or indirectly, a right to purchase, convert, realize or sell each and any of the
items mentioned in subsections (a) or (b) above; all of the above include both those
registered on a persons name as well as bearer securities;
|--------------------------- | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|"Corporate Representative" |  | as defined in Article 105 below;
|-------------------------- | - | --------------------------------

|"Companies Ordinance" |  | The Companies Ordinance [New Version], 5743-1983,
as in effect on January 31 2000 and as amended from time to time thereafter, or any other
statute which shall replace it after 1 February 2000, including amendments thereto;
|--------------------- | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|"Year" or "Month" |  | According to the Gregorian calendar;
|----------------- | - | ------------------------------------

|These Articles |  | These Articles of Association as worded herein or as
changed from time to time by the general meeting, including Resolutions of the general
meeting of the Company in respect of restricting the power of the Company to change these
Articles or any of the provisions herein, which were taken lawfully and in accordance with
the provisions of these Articles;
|---------------- | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

73

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|2. | Subject
to the provisions of Article 1 above, and except inasmuch as the wording
                    requires a different interpretation, terms which have been defined in
the                     Companies Law or the Companies Ordinance, as the case may be,
shall bear the                     same meaning in these Articles as they are given in
those statutes; words                     expressed in the singular form shall include
the plural form, and vice versa;                     words expressed in the masculine
form shall include the feminine, and words                     meaning a person shall
include any kind of corporate entity recognized by law.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Any
Article herein which determines an arrangement that differs, in part or in
                    whole, from a provision in the Companies Law or the Companies
Ordinance, as the                     case may be, that may be qualified, changed or
supplemented, either in whole or                     with regard to certain issues or
with certain restrictions, under any law, shall                     be deemed to qualify
said provision in the Companies Law or the Companies                     Ordinance, as
the case may be, even if the qualification itself was not noted in
                    said Article, and even if the Article explicitly determines that its
validity                     shall be subject to the provisions of any law.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | In
the event of a contradiction between any Article and a provision of law which
                    may not be qualified, changed or supplemented, said provision of law
shall                     prevail, without, however, impairing the force of these
Articles or of any other                     Articles herein.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | When
construing or examining the validity of any particular Article contained in these
Articles of Association, the Article should be given a construction that aims to fulfill
its purpose according to the purpose arising therefrom or from other Articles in these
Articles of Association.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Chapter B: The Company,
its Capital and Purposes

|5. | The
Company is a public company.
|-- | --------------------------------

|6. | The
Company may contribute reasonable sums to a purpose or to a worthy type of
                    purposes even if such contributions are not made due to business
considerations.                     The Board of Directors, or whomever the Board of
Directors has so empowered,                     shall be authorized to determine the
amounts of the contributions, the purpose                     or type of purposes for
which they are made, and the identity of the recipient                     of the
contribution.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# The Company Capital

|7. | The
registered share capital of the Company is NIS 5,000,000 divided into
                    125,000,000 (One hundred and twenty five million) at NIS 0.04 par
value ordinary                     shares.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Rights Appurtenant to a
Share

|8. | The
liability of the shareholders of the Company for the debts, charges and
                    obligations of the Company is limited to payment to the Company of
the par value                     of their ordinary shares in the Company.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|9. | All
of the ordinary shares shall have equal rights for all intents and purposes,
                    and each ordinary share shall grant its owner, inter alia:
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 9.1 | A
right to be invited to and to participate in all general meetings of the Company, both
annual and extraordinary, and a right to one vote for each ordinary share owned by him,
in every vote at every general meeting of the Company in which he participates, provided
that the ordinary share is owned by the shareholder on the record date determined in a
decision to convene or a notice convening the relevant general meeting;
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

74

---

---

| | 9.2 | A
right to receive dividends (if and to the extent they are distributed), a right to
receive bonus shares (if and to the extent they are issued), in proportion to the par
value of the ordinary shares, and according to the number of ordinary shares which he
held at the date of the decision to distribute the dividend or to issue the bonus or upon
distribution (as the case may be) or at such later date as may be determined in said
decision;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 9.3 | A
right to participate in a distribution (as defined in the Companies Law) which is not the
distribution of a dividend, in proportion to the par value of the shares he owns and
according to the share document he owns at the time of the decision to make a
distribution or at such later date as determined in said decision, or in such other
manner as shall be determined by the Board of Directors at its absolute discretion.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 9.4 | A
right to participate in the distribution of surplus assets of the Company at the time it
is wound up.
| | --- | -------------------------------------------------------------------------------------------------------

|10. | So
long as the shares of the Company are listed for trading on an Exchange, an
                    allotment of another class of shares shall require the approval of
the Exchange,                     to the extent that such approval is necessary according
to the rules of the                     Exchange or the provisions of any law.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|11. | Subject
to the provisions of any applicable law and in accordance with the
                    procedures required by law, the Company may issue shares, both those
included in                     its original capital and those deriving from an increase
in capital, with rights                     of a preferred rank or with rights of a
lesser rank, or to issue shares with                     other restricted rights or with
other preferred rights in respect of                     distribution of dividends,
voting rights, discharge of capital, distribution                     (which is not a
distribution of a dividend) or in respect of other matters, as                     the
Company may determine from time to time.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12. | If
at any time the share capital is divided into different classes of shares,
                    the general meeting may, unless the terms of the issuance of said
class of                     shares provide otherwise, change, convert, expand, add to or
alter in another                     manner the rights, surplus rights, advantages,
restrictions and provisions                     related thereto (or not related at that
time to one of the classes), if it                     receives the consent of the
holders of the shares of the class the rights of                     which are impaired,
which consent shall be given at a meeting of the holders of                     shares of
said class.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 12.1. | The
special rights granted to shareholders or to a class of shares that have
                    been issued, including shares issued with preferred rights or other
special                     rights, shall not be deemed to have been changed or harmed by
the creation or                     issue of additional shares of an equal rank or by the
cancellation of registered                     share capital of the same class which was
not allotted, unless the terms of the                     allotment of those shares
determines otherwise.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 12.2. | The
consolidation or splitting of the share capital of the Company shall not be
                    deemed a change in the rights of the shares being consolidated or
split.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

75

---

---

|13. | The
provisions in these Articles regarding general meetings shall apply, mutatis mutandis,
to every meeting of shareholders of any class of                     shares, as the case
may be.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14. | Subject
to the special provisions in these Articles in this regard and to the
                    rules of the Exchange, to the extent they exist, all of the shares of
the                     Company which are yet to be issued shall at all times be under
the supervision                     of the Board of Directors, which may issue them to or
otherwise deal with them                     in any way at its sole discretion, for cash
or non-cash consideration, upon such                     terms and qualifications,
whether above their par value or (subject to the                     provisions of the
Companies Law) at a deduction from their par value, at such                     times
which the Board of Directors deems fit. The Board of Directors shall have
                    full power to submit a call for any shares mentioned above, at their
par value,                     at less or at more than their par value, at times, during
a period and for                     consideration which the Board of Directors shall
deem fit, and to provide every                     person a right to demand allotment of
any shares at times, during a period and                     for consideration which the
Board of Directors shall determine at its own                     absolute discretion.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15. | The
Board of Directors may, at its absolute discretion, treat shareholders
                    differently from one another with regard to the amounts demanded for
payment and                     payment times and other terms, to the extent permitted by
these Articles, by the                     law and by the rules of the Exchange.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|16. | The
Board of Directors of the Company may, in respect of every allotment of
                    securities in the Company, pay agents fees, underwriters fees
or                     commissions in a manner that shall be determined and subject to
the provisions                     of any law.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Shareholders

|17. | Unless
determined otherwise in any law or in these Articles, the Company shall
                    be entitled to treat the registered owner, including a shareholder
who holds a                     share as a trustee, of a share as its absolute owner, and
as such shall not be                     obligated to recognize any claim by any other
person whatsoever based on a right                     in equity or on other grounds in
respect of such a share, or in respect of a                     benefit therein for any
other person, unless an order is issued by the competent                     court.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|18. | Notwithstanding
the provisions of Article 17 above, any person who is deemed to                     be a
shareholder according to the Companies Law or another applicable law shall
                    be deemed a shareholder in the Company.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|19. | The
Board of Directors may determine from time to time procedures with regard to
                    determining the identity of shareholders, and with regard to the
manner in which                     any right, benefit, asset or amount shall be
transferred or distributed to them,                     including in respect of
distribution of dividends or bonus shares, purchase of                     Securities in
the Company or granting any other right, asset or other benefit to
                    the shareholders of the Company, in their capacity as such. Moneys,
bonus                     shares, rights or assets of any type whatsoever which have been
transferred to a                     shareholder (including to his agent, attorney or
whomever the shareholder                     directs) whose identity has been verified
according to the procedures as                     aforesaid, shall be deemed a full
discharge and release of a debt of the Company                     to any person who
claims a right to such payment, transfer, distribution or                     grant of
right, as the case may be.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

76

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# Change in Share Capital

|20. | The
Company may, from time to time, increase its share capital by creating new
                    shares, whether or not all of the shares which it has decided to
issue have been                     issued up to that date or not, and whether or not all
of the shares that have                     been issued up until that time have been
fully paid-up, and the increase shall                     be in such amount, divided into
shares having such par value, issued on such                     terms and qualifications
and with such rights and supplemental rights as the                     resolution on
creation of the shares shall direct, and in the event that                     directions
are not given in the resolution  as the Board of Directors
                    shall direct; in particular, the shares may be issued with preferred
rights or                     qualified rights (including without rights) to dividends,
voting rights,                     discharge of capital or other such matters.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|21. | Except
as stated otherwise in a resolution approving the increase in share
                    capital, the new shares shall be subject to all provisions of these
Articles                     applicable to existing shares in the capital of the Company.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|22. | The
Company may, from time to time, cancel registered share capital which has
                    not yet been issued, provided that there is no undertaking of the
Company,                     including a conditional undertaking, to issue the shares.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|23. | Any
of the above acts, mentioned in articles 20 to 22, shall be deemed a change
                    of these Articles as well as amendment to the Memorandum of
Incorporation of the                     Company, and shall require a majority of 75% of
the shareholders participating                     at the shareholders meeting.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Share Certificate

|24. | A
share certificate shall be issued with the Company seal together with the
               signatures of two Directors, or together with the signature of one
Director and                the Company Secretary (if a person is appointed to this
position) or together                with the signature of one Director and of one of the
Companys signatories                or together with signatures according to the
decision of the Board of Directors.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|25. | Every
shareholder whose name appears in the Register shall be entitled to
               receive one share certificate for the shares registered in his name, or,
if the                Board of Directors so approves (after he shall have paid the amount
determined                by the Board of Directors from time to time), several share
certificates, each                for one or more such shares; every share certificate
shall indicate the name of                the shareholder (or bearer in the
event of a share warrant), the                number of shares for which it was issued,
and other details as determined by the                Board of Directors.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|26. | A
share certificate registered in the names of two or more persons shall be
               delivered to whomever all of the registered owners of said share shall
direct,                and absent such consent, to the person whose name appears first in
the Register                among the names of the joint owners.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|27. | If
a share certificate registered in the name of a person or a bearer share is
               lost or defaced, the Board of Directors may issue a new certificate in its
               place, provided that the original certificate has been submitted to it and
               destroyed by it, or it is proved to the Boards satisfaction that the
               certificate has been lost or destroyed, and the Board has received
guarantees to                its satisfaction for any possible damages, all for
consideration, if required.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|28. | The
Company may issue bearer share certificates (a: Share                Warrant)
for fully paid-up shares which shall grant the holder thereof                the rights
noted therein and the right to transfer it by delivery of the                certificate,
and the provisions of these Articles regarding transfer and                delivery of
shares shall not apply to shares specified in such a certificate.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|29. | A
holder of a share warrant may return it to the Company and may request, for a
               payment determined by the Board of Directors, that his name be listed in
the                Register as a shareholder in the Company for the shares specified in
this                certificate, and that a share certificate in the name of a person be
issued to                him. If the Register is closed at the time said request is
submitted, or the                request has not yet been carried out, the actions
enumerated in this Article                shall be performed by the Company promptly
after the opening of the Register.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|30. | Shares
shall be deemed fully paid up if the entire par value and the premium
               thereon have been paid, according to the terms of issue of the share.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|31. | Subject
to the provisions of any law, a holder of a share warrant is entitled to
               all of the rights held by an owner of a share certificate in the name of a
               person, provided that he has proved that he holds the share warrant as
aforesaid                in the following manner:
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 31.1. | A
holder of a share warrant may vote at a general meeting if he has presented
               the share warrant to the chair of the general meeting immediately after
               commencement of the meeting.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 31.2. | A
holder of a share warrant may deposit the share warrant at the registered
               office of the Company or at such other place that the Board of Directors
shall                determine, and may notify the Company regarding the particulars that
an owner of                a share certificate in the name of a person is obligated to
notify to the                Company by law or under these Articles. So long as the share
warrant is                deposited as aforesaid, the depositor shall have all of the
rights available to                a shareholder to demand that a general meeting of the
Company be convened, to                vote and to use the other rights of shareholder at
any meeting convened at least                two days after the deposit, as if his name
were listed in the Register as owner                of the shares included in the share
certificate. Only one person shall be                recognized as the depositor of the
certificate, and the Company must return the                certificate to the depositor
if he so requests in writing at least two business                days in advance.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Calls

|32. | The
Board of Directors may, from time to time at its discretion, submit calls
                    for any moneys not yet paid for shares which have been issued and
which,                     according to the terms of their issue, are not to be paid up
at predetermined                     times. Every shareholder shall pay to the Company
the amount of the call                     submitted to him, at the time and place
determined by the Board of Directors. A                     call may be divided into
several payments. A call shall be deemed made if a                     resolution
approving it has been made by the Board of Directors.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|33. | In
respect of every call, a prior notice of fourteen days shall be sent,
                    indicating the amount of payment, the place of payment and the person
to whom                     payment should be made, on the condition that before the
payment date of such a                     call the Board of Directors may, by written
notice to the shareholder, cancel or                     extend the payment date of the
call.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|34. | Joint
owners of a share shall be responsible jointly and severally for payment
                    of all calls in respect of such a share.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|35. | If,
under the terms of issue of each share or otherwise, any amount must be paid
                    at a set time or in payments at set times, whether the payment is on
account of                     the par value or as a premium, any such amount or rate
shall be discharged as if                     it were a call duly submitted by the Board
of Directors for which notice was                     duly given, and all of the
provisions in these Articles in respect of calls                     shall apply to any
such amount or rate of payment.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|36. | If
the amount of the call is not discharged on the date of payment or prior
                    thereto, the person who at that time is the owner of the share for
which the                     call was submitted or for which payment is owing, shall pay
interest on said                     amount at a rate determined by the Board of
Directors from time to time, from                     the date determined for its payment
until the date of actual payment; however,                     the Board of Directors may
waive payment of the interest, in part or in whole.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|37. | If
the Board of Directors deems fit, it may receive moneys from a shareholder
                    who wishes to make early payment for amounts that have not yet been
called, or                     for which the payment date has not yet arrived, and which
have not yet been                     discharged in respect of his shares, or part
hereof; and unless agreed otherwise                     with the shareholder, the Company
may pay interest on the moneys advanced in                     said manner, or on part
thereof, until the date on which the moneys were to have                     been paid
had they not been paid in advance, at a rate agreed upon between the
                    Board of Directors and the shareholder, and the Board of Directors
may at any                     time, so long as the payment date has not yet arrived,
return the amount                     advanced as aforesaid to said shareholder.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|38. | This
chapter shall apply, mutatis mutandis, to any right to purchase or
                    sell shares in the Company, subject to the terms of issue of said
right.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Forfeiture and
Encumbrance

|39. | If
a shareholder has not paid any call or rate of payment on or before the date
                    set for payment thereof, the Board of Directors may, at any time
thereafter, so                     long as the call or the rate of payment are not
discharged, to send a notice to                     said shareholder and to demand that
he pay them with interest accrued and all                     expenses that the Company
incurred in connection with such failure to discharge.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|40. | The
notice shall set a date (which shall be at least ten business days after the
                    date of the notice) and a place or places where said call or payment
shall be                     paid, with interest and expenses as aforesaid. The notice
shall also indicate                     that in the event of non-payment on the date set
therefor or prior thereto and                     at the place indicated in said notice,
the shares for which the call was made or                     in respect of which said
payment date has passed may be forfeited.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|41. | If
the demands included in said notice are not met, then at any time thereafter,
                    prior to payment of said call or installment, the interest and the
expenses                     owing on account of the shares, the Board of Directors may
by decision forfeit                     the shares in respect of which notice was given
as aforesaid. Such forfeiture                     shall include all dividends announced
in respect of the forfeited shares which                     have not actually been paid
prior to the forfeiture.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|42. | Every
share so forfeited shall be deemed the property of the Company and shall
                    become a dormant share, and the Board of Directors shall be entitled,
in                     accordance with the provisions of these Articles and subject to
the provisions                     of any law, sell, reissue or transfer them in another
manner as it deems fit.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|43. | The
Board of Directors may, at any time prior to sale, reissue or other transfer
                    of every share so forfeited, to cancel the forfeiture in a manner and
under                     terms that it shall determine at its absolute discretion, in
which event said                     share shall cease to be a dormant share.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|44. | Every
shareholder whose shares have been forfeited shall cease to enjoy any
                    right in connection with the forfeited shares, but in spite of this
he must pay                     immediately to the Company all of the calls,
installments, payments, interest                     and expenses owing on account of
these shares or for them on the date on which                     forfeiture is executed,
as well as interest on those amounts from the date of                     forfeiture
until the date of execution of all payments (including interest and
                    expenses as aforesaid), at a rate that shall be determined by the
Board of                     Directors; provided, that in any case in which the shares
forfeited are resold,                     the debt of the shareholder whose shares were
forfeited shall be reduced to the                     net amount (after deduction of any
taxes and the Companys expenses                     incurred in selling the
forfeited shares) received in fact from their resale.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|45. | The
provisions of these Articles regarding forfeiture of shares shall apply also
                    to cases of non-payment of a fixed amount the payment date of which
is                     predetermined, according to the terms of issue of the share or
according to the                     terms of allotment of the share, whether on account
of the par value or as a                     premium, as if this amount to be paid were a
call which was sent and notice of                     it given lawfully.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|46. | The
Company shall have the first and fundamental right to place an encumbrance
                    on any shares registered in the name of any shareholder, except fully
paid-up                     shares, and on any revenue from the sale thereof, for
discharging the debts and                     obligations of said shareholder to the
Company, whether alone or jointly with                     any other person, for shares
which the Company issued to him, whether or not the                     date of discharge
of these debts or the date of performance of these obligations                     has
arrived, and no equity rights in respect of said shares shall be created.
                    Said encumbrance shall apply to all dividends announced from time to
time in                     respect of those shares.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|47. | To
realize said encumbrance, the Board of Directors may sell the encumbered
                    shares in a manner which it deems fit, at its discretion; however, no
share                     shall be sold unless the shareholders or executors of their
estates receive                     written notice stating that the Company intends to
sell said shares, and the                     shareholder or executors of his estate, as
the case may be, have not paid the                     above debts or have not fulfilled
the above obligations within ten days from the                     date of sending said
notice.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|48. | The
net revenue (after deduction of any taxes and the Companys expenses
                    incurred in selling the shares) from any such sale shall serve to
discharge said                     debts to perform said obligations of the shareholder,
including the debts and                     obligations the time for discharge or
performance of which has not yet                     transpired, and the surplus, if any,
shall be paid to the shareholder or to the                     executors of his estate.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|49. | In
the event of a sale after forfeiture or a sale to realize an encumbrance
                    under these Articles, the Board of Directors may appoint a person to
sign a deed                     of transfer of the shares sold, and to direct that the
buyer be registered in                     the Register as the holder of the shares sold,
and the buyer shall bear no duty                     to verify that these actions are
done properly, nor shall it be his concern for                     which purposes the
moneys from the sale were expended; after his name is                     registered in
the Register in respect of these shares, the validity of the sale
                    shall be unassailable, and the only remedy of any person harmed by
the sale                     shall be in filing a claim for damages from the Company
alone.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Transfer and Delivery of
Shares

|50. | Transfer
of shares in the Company shall be effected in the following manner:
|--- | ----------------------------------------------------------------------------

| | 50.1. | Transfer
of a share warrant duly issued under these Articles shall be effected                by
delivery of the share warrant to the transferee.
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------

| | 50.2. | Any
other transfer of shares in the Company shall be done against delivery of a
               share transfer deed in the wording specified in Article 52 below, which
includes                all particulars, and the signatures of the transferor, the
transferee and                witnesses to their signatures.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|51. | Once
a transfer of shares is effected in accordance with Article 50.2 above, the
               transferor shall be deemed to remain the holder of the share until the
name of                the recipient of the share is registered in the Register of
members in respect                of the transferred share.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|52. | The
following provisions shall apply to a share transfer under Article 50 above:
|--- | --------------------------------------------------------------------------------

| | 52.1. | The
transfer deed of the share shall be worded as follows, or in as similar a
               manner as possible or in an ordinary or accepted form that shall be
approved by                the Board of Directors:
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | I,
__________________________ (I.D. number/Company registration number
_________________________)(hereinafter: the transferor), in
consideration of the sum of USD_________________ paid to me by _________________________
whose address is _______________________________________ (hereinafter: the
transferee), hereby transfer to the transferee _________ shares [from _________
to ___________ inclusive] of Top Image Systems Ltd., to be in the possession of the
transferee, the executors of his estate, his guardians and representatives, according to
all of the terms under which I held them immediately prior to signing this deed, and I,
the transferee, hereby agree to receive the above shares according to the above
conditions.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | In
witness whereof we have signed this ____th day of _______, ________.
| | -----------------------------------------------------------------------

| | ________________________
             Transferor | ________________________
             Transferee
| | ------------------------------------------------ | ------------------------------------------------

| | ________________________
Witness to transferor's signature | ________________________
Witness to transferee's signature"
| | ---------------------------------------------------------- | -----------------------------------------------------------

| | (To
the extent that the transferor or transferee is a corporation  a confirmation of an
attorney or accountant or other person acceptable to the Company should be added,
regarding the authority of the persons signing the deed on behalf of the corporation to
execute or to receive the transfer.)
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Unless
approved by the Board of Directors, the share transfer deed shall relate only to one
class of shares.
| | ------------------------------------------------------------------------------------------------------------

| | 52.2. | Any
document (including the certificate for the transferred share) required by
               the Board of Directors in connection with the transfer should be submitted
               together with the share transfer deed. If the share transfer is approved,
all                said documents shall remain in the possession of the Company. If the
share                transfer is not approved, said documents shall be returned to the
person who                submitted them, if he so requests.
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 52.3. | The
Board of Directors may:
| | ----- | ---------------------------

| | 52.3.1. | Refuse
to register the transfer of a share that has not been fully paid up.
| | ------- | ---------------------------------------------------------------------------

| | 52.3.2. | Not
recognize a share transfer deed until the certificate of the transferred
               share and other particulars necessary to prove the right of the transferor
to                transfer the share are attached thereto. Transfer deeds which are
registered                shall remain in the possession of the Company, but any transfer
deed that the                Board of Directors refuses to register shall be returned to
its sender at his                demand.
| | ------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 52.3.3 | Not
recognize a share transfer deed until it receives payment for registration of the
transfer in accordance with Article 53 below.
| | ------ | -----------------------------------------------------------------------------------------------------------------------------------

| | 52.4. | Should
the Board of Directors refuse to approve a transfer of shares, it shall
               notify the transferor to this effect no later than seven (7) days after
the date                on which the transfer deed and the share certificate were
received by the                Company.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|53. | Notwithstanding
the provisions of Article 52 above:
|--- | ---------------------------------------------------

| | The
Company shall change the registration of ownership of shares in the Register of
shareholders in each of the following instances:
| | ------------------------------------------------------------------------------------------------------------------------------------

| | (1) | A
court order to amend the Register is sent to the Company;
| | --- | -----------------------------------------------------------

| | (2) | The
conditions under law for endorsement of the right are proved to the Company.
| | --- | --------------------------------------------------------------------------------

|54. | The
Company may destroy share transfer deeds after six years have passed from
                    registration of the transfer, and cancelled share certificates after
three years                     of their cancellation; it shall be presumed prima
facie that all the                     transfer deeds and certificates that were
destroyed were fully valid, and that                     the transfers, cancellations and
the registrations effected by virtue thereof                     were lawful.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Chapter D: General
Meetings

# Convening of General
Meetings

|55. | An
annual meeting shall be convened at least once every calendar year, and no
                    later than fifteen months after the preceding annual meeting, to
deliberate on                     the financial reports, appointment of directors,
appointment of an auditing                     accountant, and any other matter which the
Board of Directors places on the                     agenda of the annual meeting, at a
time and place that the Board of Directors                     shall determine.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|56. | Except
if explicitly determined otherwise by a competent court, the provisions
                    of these Articles shall apply, mutatis mutandis, to the notice
and                     conduct of a general meeting convened at the order of the
competent court, of a                     general meeting duly convened other than by the
Board of Directors, and of the                     voting at these meetings.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|57. | Subject
to the provisions of the Companies Law, every general meeting shall be
                    convened at a place where the Board of Directors directs, or, if the
Board of                     Directors did not determine the place of the meeting, at a
place directed by the                     Chairman of the Board of Directors. If the
place of the meeting is not set by                     the Board of Directors or by the
Chairman of the Board, the meeting shall be                     convened at the Office.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|58. | The
Board of Directors shall convene an extraordinary meeting by its decision or
                    otherwise as provided for by the Companies Law.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|59 | The
agenda of the general meeting shall be set by the Board of Directors and also shall
include those issues for which the convening of an extraordinary meeting was demanded as
mentioned in Article 59 above.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Notices regarding
Convening a General Meeting

|60. | A
notice regarding a general meeting shall be sent in accordance with the dates
                    required according to the applicable law.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------

|61. | The
notice shall state the time and place of the meeting, the agenda, the
                    decisions proposed and arrangements for voting by proxy card, if the
issues on                     the agenda of the meeting include those on which the
shareholders may vote by                     proxy under law or these Articles.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|62. | When
the Company has grounds to assume that an address provided to it by a
                    shareholder is no longer his address, said shareholder shall be
deemed not to                     have provided the Company with his address in each of
the following instances:
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 62.1 | When
the Company has sent him a letter by registered mail to said address, in which he is
asked to confirm that said address is still his address, or to notify the Company of a
new address, and the Company receives no answer within 30 days from the date on which the
Company posts the aforesaid letter at the post office.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 62.2 | When
the Company has sent him at said address a letter by registered mail and the Postal
Authority (including any postal service outside Israel), upon returning the letter or
without doing so, notifies the Company that the letter was not delivered to him at said
address because he is not known at that address or for any other similar reason.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|63. | Subject
to any law:
|--- | -------------------

| | 63.1 | The
Company may send any notice or document to a shareholder by delivering them to him
personally or by sending them by post to the address which he provided to the Company. If
the notice has been sent by post, it shall be deemed duly sent if the letter containing
the notice bears the address which the shareholder provided to the Company, and it is
given to the postal service duly stamped; unless the contrary is proved, it shall be
deemed delivered within 72 hours from its posting by the Company with the postal service
when the address is in the USA, and within six days of its posting by the Company with
the postal service when the address is outside USA.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 63.2 | The
Company may send any notice or document to a shareholder by giving it to him in any other
manner in writing, provided that doing so is not prohibited by law or rule of the
Exchange.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 63.3 | A
written confirmation signed by a director or the secretary or the stock transfer agent
representative regarding sending a written notice or giving notice in any of the manners
specified in Articles 61.1 and 61.2 above, shall be deemed conclusive evidence regarding
every particular included therein.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 63.4 | A
notice regarding a general meeting shall be sent in one of the above ways to every person
who has the right to a share upon the death or bankruptcy or winding up of a shareholder,
and who would have been entitled to receive notice of an annual meeting had such
circumstances not occurred.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 63.5 | Every
shareholder may waive his right to receive notice or his right to receive notice at a
particular time, and may agree that the general meeting shall be convened and shall take
decisions even without his having received notice thereof or without having received
notice thereof within a particular time period, subject to the provisions of any law
which forbid such waiver or consent.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

84

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|64. | The
Company may give notice to the joint owners of a share by notice to the
                    joint owner whose name is listed first in the Register of
shareholders with                     regard of said share.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|65. | Every
document or notice sent by the Company according to the provisions of
                    these Articles shall be deemed duly sent despite the death,
bankruptcy or                     winding up of said shareholder (whether or not the
Company knew thereof), so                     long as someone else is not registered in
lieu of the shareholder in the                     Register, and delivery or sending as
aforesaid shall be deemed adequate in all                     respects with regard to any
person who claims a right in said shares.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Decisions at General
Meetings

|66. | No
deliberation at a general meeting may be commenced unless a legal quorum is
                    present at the time it is commenced. Except in cases in respect of
which these                     Articles determine otherwise, or according to any law or
the order of a                     competent court, a legal quorum shall be deemed to be
the attendance of at least                     two shareholders, themselves or by their
representatives or by proxy card, who                     hold in the aggregate at least
thirty three percent and one third (33 ?%) of the                     voting power in the
Company.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|67. | If,
after one-half hour has passed from the time set for the general meeting,
                    there is not a legal quorum present, the meeting shall be
automatically                     postponed to the same day one week hence, at the same
time and place as set for                     the original meeting (with no need for any
notice to the shareholders), or to a                     later date if said date is
indicated in the prior notice of the general meeting                     or if the
Company has sent to the shareholders a prior notice of no less than 72
                    hours before the date set for the postponed meeting.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|68. | If
there is no quorum present at a postponed meeting, the meeting may be
                    postponed to another date.
|--- | -----------------------------------------------------------------------------------------------------------------------

|69. | The
Chairman of the Board of Directors shall serve as chair of every general
                    meeting of the Company. If there is no chair of the Board of
Directors, or the                     Board did not determine that another individual
shall chair the meeting as                     aforesaid, or if the intended chair was
not in attendance 15 minutes from the                     time set for the meeting, or if
he refuses to chair the meeting, the                     shareholders present at the
meeting shall elect, by themselves or through their                     representatives
one of the Directors to act as chairman, and if only one                     Director is
present, he shall act as chairman. If no Directors are present or if
                    they all refuse to chair the meeting, the shareholders shall elect a
shareholder                     or a representative present at the meeting as chair of
the meeting.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|70. | The
chair of the meeting may, with the consent of a meeting in which legal
                    quorum is present, postpone the meeting from time to time and from
place to                     place, and he must postpone it as aforesaid if the meeting
directs him to do so.                     At a postponed meeting as aforesaid only those
matters shall be discussed which                     were on the agenda of the original
meeting and the discussion of which was not                     concluded or was not
commenced. No notice need be given regarding the                     postponement and the
matters on the agenda of the postponed meeting.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|71. | A
decision at the general meeting shall be taken by a poll of shareholders who
                    are in attendance and who take part in the voting, by themselves, by
an agent or                     by proxy card.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|72. | Unless
otherwise prescribed in these Articles or under applicable law, all
                    decisions of the general meeting require a simple majority of the
total number                     of votes at the meeting. Any amendment of these Articles
and/or the Company                     Memorandum of Incorporation and/or any decision
winding up of the Company, shall                     require a majority of seventy-five
per cent (75%) of the total number of votes                     in the meeting and all
other rules shall apply mutatis mutandis with                     regard to such
vote.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|73. | Every
shareholder present, either himself or by a representative, has the right
                    to one vote for each share which he owns and which grants him voting
rights,                     regardless of its par value.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|74. | An
announcement by the chair that a decision was taken unanimously or by a
                    particular majority or was rejected shall constitute prima facie evidence
                    of its contents. An announcement as aforesaid and a note recorded to
this effect                     in the minutes of the Company shall constitute testimony
to their contents, and                     there shall be no need to prove the number or
proportion of votes in favor of or                     against the decision.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Voting of Shareholders
by a Representative or Agent

|75. | A
corporation which is a shareholder in the Company may authorize, by a decision
                    of its directors or of another managing body, an officer in the
corporation as                     its representative at any meeting of the Company. A
person so authorized may                     use, on behalf of the corporation, the same
powers that the corporation itself                     would have been able to use were
it a flesh and blood shareholder in the                     Company.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|76. | A
shareholder who is a minor, and any shareholder whom a competent court has
                    declared incompetent may vote only through his guardian, and any
guardian as                     aforesaid may vote by means of a representative.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|77. | In
the case of joint shareholders, the view of the head of the joint
                    shareholders, given by himself, his representative, his agent or by
proxy card                     shall be controlling, and the views of the other joint
owners shall not be                     considered. For the purposes of this Article, the
head of the joint owners shall                     be the shareholder whose name appears
first in the Register in respect of the                     relevant share.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|78. | A
shareholder may appoint an agent to vote in his place. Such an agent is not
                    required to be a shareholder in the Company himself. Appointment of
an agent                     shall be in writing, signed by the appointing shareholder or
his representative                     authorized to this end, and if the appointing
shareholder is a corporation, then                     by the person or persons
authorized to bind the corporation by their signature.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|79. | The
document appointing a voting agent (hereinafter: the writ of
                    appointment) and a power-of-attorney (if such exists) by
virtue of                     which the writ of appointment was signed, or a copy thereof
confirmed to the                     satisfaction of the Board of Directors, shall be
deposited at the Office or at                     the intended location of the general
meeting at least 48 hours prior to the time                     set for the beginning of
the meeting at which the person mentioned in the                     document is to vote,
or shall be delivered by hand to the chair of the meeting                     at the
beginning of the meeting; however, the chair of the meeting may waive
                    this requirement regarding a particular meeting.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|80. | A
shareholder who holds more than one share may appoint more than one agent,
                    subject to the following provisions:
|--- | -------------------------------------------------------------------------------------------------------------------------------------

| | 80.1 | The
writ of appointment shall indicate the class and the number of the shares for which it is
given;
| | ---- | ----------------------------------------------------------------------------------------------------

| | 80.2 | If
the total number of shares of a particular class stated in the writ of appointment given
by a single shareholder exceeds the total number of shares of that class which he holds,
all deeds of appointment given by that shareholder shall be invalid;
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 80.3 | If
only one agent is appointed by a shareholder and the writ of appointment does not
indicate the number and class of shares for which it is given, the writ of appointment
shall be deemed to have been given for all shares held by the shareholder as of the
determining date for entitlement to participate in and vote at the meeting (if the writ
of appointment is given for a particular meeting) or for all shares held by the
shareholders on the day of deposit of the writ of appointment with the Company, or on the
date it is delivered to the chair of the meeting, as the case may be. To the extent that
the writ of appointment is given for a number of shares fewer than the number of shares
held by the shareholder, the shareholder will be deemed to have abstained from voting his
remaining shares, and the writ of appointment shall be valid for the number of shares
indicated therein.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|81. | Every
writ of appointment of an agent, whether for a specifically noted meeting
                    or otherwise, shall be in the following form, as far as the
circumstances                     permit:
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | "I,
 _________________________(I.D.  number/Corporate registration no.) of
 _____________________________,  as a        shareholder  in Top  Image  Systems  Ltd.,
 hereby  appoint  __________________________  (I.D.  number/corporate        registration
   no.______________________)   of    ____________________________    or,   in   his/her
  absence,        _______________________________     (I.D.    number/corporate
   registration     no.____________________)    of        _____________________________
   or,   in   his/her   absence    ______________________________________    (I.D.
       number/corporate  registration  no.  ___________________________),  to vote for me
and in my name in  respect of        ______________  class _______  shares held by me, at
the  (annual/extraordinary)  meeting of the Company,  which        shall be held on
_______ of the month of _____________, ______________(year).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
witness whereof I have set my hand hereto on this _____th day of ____________,
__________(year).
| | ----------------------------------------------------------------------------------------------------

|82. | A
vote in accordance with the instructions in a document appointing an agent
                    shall be valid despite the death of the appointing shareholder or the
annulment                     of the power of attorney or transfer of the share for which
he voted as                     aforesaid, unless written notice of said death,
cancellation or transfer is                     received by the Company or the chair of
the meeting, prior to the time of the                     vote.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

87

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# Voting by Proxy Card and
Delivery of Position Notices

|83. | A
shareholder may vote his shares in any matter raised on the agenda of a
                    shareholders meeting through a proxy card, in a form determined by
the Board of                     Directors and attached to the notice provided to
shareholders with regard to any                     meeting.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|84. | Subject
to the provisions of the Companies Law and provisions established
                    thereunder, from time to time, the Board of Directors may from time
to time and                     at its absolute discretion:
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 84.1 | Determine,
update and change procedures as determined by the law or in Article 83 herein above, on
any matter related to voting of shareholders by proxy cards or to sending of position
notices to shareholders in the Company, including in respect of any matter specified in
this regard in the Companies Law and including with respect to the format of such proxy
cards or position notices.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 84.2 | Determine,
update and change matters on which decisions at the general meeting may be taken by way
of proxy cards as determined by the law or in Article 83 herein above, and to change said
matters determined by it.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 84.3 | Establish,
update and change procedures in respect of voting by means of proxy cards at some or all
class meetings, and in respect of sending position notices to shareholders of particular
classes.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Chapter E: The Board of
Directors

# Appointment and Removal of
Directors

|85. | So
long as the general meeting does not determine otherwise, the number of
                    members of the Board of Directors shall be not less than five (5) but
not more                     than eleven (11) to be determined according to the following
Articles.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|86. | The
Directors of the Company, except for external directors, shall be elected by
                    the general meeting, either at an annual or an extraordinary meeting.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|87. | The
general meeting may remove a director, including a director appointed by the
                    Board according to Article 90 below, with or without cause before the
end of his                     term at any general meeting (whether an annual or
extraordinary meeting),                     provided that the Director is given a
reasonable opportunity to present his                     position to the general
meeting.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|88. | So
long as the Company is required under law to appoint external directors, the
                    general meeting of the Company, both at an annual meeting and at an
                    extraordinary meeting, may appoint external directors, in a number
and manner                     and under terms stipulated by law.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

88

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|89. | Except
for external directors, the tenure of a director appointed by the general
                    meeting shall begin on the date determined by the general meeting and
shall end:                     (i) on the date of the subsequent annual general meeting;
or (ii) on another                     date as determined by the general meeting;
provided however, that in the event                     that the general meeting does not
elect at least the minimum number of directors                     under these Articles,
then the outgoing Board of Directors shall continue its                     tenure until
the general meetings elects at least such minimum number of
                    directors.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|90. | Without
derogating from the provisions of Articles 85 to 89 above, in addition
                    to directors appointed by the general meeting, the Board of Directors
of the                     Company is authorized to appoint additional directors at its
discretion,                     provided that the number of directors after such
appointment shall not exceed                     the maximal number stated in Article 85
above. To eliminate any doubt, the Board                     of directors may, at
anytime, appoint additional directors as aforesaid even if,                     for any
reason, the number of directors serving, at the time of such
                    appointment(s) is less than the minimum prescribed under these
Articles.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|91. | The
tenure of a director appointed by the Board of Directors shall begin on the
                    date determined by the Board of Directors and shall end on the date
determined                     in the resolution regarding his appointment or on the date
which the annual                     general meeting is convened, whichever is earlier.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|92. | Without
derogating from the provisions of any law or from the authority of the
                    general meeting as determined in these Articles, the Board of
Directors shall be                     authorized to remove a director appointed by the
Board from office for any                     reason.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|93. | Every
replacement, appointment or reappointment of a director under Articles 90
                    to 92 above shall be done by majority vote of the directors present
and voting                     at a meeting of the Board of Directors at which the issue
was placed on the                     agenda.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|94. | Subject
to the provisions of any law, a director who has ceased serving is
                    competent to be reappointed.
|--- | ---------------------------------------------------------------------------------------------------------------------------

|95. | Subject
to the provisions of any law, the tenure of a director (including that
                    of an Alternate Director and a Corporate Representative as such)
shall expire                     automatically in any of the following instances:
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 95.1. | On
his death;
| | ----- | -------------

| | 95.2. | If
he is declared incompetent;
| | ----- | ------------------------------

| | 95.3 | If
he is declared bankrupt, or, in the event that the director is a corporation, if a
temporary or permanent receiver, liquidator, special director, or trustee is appointed
over it or its property in the context of a settlement with creditors or an order to
freeze proceedings;
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 95.4 | If
he resigns from office by written notice to the Company, to the Chairman of the Board of
Directors or to the Board, whereupon his tenure shall expire on the date of delivery of
such notice or at such later date as determined in the notice as the effective date of
the resignation.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 95.5 | If
his tenure ends under Articles 89 or 91 above, or if he is dismissed under Articles 87 or
92 above;
| | ---- | ------------------------------------------------------------------------------------------------------

| | 95.6 | If
a director is  convicted  in a final  judgment of an offense as a result of which a
person may not serve as                   a director.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------

89

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|96. | If
no director is appointed, or if no appointment of any director enters into
                    force, or if a director position becomes vacant, the remaining
directors may act                     in any manner, so long as their number is no less
then the minimum number of                     directors stipulated in Article 85 above.
Should the number of directors fall                     below said minimum, the directors
may not act except in urgent cases, or for the                     purpose of convening a
general meeting or the appointment of additional                     directors under
Article 90 above.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Alternate Director and
Corporate Representative

|97. | A
director may at any time appoint a deputy (Alternate                     Director),
who is qualified to be appointed as a director in the                     Company (except
if such person is serving at the time as a director, an                     alternate or
other director, or as an individual Corporate Representative). So
                    long as an appointment of an Alternate Director is in force, he shall
be                     entitled to participate in every meeting of the Board of Directors
from which                     the appointing director is absent, in the name and in
place of the appointing                     director, and may make use, subject to the
provisions of the writ of appointment                     under which he was appointed
and which was given to the Company, all powers held                     by the director
and shall act as his alternate (except for the power to appoint                     a
deputy for himself).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|98. | An
Alternate Director shall not serve as an alternate director or a Corporate
                    Representative of more than one director.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|99. | The
appointment of an Alternate Director shall be effected by a writ of
                    appointment which he shall deliver to the Company, and shall enter
into force                     after depositing the writ of appointment with the Company
or on the date                     determined in the writ of appointment, whichever is
later.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|100. | A
director who appoints an Alternate Director may annul the appointment at any
                    time. The position of the Alternate Director shall also become vacant
whenever                     the Alternate Director notifies the Company in writing of
his resignation from                     his tenure as an Alternate Director, or whenever
the tenure of the director who                     appointed him as his deputy ends, in
any manner, or whenever his tenure shall                     expire according to law or
the provisions of these Articles.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|101. | Every
appointment and nullification of an appointment of an Alternate Director
                    shall be effected by written notice delivered to the Company.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|102. | A
corporation is qualified to serve as a director and as an Alternate Director
                    in the Company.
|---- | ------------------------------------------------------------------------------------------------------------------

|103. | A
corporation which serves as a director or as an Alternate Director shall
                    appoint an individual who is qualified to be appointed as a director
of the                     Company to serve on its behalf on the Board of Directors (Corporate
                    Representative).
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|104. | The
appointment or nullification of appointment of a Corporate Representative
                    shall be effected by written notice, which the appointing corporation
shall                     deliver to the Company, and shall enter into force on the date
of notice to the                     Company as aforesaid.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

90

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|105. | The
appointing corporation shall not be entitled to the powers and rights of a
                    director during the time in which the corporation does not have a
representative                     whose appointment is valid.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Remuneration of Directors

|106. | A
director is entitled to receive remuneration, benefits and reimbursement for
                    expenses from the Company to the extent permitted by the law, subject
to the                     approvals required under law and according to the procedures
detailed therein.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Chairman of the Board of
Directors

|107. | Subject
to the provisions of any law, the Board of Directors shall elect, from
                    time to time, one of the directors to serve as Chairman of the Board,
and may                     remove the Chairman and appoint another Chairman in his
place.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|108. | The
Chairman of the Board of Directors shall have all powers, rights and
                    authorities given to him under these Articles or under law and
subject to any                     restrictions and qualifications in these Articles or
under law. Without                     derogating from the generality of the aforesaid,
the Chairman of the Board of                     Directors is entitled to any power or
authority necessary to carry out his                     functions and to use his rights
and authorities effectively, including the power                     to act in the name
of and in place of the Company.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|109. | Without
derogating from any of the aforesaid, and unless otherwise expressly
                    provided, the chairman of the meeting of the Board of Directors,
whether the                     Chairman of the Board of Directors or any other director
chosen to serve as                     chairman of the meeting, shall not have an
additional or casting vote.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Convening and Conduct of
Meetings of the Board of Directors

|110. | The
Board of Directors shall convene for meetings according to the needs of the
                    Company, and no less than once every three months. The Chairman of
the Board of                     Directors may convene the Board at any time.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|111. | The
Board of Directors shall be convened as follows:
|---- | ----------------------------------------------------

| | (1) | According
to the decision of the Chairman of the Board of Directors at any time;
| | --- | --------------------------------------------------------------------------------

| | (2) | At
the request of two directors;
| | --- | --------------------------------

| | (3) | In
any other case in which the Chairman of the Board of Directors bears a legal
          duty to convene the Board of Directors.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------

|112. | If
the Chairman of the Board of Directors does not convene the Board within 10
                    business days of the date on which he was required to convene a
meeting as                     detailed in Article 111 (2) and (3) above, anyone
authorized to demand such                     meeting may convene a Board meeting which
shall address only the issues detailed                     in any demand.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|113 | The
agenda of the meeting of the Board of Directors shall be set by the Chairman of the Board
and shall include issues as determined by the Law.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|114. | Subject
to the provisions of any law, the Board of Directors may conduct
                    meetings, hold votes and take decisions, among other things, by means
of                     telecommunications (including by means of several types of
telecommunications                     media, and including in a manner in which part of
the directors are present in                     person at the place of the meeting and
the remaining directors participate in                     the meeting are present by
means of telecommunications media), as permitted by                     applicable law.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

91

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|115. | The
legal quorum for opening a meeting of the Board of Directors shall be a
                    majority of the number of directors.
|---- | ------------------------------------------------------------------------------------------------------------------------------------

|116. | The
Board of Directors may take a resolution without actually convening,
                    provided that all of the directors entitled to participate in the
discussion and                     to vote on the matter brought for decision have so
agreed, and said resolution                     shall have the same force for any purpose
as if it had been taken at a duly                     convened and conducted meeting of
the Board, and may be taken by a simple                     majority.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|117. | The
Chairman of the Board of Directors shall have minutes recorded of the
                    decisions taken without convening the Board of Directors as aforesaid
and shall                     sign them.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|118. | At
all votes of the Board of Directors each Director shall have one vote.
|---- | -------------------------------------------------------------------------

|119. | Decisions
of the Board shall be taken by an ordinary majority of the Directors
                    who voted on the agenda item being decided.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------

|120. | Every
act done by or according to a decision of the Board of Directors, or by or
                    according to a committee of the Board of Directors or by a director
in his                     capacity as such, shall be valid even if it turns out
afterward that there was                     some defect in the election of the
directors, or that all or any one of them                     were legally unqualified,
as if each of them were duly elected and had all the                     necessary
qualifications for being a director, an Alternate Director, a
                    Corporate Representative or a member of said committee, as the case
may be.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Notices of Board Meetings

|121. | A
notice of a meeting of the Board of Directors to be convened by the Chairman
                    of the Board may be delivered in writing, at least three business
days before                     the date set for the meeting, unless the Chairman of the
Board set a shorter                     date for giving notice due to the urgency of the
matter on the agenda of the                     meeting.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|122. | A
notice of a Board meeting shall be sent to every director. If a director has
                    appointed an Alternate Director for himself, the notice shall be sent
solely to                     the Alternate Director (unless the writ of appointment by
virtue of which the                     Alternate Director was appointed directs
otherwise). Notice to a director that                     is a corporation shall be
delivered to the Corporate Representative (unless the                     corporation
instructs the Company otherwise in writing), and a notice delivered
                    to an Alternate Director or to a Corporate Representative, as the
case may be,                     shall be deemed a notice delivered to the director who
appointed them.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|123. | A
notice of a meeting of the Board of Directors shall be deemed delivered at the
                    following times two business days if sent by registered mail; or upon
delivery                     if delivered by hand; or one business day if sent by
facsimile or electronic                     mail;
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

92

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| | The
address of the director and the other particulars necessary for communication with him
for the purpose of sending notices shall be the information appearing in the Register of
Directors which the Company maintains, or of which he notified the Company in a written
request that is used for the purpose of sending notices.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|124. | A
notice of a meeting of the Board of Directors shall include reasonable details
                    as required by the law as well as relevant ancillary material.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|125. | Notwithstanding
the aforesaid in Article 121 above, all of the directors (in                     case of
a corporate director or a director who appointed a deputy  the
                    Corporate Representative or Alternate Director, as the case may be)
may agree to                     the convening of a meeting of the Board of Directors by
advance notice shorter                     than that required under Article 121 above, or
without notice.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Powers of the Board of
Directors

|126. | The
Board of Directors shall formulate the policy of the Company, and shall
               oversee the execution of the functions and actions of the Chief Executive
               Officer. The Board of Directors shall have the powers and authority
necessary,                in the view of the Board, to carry out its functions fully and
effectively.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|127. | Without
derogating from the generality of the provisions of Article 128 above,                the
Board of Directors may use all powers and authorities, and my take all
               actions or do any deeds available to it under law or contract or under
these                Articles or under the Memorandum of Incorporation of the Company.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|128. | The
Board of Directors may instruct the Chief Executive Officer how to act in
               respect of a particular matter.
|---- | ----------------------------------------------------------------------------------------------------------------------------

|129. | The
power of the Board of Directors shall be subject to law, to these Articles,
               to the Memorandum of Incorporation of the Company and to any regulation
               promulgated by the Company at the general meeting, to the extent that it
does                not contradict said provisions or Articles, provided that no such
regulation                shall annul the legal force of any act done prior thereto by
the Board of                Directors or pursuant to its decisions which would have been
legally valid had                said regulation not been promulgated.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|130. | For
the exercise of the general powers granted to the Board of Directors, and
               without limiting or constricting to any degree said powers or any one of
them,                it is hereby declared explicitly that the Board of Directors shall
have the                following powers:
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 130.1. | The
Board of Directors may, from time to time, appoint by majority decision one
               or more persons (whether or not he is a member of the Board) as Chief
Executive                Officer of the Company, either for a set period or without
limitation in time,                and may from time to time (taking into account the
terms of any contract between                him or them and the Company) release him or
them from their office and appoint                another person or other persons in his
or their place.
| | ------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

93

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| | 130.2. | Subject
to any law, the compensation of the Chief Executive Officer shall be
               determined from time to time (taking into account the terms of any
contract                between him and the Company) by the Board of Directors, and may
be in the form                of a fixed salary, a commission on dividends, profits or
revenues of the Company                or of any other company in which the Company has
an interest, or by sharing in                such profits, or by one or more of these
methods or in any other manner that the                Board of Directors deems fit.
| | ------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 130.3. | The
Board of Directors shall determine the compensation of the auditing
               accountant of the Company for the services rendered by him.
| | ------ | --------------------------------------------------------------------------------------------------------------------------------------------------

| | 130.4. | The
Company may issue redeemable securities on terms determined by the Board of
               Directors of the Company.
| | ------ | ------------------------------------------------------------------------------------------------------------------------

| | 130.5. | The
Board of Directors of the Company may attach to such redeemable securities
               the characteristics of shares, including voting rights and the right to
share in                profits.
| | ------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 130.6. | The
Board of Directors may decide on allotment of non-par value shares; in the
               event that non-par value shares are allotted, only their number shall be
noted                in the Articles, and the provisions of the Companies Law dealing
with the                registered or issued capital shall apply, with the necessary
changes.
| | ------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Committees of the Board
of Directors

|131. | The
Board of Directors may, from time to time, form committees, appoint members
                    of such committees from among the directors and determine, subject to
the                     provisions of any law, the powers of the Board of Directors to be
delegated to                     the Board committees; and may, from time to time, cancel
said delegation of                     powers, in part or in whole, and cancel any of
said Board committees.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|132. | Every
Board committee must, in using its powers, follow the instructions of the
                    Board of Directors.
|---- | -----------------------------------------------------------------------------------------------------------------------

|133. | Subject
to Article 135 below, the meetings, decisions and actions of the Board
                    committees shall be conducted and convened according to the
provisions of these                     Articles in respect of convening and conduct of
the meetings, decisions and                     actions of the Board of Directors, with
the necessary changes.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|134. | Subject
to the provisions of any law and notwithstanding the aforesaid in
                    Article 133 above, the Board of Directors may, from time to time,
establish                     procedures and directives in respect of convening and
conduct of meetings,                     decisions and actions of the Board committees.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|135. | The
Board of Directors shall appoint from among its members an audit committee,
                    the composition and functions of which shall be in accordance with
the                     provisions of law and rules of the Exchange
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Chapter F: The Chief
Executive Officer and other Officers

# The Chief Executive
Officer

|136. | The
Chief Executive Officer is responsible for the day-to-day administration of
                    the Companys affairs, in the framework of the policy determined
by the                     Board of Directors and subject to its instructions.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

94

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|137. | The
power of the Chief Executive Officer shall be subject to the provisions of
                    any law, to these Articles, to any regulation promulgated by the
Company at the                     general meeting to the extent it does not contradict
said provisions or                     Articles, and any directive or rule determined by
the Board of Directors from                     time to time, provided that no
regulation, directive or rule as aforesaid shall                     cancel the legal
validity of any act taken prior thereto by the Chief Executive
                    Officer or pursuant to his decisions which would have been legally
valid had                     said regulation not been promulgated or had said directive
or rule not been                     determined.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Insurance and Indemnity
of Officers

|138. | The
Company may, from time to time and subject to the provisions of any law:
|---- | ----------------------------------------------------------------------------

| | 138.1. | Enter
into a contract for insuring the liability of an Officer, in part or in
                    whole, for an obligation imposed on him as a result of an act or
omission                     performed in his capacity as an Officer, under any
circumstances with respect to                     which the Company may, or will be able
to insure an Officer of the Company.
| | ------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 138.2. | Indemnify
an Officer of the Company for a debt or expense imposed on him as a
                    result of an act performed by him in his capacity as an Officer with
regard to                     circumstances with respect to which the Company may, or
will be able to                     indemnify an Officer of the Company.
| | ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 138.3. | The
Company may indemnify an Officer as specified in sub-Article 138.2 above,
                    either retroactively or undertake to indemnify an Officer in advance.
An                     undertaking to indemnify an Officer shall be limited to the type
of events that                     the Board of Directors deems that it is possible to
expect at the time of                     granting the undertaking, and to an amount that
the Board of Directors                     determined is reasonable in the circumstances.
| | ------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 138.4. | All
of the above provisions shall be limited to the extent permitted by the law,
                    and in no event shall an Officer be entitled to insurance,
indemnification or an                     exemption with regard to events for which the
law prohibits the provision of                     insurance and indemnification.
| | ------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|139. | The
above provisions neither intend, nor shall they be construed, to limit the
                    Company in any manner whatsoever in respect of its entering into a
contract of                     insurance, exemption or indemnity with respect to those
who are not Officers in                     the Company, including employees, contractors
or advisors of the Company who are                     not Officers therein to the extent
permitted by law;
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Signing in the Name of
the Company

|140. | Every
signature in the name of the Company shall be effected by the person
                    authorized to do so under law, according to these Articles or
according to a                     decision of the Board of Directors, and shall be
accompanied by the Company seal                     or a seal in the name of the Company.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Chapter G: Minutes,
Records and Accounting Books

|141. | The
Board of Directors shall see to it that minutes are properly recorded in
                    books prepared for this purpose, regarding:
|---- | --------------------------------------------------------------------------------------------------------------------------------------------

| | 141.1. | The
names of the members of the Board of Directors present at any meeting of the
                    Board of Directors and at every meeting of a Board Committee
(including in every                     decision of the Board of Directors or any of its
committees which was taken                     without actually convening).
| | ------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

95

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| | 141.2. | The
proceedings at the general meetings, Board of Directors meetings and
                    Board Committee meetings, including resolutions taken without
actually                     convening.
| | ------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 141.3. | The
results of votes taken at any meeting and resolutions adopted at such
                    meetings.
| | ------ | -------------------------------------------------------------------------------------------------------

|142. | All
such minutes of a meeting of the Board of Directors or of any of its
                    Committees, or of the general meeting of the Company, which purports
to be                     signed by the Chairman of the meeting or by the chairman of the
subsequent                     meeting, shall be prima facie evidence of its
contents.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|143. | The
Company shall preserve the minutes mentioned in this chapter as required by
                    law.
|---- | --------------------------------------------------------------------------------------------------------

|144. | The
Company shall keep books and records as required by any law.
|---- | ----------------------------------------------------------------

|145. | The
Company shall keep books and shall prepare financial reports in accordance
                    with the applicable law.
|---- | ---------------------------------------------------------------------------------------------------------------------------

# Chapter H: Audit

# Auditing Accountants

|146. | At
least once a year the financial reports of the Company shall be audited by an
                    auditing accountant or accountants who will render their opinion
thereon.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|147. | The
Company shall appoint at an annual meeting an auditing accountant or
                    accountants who will serve until the next annual meeting; however,
the annual                     meeting may appoint an auditing accountant for a longer
period, which shall not                     exceed three years.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|148. | The
compensation of the auditing accountant for the audit shall be determined by
                    the Board of Directors or by the Audit Committee, if it is so
authorized by the                     Board of Directors.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Chapter I: Capital
Funds, Distribution, Bonus Shares and Decrease of Capital

# Capital Funds

|149. | The
Board of Directors may, at any time, set aside from surplus accounts amounts
                    as it deems fit, as a reserve fund for distribution of dividends, for
                    distribution of bonus shares, for purchase of securities in the
Company or for                     any other purpose which it deems fit. In addition, the
Board of Directors may                     direct the manner of administration and use of
the amounts in any fund or part                     thereof, including use of the amount
of the fund or part thereof in the                     Companys business, without
having to maintain them separately from the                     other assets of the
Company.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|150. | The
Board of Directors may transfer, from time to time, sums set aside to a
                    reserve fund as aforesaid to the surplus account.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------

|151. | The
Board of Directors may, from time to time, subject to the provisions of any
                    law and these Articles, change the intended use of the amounts in any
capital                     fund of whatever sort or the manner of its administration, or
may split or                     consolidate capital funds, or may transfer the amount of
any capital fund to the                     surplus account or to any other account on
the Companys books.                     Notwithstanding the aforesaid, the Board of
Directors may not transfer an amount                     from a share premium account
except to share capital of the Company or for the                     purpose of reducing
capital.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

96

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# Distribution of a
Dividend and Bonus Shares

|152. | Every
ordinary share shall grant its owner the right to receive dividends and
                    bonus shares, if and when they are distributed, in proportion to the
paid up par                     value of the shares, or that which is deemed paid up.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|153. | A
decision of distribution (as defined in the Companies Law) shall be taken by
                    the Board of Directors. However, the Board of Directors, at its
discretion, may                     transfer the decision in this matter to the general
meeting.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|154. | The
Board of Directors may, from time to time, transfer to owners of securities
                    issued by the Company which may be converted to or realized in the
form of                     shares in the Company, bonus shares or dividends which the
Company distributed                     during the period from the date of issue of said
securities until the date of                     realization or conversion to shares in
the Company.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|155. | For
the execution of any decision regarding distribution of a divided or bonus
                    shares or acquisition of securities in the Company, the Board of
Directors may:
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 155.1. | Resolve
as it best sees fit any difficulty that may arise in connection with
                    such distribution and take all steps which it deems proper to
overcome such                     difficulty.
| | ------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 155.2. | Issue
certificates for share fractions or to decide that shares in the Company
                    which entitle their owners to share fractions at a rate lower than
that                     determined by the Board of Directors shall not entitle their
owners in respect                     of said distribution, or sell share fractions and
pay the net price (after                     deducting expenses of sale and any tax on
the sale) to those entitled to them.
| | ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 155.3. | Make
any other arrangements that will be necessary in the view of the Board of
                    Directors to enable the distribution or to make it more efficient.
| | ------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|156. | The
Board of Directors may appoint trustees for shareholders who, during a
                    period as determined by the Board of Directors, did not apply to the
Company to                     receive dividends, bonus shares or any other right (as
detailed in Articles 152                     to 155 above (hereinafter: Bonus)
which the Company issued or                     distributed to its shareholders in their
capacity as such. Every action taken by                     said trustees, and any
contract between the Board of Directors and the trustees,                     shall be
valid and shall bind the shareholders for whom the trustees were
                    appointed.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|157. | Said
trustees shall be appointed for the purpose of realizing, collecting and
                    receiving a Bonus, but may not transfer the Bonus or part thereof or
grant any                     rights in the Bonus or use it, an may not vote any
securities in the Company                     which were included in the Bonus.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

97

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|158. | The
trustees shall transfer the Bonus, including any earnings thereon and after
                    deduction of their fees as determined by the Board of Directors, to
the                     shareholders entitled to the Bonus as promptly as possible after
receiving the                     shareholders first written demand, subject to
verification of the identity                     of the shareholder and all terms of the
Bonus to which he is entitled in                     accordance with procedures
determined by the Board of Directors. The relevant                     provisions of
these Articles with regard to transfer of rights, shall apply to
                    transfer of the Bonus, with the necessary changes.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|159. | The
Board of Directors may determine from time to time the manner of payment of
                    dividends or distribution of bonus shares, and related arrangements,
with                     respect to the various classes of shareholders. Without
derogating from the                     generality of the aforesaid, the Board of
Directors may pay any dividends or                     moneys for shares by sending a
check by registered mail, and if the bonus, in                     part or in whole, is
an asset or right, by sending by registered mail any                     document
attesting to or creating said right, to the address of the shareholder
                    as listed in the Register. Every said posting of a check or document
shall be                     done at the risk of the shareholder.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|160. | The
Board of Directors may withhold any dividend, bonus, rights or amounts to be
                    paid for shares in respect of which the Company has an encumbrance/a
lien, and                     may use the proceeds of realization to discharge the debts
in respect of which                     the Company has such encumbrance/lien.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|161. | The
Board of Directors may decide that the bonus shares shall be of the same
                    class of shares held by the shareholders, participating in the
distribution of                     bonus shares, or of a different class of shares
regardless held by the aforesaid                     shareholders or a combination of the
two classes.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|162. | A
transfer of shares shall not grant the transferee the right to a dividend or
                    to any other distribution announced after said transfer but before
registration                     of the transfer in the Register, provided that if the
transfer of shares                     requires approval by the Board of Directors, the
date of approval shall come in                     place of the date of registration of
the transfer in the Register.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|163. | In
the case of a dividend the payment of which was not demanded within seven
                    years from the date of the decision to distribute it, the person
entitled to it                     shall be deemed to have waived it and it shall revert
to the ownership of the                     Company.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|164. | The
Board of Directors may deduct from any dividend, grant or other moneys to be
                    paid to a shareholder (including to a person who is one of several
joint owners                     of a share), any amounts owing from said shareholder
which he must discharge                     (either by himself or jointly with another
person) to the Company on account of                     payment demands or for any other
debt which the shareholder owes to the Company                     in his capacity as
shareholder.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|165. | To
the extent that several persons are registered as joint owners of a share,
                    each of them may give the Company a valid receipt for any dividend,
bonus shares                     paid or transferred in respect of the share or for any
amount that the Company                     pays for acquiring the share, or for any
other moneys or beneficial rights given                     in relation to or by virtue
of said share.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

98

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# Chapter J: Winding up,
Merger and Reorganization

# Winding up

|166. | Subject
to the provisions of the Companies Ordinance and the Companies Law, the
                    general meeting may take a decision in respect of the winding up of
the Company,                     provided that said decision is taken by the majority
required by law or, absent                     a requirement by law, by a majority
required to take decisions under these                     Articles. All of the
procedures with regard to winding up shall be taken in                     accordance
with the Companies Ordinance or the Companies Law as applicable.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Merger and Reorganization

|167. | Merger
of the Company shall be carried out in accordance with the provisions of           any
applicable law.
|---- | -------------------------------------------------------------------------------------------------------------

99

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EXHIBIT 4.48

# TOP IMAGE SYSTEMS LTD.

# THE 2003 ISRAELI SHARE
OPTION PLAN

# (*In compliance with
Amendment No. 132 of the Israeli Tax Ordinance, 2002)

100

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# TABLE OF CONTENTS

|                                                      | 
|----------------------------------------------------- | 
|
|
|
|
|1. PURPOSE OF THE ISOP                                | 
|2. DEFINITIONS                                        | 
|3. ADMINISTRATION OF THE ISOP                         | 
|4. DESIGNATION OF PARTICIPANTS                        | 
|5. DESIGNATION OF OPTIONS PURSUANT TO SECTION 102     | 
|6. TRUSTEE                                            | 
|7. SHARES RESERVED FOR THE ISOP                       | 
|8. PURCHASE PRICE                                     | 
|9. ADJUSTMENTS                                        | 
|10. TERM AND EXERCISE OF OPTIONS                      | 
|11. VESTING OF OPTIONS                                | 
|12. PURCHASE FOR INVESTMENT                           | 
|12. DIVIDENDS                                         | 
|13. RESTRICTIONS ON ASSIGNABILITY AND SALE OF OPTIONS | 
|14. EFFECTIVE DATE AND DURATION OF THE ISOP           | 
|15. AMENDMENTS OR TERMINATION                         | 
|16. GOVERNMENT REGULATIONS                            | 
|17. CONTINUANCE OF EMPLOYMENT                         | 
|18. GOVERNING LAW & JURISDICTION                      | 
|19. TAX CONSEQUENCES                                  | 
|20. NON-EXCLUSIVITY OF THE ISOP                       | 
|21. MULTIPLE AGREEMENTS                               | 

101

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---

| | This
plan, as amended from time to time, shall be known as Top Image Systems Ltd. 2003
Israeli Share Option Plan (the "ISOP").
| | ------------------------------------------------------------------------------------------------------------------------------

|1. | PURPOSE
OF THE ISOP
|-- | -------------------

| | The
ISOP is intended to provide an incentive to retain, in the employ of theCompany
and its Affiliates (as defined below), persons of training, experience, and ability, to
attract new employees, directors, consultants, service providers and any other entity
which the Board shall decide their services are considered valuable to the Company, to
encourage the sense of proprietorship of such persons, and to stimulate the active
interest of such persons in the development and financial success of the Company by
providing them with opportunities to purchase shares in the Company, pursuant to the
ISOP.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | For
purposes of the ISOP and related documents, including the Option Agreement, the following
definitions shall apply:
| | ----------------------------------------------------------------------------------------------------------------------

| | 2.1 | "Affiliate"
means any "employing company" within the meaning of Section 102(a) of the Ordinance.
| | --- | ------------------------------------------------------------------------------------------------

| | 2.2 | Approved
102 Option means an Option granted pursuant to Section 102(b) of the Ordinance
and held in trust by a Trustee for the benefit of the Optionee.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.3 | "Board"
means the Board of Directors of the Company.
| | --- | ----------------------------------------------------

| | 2.4 | "Capital
Gain Option (CGO)" as defined in Section 5.4 below.
| | --- | ------------------------------------------------------------

| | 2.5 | Cause means,
(i) conviction of any felony involving moral turpitude or affecting the Company; (ii) any
refusal to carry out a reasonable directive of the chief executive officer, the Board or
the Optionees direct supervisor, which involves the business of the Company or its
Affiliates and was capable of being lawfully performed; (iii) embezzlement of funds of
the Company or its Affiliates; (iv) any breach of the Optionees fiduciary duties or
duties of care of the Company; including without limitation disclosure of confidential
information of the Company; and (v) any conduct (other than conduct in good faith)
reasonably determined by the Board to be materially detrimental to the Company.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.6 | "Chairman"
means the chairman of the Committee.
| | --- | -----------------------------------------------

| | 2.7 | "Code"
 means  the  United  States  Internal  Revenue  Code of 1986,  as now in effect or as
         hereafter amended.
| | --- | ------------------------------------------------------------------------------------------------------------------------

| | 2.8 | Committeemeans
a share option compensation committee of the Board, designated from time to time by the
resolution of the Board, which shall consist of no fewer than two members of the Board.
The Committee shall consist of directors who are outside directors as defined
in Section 162(m) of the Code and Non-Employee Directors as defined in Rule
16b-3 promulgated by the Securities and Exchange Commission under the United States
Securities Exchange Act of 1934.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

102

---

---

| | 2.9 | "Company"
means Top Image Systems Ltd., an Israeli Company.
| | --- | -----------------------------------------------------------

| | 2.10 | "Companies
Law" means the Israeli Companies Law 5759-1999.
| | ---- | ----------------------------------------------------------

| | 2.11 | "Controlling
 Shareholder"  shall have the meaning  ascribed  to it in Section  32(9) of the
Ordinance.
| | ---- | -------------------------------------------------------------------------------------------------------

| | 2.12 | Date
of Grant means, the date of grant of an Option, as determined by the Board or
authorized Committee and set forth in the Optionees Option Agreement.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.13 | Employee means
a person who is employed by the Company or its Affiliates, including an individual who is
serving as a director or an office holder, but excluding Controlling Shareholder.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.14 | Expiration
date means the date upon which an Option shall expire, as set forth in Section
10.2 of the ISOP.
| | ---- | -------------------------------------------------------------------------------------------------------------

| | 2.15 | "Fair
Market Value" means as of any date, the value of a Share determined as follows:
| | ---- | -------------------------------------------------------------------------------------

| | (i) If the Shares are listed on any
established stock exchange or a national market           system, including without
limitation the NASDAQ National Market system, or the           NASDAQ SmallCap Market of
the NASDAQ Stock Market, the Fair Market Value shall           be the closing sales price
for such Shares (or the closing bid, if no sales were           reported), as quoted on
such exchange or system for the last market trading day           prior to time of
determination, as reported in the Wall Street Journal, or such           other source as
the Board deems reliable.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Without
derogating from the above, solely for the purpose of determining the tax liability
pursuant to Section 102(b)(3) of the Ordinance, if at the Date of Grant the Companys
shares are listed on any established stock exchange or a national market system or if the
Companys shares will be registered for trading within ninety (90) days following
the Date of Grant, the Fair Market Value of a Share at the Date of Grant shall be
determined in accordance with the average value of the Companys shares on the
thirty (30) trading days preceding the Date of Grant or on the thirty (30) trading days
following the date of registration for trading, as the case may be;
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii)
If the Shares are regularly quoted by a recognized securities dealer but
          selling prices are not reported, the Fair Market Value shall be the mean
between           the high bid and low asked prices for the Shares on the last market
trading day           prior to the day of determination, or;
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii)
In the absence of an established market for the Shares, the Fair Market Value
          thereof shall be determined in good faith by the Board.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.16 | "ISOP"means this 2003 Israeli Share Option Plan.
| | ---- | ------------------------------------------------

| | 2.17 | ITA means
the Israeli Tax Authorities.
| | ---- | ----------------------------------------

| | 2.18 | "Non-Employee"means a consultant, adviser, service provider, Controlling Shareholder or
any other person who is not an Employee.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------

103

---

---

| | 2.19 | "Ordinary
Income Option (OIO)"as defined in Section 5.5 below.
| | ---- | --------------------------------------------------------------

| | 2.20 | "Option"means an option to purchase one or more Shares of the Company pursuant to the ISOP.
| | ---- | -------------------------------------------------------------------------------------------

| | 2.21 | "102
Option"means any Option granted to Employees pursuant to Section 102 of the Ordinance.
| | ---- | -------------------------------------------------------------------------------------------

| | 2.22 | "3(i)
Option"means an Option granted pursuant to Section 3(i) of the Ordinance to any
person who is Non- Employee.
| | ---- | ------------------------------------------------------------------------------------------------------------------

| | 2.23 | "Optionee"means a person who receives or holds an Option under the ISOP.
| | ---- | ------------------------------------------------------------------------

| | 2.24 | Option
Agreementmeans the share option agreement between the Company and an Optionee
that sets out the terms and conditions of an Option.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------

| | 2.25 | Ordinancemeans
the 1961 Israeli Income Tax Ordinance [New Version] 1961 as now in effect or as hereafter
amended.
| | ---- | -------------------------------------------------------------------------------------------------------------------

| | 2.26 | "Purchase
Price"means the price for each Share subject to an Option.
| | ---- | --------------------------------------------------------------------

| | 2.27 | "Section
102"means section 102 of the Ordinance as now in effect or as hereafter amended.
| | ---- | -----------------------------------------------------------------------------------------

| | 2.28 | Share means
the ordinary shares, NIS 0.04 par value each, of the Company.
| | ---- | ---------------------------------------------------------------------------

| | 2.29 | "Successor
Company"means any entity the Company is merged to or is acquired by, in which
the Company is not the surviving entity.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------

| | 2.30 | Transactionmeans
(i) merger, acquisition or reorganization of the Company with one or more other entities
in which the Company is not the surviving entity, (ii) a sale of all or substantially all
of the assets of the Company.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.31 | Trusteemeans
any individual appointed by the Company to serve as a trustee and approved by the ITA,
all in accordance with the provisions of Section 102(a) of the Ordinance.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.32 | Unapproved
102 Option means an Option granted pursuant to Section 102(c) of the Ordinance
and not held in trust by a Trustee.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------

| | 2.33 | "Vested
Option"means any Option, which has already been vested according to the Vesting
Dates.
| | ---- | ----------------------------------------------------------------------------------------------

| | 2.34 | Vesting
Dates means, as determined by the Board or by the Committee, the date as of
which the Optionee shall be entitled to exercise the Options or part of the Options, as
set forth in section 11 of the ISOP.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

104

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|3. | ADMINISTRATION
OF THE ISOP
|-- | --------------------------

| | 3.1 | The
Board shall have the power to administer the ISOP either directly or upon the
recommendation of the Committee, all as provided by applicable law and in the Companys
Articles of Association. Notwithstanding the above, the Board shall automatically have
residual authority: (i) if no Committee shall be constituted or; (ii) if such Committee
shall cease to operate for any reason or; (iii) with respect to the rights not delegated
by the Board to the Committee.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.2 | The
Committee shall select one of its members as its Chairman and shall hold its meetings at
such times and places as the Chairman shall determine. The Committee shall keep records
of its meetings and shall make such rules and regulations for the conduct of its business
as it shall deem advisable.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.3 | The
Committee shall have the power to recommend to the Board and the Board shall have the
full power and authority to: (i) designate participants; (ii) determine the terms and
provisions of the respective Option Agreements, including, but not limited to, the number
of Options to be granted to each Optionee, the number of Shares to be covered by each
Option, provisions concerning the time and the extent to which the Options may be
exercised and the nature and duration of restrictions as to the transferability or
restrictions constituting substantial risk of forfeiture and to cancel or suspend awards,
as necessary; (iii) determine the Fair Market Value of the Shares covered by each Option;
(iv) make an election as to the type of Approved 102 Option; and (v) designate the type
of Options. The Board shall be entitled to delegate its powers detailed herein above to
the Committee according to its discretion and to the extent permitted by law.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Committee shall have full power and authority to (i) interpret the provisions and
supervise the administration of the ISOP; (ii) accelerate the right of an Optionee to
exercise in whole or in part, any previously granted Option; (iii) determine the Purchase
Price of the Option;
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.4 | Notwithstanding
the above, the Committee shall not be entitled to grant Options to the Optionees,
however, it will be authorized to issue Shares underlying Options which have been granted
by the Board and duly exercised pursuant to the provisions herein in accordance with
section 112(a)(5) of the Companies Law.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.5 | The
Board shall have the authority to grant, at its discretion, to the holder of an
outstanding Option, in exchange for the surrender and cancellation of such Option, a new
Option having a purchase price equal to, lower than or higher than the Purchase Price of
the original Option so surrendered and canceled and containing such other terms and
conditions as the Committee may prescribe in accordance with the provisions of the ISOP.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.6 | The
interpretation and construction by the Committee of any provision of the ISOP or of any
Option Agreement thereunder shall be final and conclusive unless otherwise determined by
the Board.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

105

---

---

| | 3.7 | No
member of the Board or of the Committee shall be liable for any act or determination made
in good faith with respect to the ISOP or any Option granted thereunder.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | DESIGNATION
OF PARTICIPANTS
|-- | ---------------------------

| | 4.1 | The
persons eligible for participation in the ISOP as Optionees shall include any Employees
and/or Non-Employees of the Company or of any Affiliate; provided, however, that (i)
Employees may only be granted 102 Options; (ii) Non-Employees may only be granted 3(i)
Options; .
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.2 | The
grant of an Option hereunder shall neither entitle the Optionee to participate nor
disqualify the Optionee from participating in, any other grant of Options pursuant to the
ISOP or any other option or share plan of the Company or any of its Affiliates.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | DESIGNATION
OF OPTIONS PURSUANT TO SECTION 102
|-- | ----------------------------------------------

| | 5.1 | The
Company may designate Options granted to Employees pursuant to Section 102 as Unapproved
102 Options or Approved 102 Options.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------

| | 5.2 | The
grant of Approved 102 Options shall be made under this ISOP adopted by the Board as
described in Section 15 below, and shall be conditioned upon the approval of this ISOP by
the ITA as required by Section 102.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5.3 | Approved
102 Option may either be classified as Capital Gain Option (CGO) or
Ordinary Income Option (OIO).
| | --- | --------------------------------------------------------------------------------------------------------------

| | 5.4 | Approved
102 Option elected and designated by the Company to qualify under the capital gain tax
treatment in accordance with the provisions of Section 102(b)(2) shall be referred to
herein as CGO.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5.5 | Approved
102 Option elected and designated by the Company to qualify under the ordinary income tax
treatment in accordance with the provisions of Section 102(b)(1) shall be referred to
herein as OIO.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5.6 | The
Companys election of the type of Approved 102 Options as CGO or OIO granted to
Employees (the Election), shall be appropriately filed with the ITA
before the Date of Grant of an Approved 102 Option. Such Election shall become effective
beginning the first Date of Grant of an Approved 102 Option under this ISOP and shall
remain in effect until the end of the year following the year during which the Company
first granted Approved 102 Options. The Election shall obligate the Company to grant only the
type of Approved 102 Option it has elected, and shall apply to all Optionees who were
granted Approved 102 Options during the period indicated herein, all in accordance with
the provisions of Section 102(g) of the Ordinance. For the avoidance of doubt, such
Election shall not prevent the Company from granting Unapproved 102 Options
simultaneously.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5.7 | All
 Approved  102 Options  must be held in trust by a Trustee,  as  described  in Section 6
below.
| | --- | ---------------------------------------------------------------------------------------------------

106

---

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| | 5.8 | For
the avoidance of doubt, the designation of Unapproved 102 Options and Approved 102
Options shall be subject to the terms and conditions set forth in Section 102 of the
Ordinance and the regulations promulgated thereunder.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5.9 | With
regards to Approved 102 Options, the provisions of the ISOP and/or the Option Agreement
shall be subject to the provisions of Section 102 and the Tax Assessing Officers
permit, and the said provisions and permit shall be deemed an integral part of the ISOP
and of the Option Agreement. Any provision of Section 102 and/or the said permit which is
necessary in order to receive and/or to keep any tax benefit pursuant to Section 102,
which is not expressly specified in the ISOP or the Option Agreement, shall be considered
binding upon the Company and the Optionees.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | GRANT
OF OPTIONS AND ISSUANCE OF SHARES IN TRUST
|-- | ------------------------------------------------

| | 6.1 | Approved
102 Options which shall be granted under the ISOP and/or any Shares allocated or issued
upon exercise of such Approved 102 Options and/or other shares received subsequently
following any realization of rights, including without limitation bonus shares, shall be
allocated or issued to the Trustee and held for the benefit of the Optionees for such
period of time as required by Section 102 or any regulations, rules or orders or
procedures promulgated thereunder (the Holding Period). In the case
the requirements for Approved 102 Options are not met, then the Approved 102 Options may
be treated as Unapproved 102 Options, all in accordance with the provisions of Section
102 and regulations promulgated thereunder.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6.2 | Notwithstanding
anything to the contrary, the Trustee shall not release any Shares allocated or issued
upon exercise of Approved 102 Options prior to the full payment of the Optionees
tax liabilities arising from Approved 102 Options which were granted to him and/or any
Shares allocated or issued upon exercise of such Options.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6.3 | With
respect to any Approved 102 Option, subject to the provisions of Section 102 and any
rules or regulation or orders or procedures promulgated thereunder, an Optionee shall not
be entitled to sell or release from trust any Share received upon the exercise of an
Approved 102 Option and/or any share received subsequently following any realization of
rights, including without limitation, bonus shares, until the lapse of the Holding Period
required under Section 102 of the Ordinance.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6.4 | Upon
receipt of Approved 102 Option, the Optionee will sign an undertaking to release the
Trustee from any liability in respect of any action or decision duly taken and bona fide
executed in relation with the ISOP, or any Approved 102 Option or Share granted to him
thereunder.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

107

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|7. | SHARES
RESERVED FOR THE ISOP; RESTRICTION THEREON
|-- | -------------------------------------------------

| | 7.1 | The
Company has reserved the minimum number of 181,242(One hundred and eighty one
thousand, two hundred and forty two) (the Minimum Number) authorized but
unissued Shares, for the purposes of the ISOP and for the purposes of any other share
option plans which may be adopted by the Company in the future, subject to adjustment as
set forth in Section 9 below. The Minimum Number may be increased by a number of shares
that shall reflect the number of expired Old Options. Any Shares which remain
unissued and which are not subject to the outstanding Options at the termination of the
ISOP shall cease to be reserved for the purpose of the ISOP, but until termination of the
ISOP the Company shall at all times reserve sufficient number of Shares to meet the
requirements of the ISOP. Should any Option for any reason expire or be canceled prior to
its exercise or relinquishment in full, the Shares subject to such Option may again be
subjected to an Option under the ISOP or under the Companys other share option
plans.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the purpose of this Plan, Old Options shall mean options granted out of the Companys
terminated option plans (Top Image Systems Ltd. Employee Share Option Plan (2000) and Top
Image Systems Ltd. Employee Stock Option Plan from 1996) which are currently outstanding
and shall expire within their original lifetime. The number of Old Options shall not
exceed 539,242 (Five hundred thousand and thirty nine two hundred forty two).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 7.2 | Each
Option granted pursuant to the ISOP, shall be evidenced by a written Option Agreement
between the Company and the Optionee, in such form as the Board or the Committee shall
from time to time approve. Each Option Agreement shall state, among other matters, the
number of Shares to which the Option relates, the type of Option granted thereunder
(whether a CGO, OIO, Unapproved 102 Option or a 3(i) Option), the Vesting Dates, the
Purchase Price per share, the Expiration Date and such other terms and conditions as the
Committee or the Board in its discretion may prescribe, provided that they are consistent
with this ISOP.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8. | PURCHASE
PRICE
|-- | --------------

| | 8.1 | The
Purchase Price of each Share subject to an Option shall be determined by the Committee in
its sole and absolute discretion in accordance with applicable law, subject to any
guidelines as may be determined by the Board from time to time. Each Option Agreement
will contain the Purchase Price determined for each Optionee.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 8.2 | The
Purchase Price shall be payable upon the exercise of the Option in a form satisfactory to
the Committee, including without limitation, by cash or check. The Committee shall have
the authority to postpone the date of payment on such terms as it may determine.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 8.3 | The
Purchase Price shall be denominated in the currency of the primary economic environment
of, either the Company or the Optionee (that is the functional currency of the Company or
the currency in which the Optionee is paid) as determined by the Company.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

108

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|9. | ADJUSTMENTS
|-- | -----------

| | Upon
the occurrence of any of the following described events, Optionees rights to
purchase Shares under the ISOP shall be adjusted as hereafter provided:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | 9.1 | In
the event of Transaction, the unexercised Options then outstanding under the ISOP shall
be assumed or substituted by an appropriate number of shares of each class of shares or
other securities of the Successor Company (or a parent or subsidiary of the Successor
Company) as shall be determined within the Transaction. In the case of such assumption
and/or substitution of Options, appropriate adjustments shall be made to the Purchase
Price for reflection of such action and all other terms and conditions of the Option
Agreements shall remain unchanged, including but not limited to the vesting schedule, all
subject to the determination of the Board, which determination shall be in its sole
discretion and final. The Company shall notify the Optionee of the Transaction in such
form and method as it deems applicable at least fifteen (15) days prior to the effective
date of such Transaction.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 9.2 | Notwithstanding
the above and subject to any applicable law, if in any such Transaction as described in
section 9.1 above, the Successor Company (or parent or subsidiary of the Successor
Company) does not agree to assume or substitute for the Options, all of the outstanding
Options shall become exercisable immediately including outstanding Options that were not
otherwise exercisable at the time of the Transaction and any Option may be exercised for
a period of 15 days.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 9.3 | If
the Company is voluntarily liquidated or dissolved while unexercised Options remain
outstanding under the ISOP, the Company shall immediately notify all unexercised Option
holders of such liquidation, and the Option holders shall have the right to exercise any
unexercised Vested Option held by them at that time until fifteen (15) days prior to such
voluntary liquidation or dissolution, in accordance with the exercise procedure set forth
herein and as long as such Vested Option has not expired prior to the date defined
herein. To the extent it was not previously exercised, all remaining outstanding Options
will terminate immediately prior to the consummation of such proposed action.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 9.4 | If
the outstanding shares of the Company shall at any time be changed or exchanged by
declaration of a share dividend (bonus shares), share split, combination or exchange of
shares, recapitalization, or any other like event by or of the Company, and as often as
the same shall occur, then the number, class and kind of the Shares subject to the ISOP
or subject to any Options therefore granted, and the Purchase Prices, shall be
appropriately and equitably adjusted so as to maintain the proportionate number of Shares
without changing the aggregate Purchase Price, provided, however, that no adjustment
shall be made by reason of the distribution of subscription rights (rights offering) on
outstanding shares. Upon happening of any of the foregoing, the class and aggregate
number of Shares issuable pursuant to the ISOP (as set forth in Section 7 hereof), in
respect of which Options have not yet been exercised, shall be appropriately adjusted,
all as will be determined by the Board whose determination shall be final.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

109

---

---

|10. | TERM
AND EXERCISE OF OPTIONS
|--- | ----------------------------

| | 10.1 | Options
shall be exercised by the Optionee by giving written notice to the Company and/or to any
third party designated by the Company (the Representative), in such
form and method as may be determined by the Company and when applicable, by the Trustee
in accordance with the requirements of Section 102, which exercise shall be effective
upon receipt of such notice by the Company and/or the Representative and the payment of
the Purchase Price at the Companys or the Representatives principal office.
The notice shall specify the number of Shares with respect to which the Option is being
exercised.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.2 | Options,
to the extent not previously exercised, shall terminate forthwith upon the earlier of:
(i) the date set forth in the Option Agreement; and (ii) the expiration of any extended
period in any of the events set forth in section 10.5 below.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.3 | The
Options may be exercised by the Optionee in whole at any time or in part from time to
time, to the extent that the Options become vested and exercisable, prior to the
Expiration Date, and provided that, subject to the provisions of section 10.5 below, the
Optionee is employed by or providing services to the Company or any of its Affiliates, at
all times during the period beginning with the granting of the Option and ending upon the
date of exercise.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.4 | Subject
to the provisions of section 10.5 below, in the event of termination of Optionees
employment or services, with the Company or any of its Affiliates, all Options granted to
such Optionee will immediately expire upon his termination date. For the avoidance of
doubt, in case of such termination of employment or service, the unvested portion of the
Optionees Option shall not vest and shall not become exercisable unless such
vesting is scheduled prior to the date of termination.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.5 | Notwithstanding
anything to the contrary hereinabove and unless otherwise determined in the Optionees
Option Agreement, an Option may be exercised after the date of termination of Optionees
employment or service with the Company or any Affiliates during an additional period of
time beyond the date of such termination, but only with respect to the number of Vested
Options at the time of such termination according to the Vesting Dates, if:
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (i) | termination
is without Cause, in which event any Vested Option still in force           and unexpired
may be exercised within a period of ninety (90) days after the           date of such
termination; or-
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | termination
is the result of death or disability of the Optionee, in which event           any Vested
Option still in force and unexpired may be exercised within a period           of twelve
(12) months after the date of such termination; or 
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) | prior
to the date of such termination, the Committee or the Board shall           authorize an
extension of the terms of all or part of the Vested Options beyond           the date of
such termination for a period not to exceed the period during which           the Options
by their terms would otherwise have been exercisable.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
avoidance of any doubt, if termination of employment or service is for Cause, any
outstanding unexercised Option (whether vested or non-vested), will immediately expire
and terminate, and the Optionee shall not have any right in connection with such
outstanding Options.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

110

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| | 10.6 | To
avoid doubt, the Optionees shall not have any of the rights or privileges of shareholders
of the Company in respect of any Shares purchasable upon the exercise of any Option, nor
shall they be deemed to be a class of shareholders or creditors of the Company for
purpose of the operation of sections 350 and 351 of the Companies Law or any successor to
such section, until registration of the Optionee as holder of such Shares in the Companys
register of shareholders upon exercise of the Option in accordance with the provisions of
the ISOP, but in case of Options and Shares held by the Trustee, subject to the
provisions of Section 6 of the ISOP.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.7 | Any
form of Option Agreement authorized by the ISOP may contain such other provisions as the
Committee may, from time to time, deem advisable.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------

| | 10.8 | With
respect to Unapproved 102 Option, if the Optionee ceases to be employed by the Company or
any Affiliate, the Optionee shall extend to the Company and/or its Affiliate a security
or guarantee for the payment of tax due at the time of sale of Shares, all in accordance
with the provisions of Section 102 and the rules, regulation or orders promulgated
thereunder.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|11. | VESTING
OF OPTIONS
|--- | ------------------

| | 11.1 | Subject
to the provisions of the ISOP, each Option shall vest following the Vesting Dates and for
the number of Shares as shall be provided in the Option Agreement. However, no Option
shall be exercisable after the Expiration Date.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 11.2 | An
Option may be subject to such other terms and conditions on the time or times when it may
be exercised, as the Committee may deem appropriate. The vesting provisions of individual
Options may vary.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12. | PURCHASE
FOR INVESTMENT
|--- | -----------------------

| | The
Companys obligation to issue or allocate Shares upon exercise of an Option granted
under the ISOP is expressly conditioned upon: (a) the Companys completion of any
registration or other qualifications of such Shares under all applicable laws, rules and
regulations or (b) representations and undertakings by the Optionee (or his legal
representative, heir or legatee, in the event of the Optionees death) to assure
that the sale of the Shares complies with any registration exemption requirements which
the Company in its sole discretion shall deem necessary or advisable. Such required
representations and undertakings may include representations and agreements that such
Optionee (or his legal representative, heir, or legatee): (a) is purchasing such Shares
for investment and not with any present intention of selling or otherwise disposing
thereof; and (b) agrees to have placed upon the face and reverse of any certificates
evidencing such Shares a legend setting forth (i) any representations and undertakings
which such Optionee has given to the Company or a reference thereto and (ii) that, prior
to effecting any sale or other disposition of any such Shares, the Optionee must furnish
to the Company an opinion of counsel, satisfactory to the Company, that such sale or
disposition will not violate the applicable laws, rules, and regulations, whether of the
State of Israel or of the United States or any other State having jurisdiction over the
Company and the Optionee.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

111

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---

|13. | DIVIDENDS
|--- | ---------

| | With
respect to all Shares (but excluding, for avoidance of any doubt, any unexercised
Options) allocated or issued upon the exercise of Options purchased by the Optionee and
held by the Optionee or by the Trustee, as the case may be, the Optionee shall be
entitled to receive dividends in accordance with the quantity of such Shares, subject to
the provisions of the Companys Articles of Association (and all amendments thereto)
and subject to any applicable taxation on distribution of dividends, and when applicable
subject to the provisions of Section 102 and the rules, regulations or orders promulgated
thereunder.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14. | RESTRICTIONS
ON ASSIGNABILITY AND SALE OF OPTIONS
|--- | -------------------------------------------------

| | 14.1 | No
Option or any right with respect thereto, purchasable hereunder, whether fully paid or
not, shall be assignable, transferable or given as collateral or any right with respect
to it given to any third party whatsoever, except as specifically allowed under the ISOP,
and during the lifetime of the Optionee each and all of such Optionees rights to
purchase Shares hereunder shall be exercisable only by the Optionee.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Any
such action made directly or indirectly, for an immediate validation or for a future one,
shall be void.
| | ------------------------------------------------------------------------------------------------------------

| | 14.2 | As
long as Options and/or Shares are held by the Trustee on behalf of the Optionee, all
rights of the Optionee over the Shares are personal, can not be transferred, assigned,
pledged or mortgaged, other than by will or pursuant to the laws of descent and
distribution.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15. | EFFECTIVE
DATE AND DURATION OF THE ISOP
|--- | ---------------------------------------

| | The
ISOP shall be effective as of the day it was adopted by the Board and shall terminate at
the end of seven (7) years from such day of adoption.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

|16. | AMENDMENTS
OR TERMINATION
|--- | -------------------------

| | The
Board may at any time, but when applicable, after consultation with the Trustee, amend,
alter, suspend or terminate the ISOP. No amendment, alteration, suspension or termination
of the ISOP shall impair the rights of any Optionee, unless mutually agreed otherwise
between the Optionee and the Company, which agreement must be in writing and signed by
the Optionee and the Company. Termination of the ISOP shall not affect the Committees
ability to exercise the powers granted to it hereunder with respect to Options granted
under the ISOP prior to the date of such termination.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|17. | LAWS,
GOVERNMENT REGULATIONS
|--- | ----------------------------

| | The
ISOP, and the granting and exercise of Options hereunder, and the obligation of the
Company to sell and deliver Shares under such Options, shall be subject to all applicable
laws, rules, and regulations, whether of the State of Israel or of the United States or
any other State having jurisdiction over the Company and the Optionee, including the
registration of the Shares under the United States Securities Act of 1933, and the
Ordinance and to such approvals according to any law and/or by any governmental agencies
or national securities exchanges as may be required. Nothing herein shall be deemed to
require the Company to register the Shares under the securities laws of any jurisdiction.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

112

---

---

|18. | CONTINUANCE
OF EMPLOYMENT OR HIRED SERVICES
|--- | -------------------------------------------

| | Neither
the ISOP nor the Option Agreement with the Optionee shall impose any obligation on the
Company or an Affiliate thereof, to continue any Optionee in its employ or service, and
nothing in the ISOP or in any Option granted pursuant thereto shall confer upon any
Optionee any right to continue in the employ or service of the Company or an Affiliate
thereof or restrict the right of the Company or an Affiliate thereof to terminate such
employment or service at any time.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|19. | GOVERNING
LAW &JURISDICTION
|--- | ---------------------------

| | The
ISOP shall be governed by and construed and enforced in accordance with the laws of the
State of Israel applicable to contracts made and to be performed therein, without giving
effect to the principles of conflict of laws. The competent courts of Tel-Aviv, Israel
shall have sole jurisdiction in any matters pertaining to the ISOP.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|20. | TAX
CONSEQUENCES
|--- | ----------------

| | 20.1 | Any
tax consequences arising from the grant or exercise of any Option, from the payment for
Shares covered thereby or from any other event or act (of the Company and/or its
Affiliates, the Trustee or the Optionee), hereunder, shall be borne solely by the
Optionee. The Company and/or its Affiliates and/or the Trustee shall withhold taxes
according to the requirements under the applicable laws, rules, and regulations,
including withholding taxes at source. Furthermore, the Optionee shall agree to indemnify
the Company and/or its Affiliates and/or the Trustee and hold them harmless against and
from any and all liability for any such tax or interest or penalty thereon, including
without limitation, liabilities relating to the necessity to withhold, or to have
withheld, any such tax from any payment made to the Optionee.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 20.2 | The
Company and/or, when applicable, the Trustee shall not be required to release any Share
certificate to an Optionee until all required payments have been fully made.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|21. | NON-EXCLUSIVITY
OF THE ISOP
|--- | ---------------------------

| | The
adoption of the ISOP by the Board shall not be construed as amending, modifying or
rescinding any previously approved incentive arrangements or as creating any limitations
on the power of the Board to adopt such other incentive arrangements as it may deem
desirable, including, without limitation, the granting of Options otherwise than under
the ISOP, and such arrangements may be either applicable generally or only in specific
cases.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|22. | MULTIPLE
AGREEMENTS
|--- | -------------------

| | The
terms of each Option may differ from other Options granted under the ISOP at the same
time, or at any other time. The Board may also grant more than one Option to a given
Optionee during the term of the ISOP, either in addition to, or in substitution for, one
or more Options previously granted to that Optionee.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

113

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EXHIBIT 8

List of
Subsidiaries

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

114

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EXHIBIT 13.1

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

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

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

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

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

Date: June 23, 2004

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

115

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---

EXHIBIT 13.2

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

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

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

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

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

Date: June 23, 2004

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

116

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---

EXHIBIT 14.1

# CONSENT OF INDEPENDENT
PUBLIC ACCOUNTING FIRM

June 20, 2004

The Board of Directors
Top Image Systems Ltd.
Tel Aviv
Israel

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

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

117

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---

EXHIBIT 14.2

CONSENT OF INDEPENDENT
AUDITORS

We
consent to the incorporation by reference, in the Registration Statements on Form S-8,
Registration Nos. 333-101990, and 333-11560, and on Form F-3 File No. 333-05718 of our
report dated March 3, 2004 with respect to the consolidated financial statements of Top
Image Systems Ltd. included in this Annual Report on Form 20-F for the year ended December
31, 2003.

|Tel Aviv, Israel
June, 20, 2004 |  | Kost Forer Gabbay and Kasierer   
A Member of Ernst & Young Global
|------------------------------- |  | ------------------------------------------------------------------

118

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---

EXHIBIT 14.3

AUDIT
COMMITTEE CHARTER

Purpose

The Audit Committee is
appointed by the Board to assist the Board in monitoring (1) the integrity of
the financial statements of the Company, (2) the Companys compliance with
legal and regulatory requirements, (3) the independent auditors qualifications
and independence, and (4) the performance of the Companys internal audit
function and independent auditors.

Committee
Membership

The Audit Committee shall
consist of no fewer than three members. 
Each member of the Audit Committee shall meet the independence and
experience requirements of the National Association of Securities Dealers
(NASD) applicable to the Company and all rules and regulations promulgated by
the Securities and Exchange Commission (SEC).  Each member of the Audit Committee shall be financially literate,
as determined by the Board in its business judgment.  In addition, at least one member of the Audit Committee shall be
a financial expert (as defined by the SEC).

In addition to the above
requirements and qualifications, Audit Committee members must also comply with
Israeli law requirements, including the Companies Law, 1999 and other rules and
regulations.  The Audit Committee shall
consist of at least three directors (and only directors may serve as audit
committee members) and all of the External Directors shall serve on it.  The following may not serve as Audit
Committee members:  the chairman of the
board, a director who is employed by the company, a director who provides the
company with other services on a regular basis, a director who is a shareholder
in control and any of his relatives.

External Director:  is a director appointed by the shareholders
meeting for a period of three years. 
Certain restrictions apply with regard to the qualifications of an
External Director and every candidate has to declare, prior to his appointment
by the shareholders meeting that he qualifies to serve as an External Director
in accordance with the requirements of the law.

The members of the Audit
Committee shall be appointed by the Board. 
Audit Committee members may be replaced by the Board.

Committee
Rules of Procedure

The Audit Committee shall
meet as often as it determines, but not less frequently than quarterly.  Special meetings may be convened as the
Audit Committee deems necessary or appropriate.

A majority of the members
of the Audit Committee shall constitute a quorum to transact business (subject
to the presence of at least one External Director for the purpose of approving
transactions with interested parties). 
Members of the Audit Committee may participate in a meeting of the
Committee by means of telephone conference call or similar communications
equipment by means of which all persons participating in the meeting can hear
each other.  Except in extraordinary
circumstances, notice shall be delivered to all Committee members at least 48
hours in advance of the scheduled meeting. 
Minutes of each meeting will be kept and distributed to the entire
Board.

The internal auditor
shall receive a notice with regard to any meeting and shall be entitled to
participate in them.  The internal
auditor shall also be entitled to require the chairman of the audit committee
to convene a meeting with regard to any issue and the chairman shall convene
such a meeting within reasonable time if he finds it appropriate.

Notice with regard to a
meeting in which the financial reports are reviewed will be provided to the
independent auditor and he may participate in such meeting.

The affirmative vote of a
majority of the members of the Audit Committee present at the time of such vote
will be required to approve any action of the Committee.  Subject to the requirements of any
applicable law, regulation or NASD rule, any action required or permitted to be
taken at a meeting of the Audit Committee may be taken without a meeting if consent
in writing, setting forth the action so taken, is signed by all of the members
of the Committee.  Such written consent
shall have the same force as a unanimous vote of the Committee.

Committee
Authority and Responsibilities

The Audit Committee shall
be directly responsible for the appointment, compensation, oversight,
termination and replacement of the Companys independent auditor (subject, if
applicable, to board of directors and/or shareholder ratification), and shall
have the sole authority to approve all audit engagement fees and terms and all
non-audit engagements with the independent auditors.

119

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The Audit Committee shall
approve all audit and non-audit engagements of the Companys independent
auditors in advance.

The Audit Committee shall
have the authority, to the extent it deems necessary or appropriate to carry
out its responsibilities, to retain at the expense of the Company special
legal, accounting or other consultants to advise the Committee.  The Audit Committee shall have the sole
authority to determine and agree upon all fees and terms of engagement of such
advisors.

The Audit Committee may
request any officer or employee of the Company or the Companys outside counsel
or independent auditor to attend a meeting of the Committee or to meet with any
member of, or consultants to, the Committee. 
The Audit Committee shall meet with management, the internal auditors
(or other personnel responsible for the internal audit function) and the
independent auditor in separate executive sessions as often as the Committee
determines.

The Audit Committee shall
make regular reports to the Board and shall review with the Board any issues
that arise with respect to (i) the quality or integrity of the Companys
financial statements, (ii) the Companys compliance with legal or regulatory requirements
that may have a material impact on the Companys financial statements, (iii)
the performance and independence of the Companys independent auditors or (iv)
the performance of the internal audit function.  In addition, the Audit Committee annually shall review its own
performance.

The Audit Committee shall
review and reassess the adequacy of this Charter annually and recommend any
proposed change to the Board for its approval.

In addition to the
foregoing, the Audit Committee, to the extent it deems necessary or
appropriate, shall:

|Financial Statement and Disclosure Matters
|------------------------------------------
|                                          
|1.                                        
|                                          
|2.                                        
|                                          
|3.                                        
|                                          
|4.                                        
|                                          
|5.                                        
|                                          
|6.                                        
|                                          
|7.                                        

120

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|                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|8.                                                                     | Discuss with the independent auditor the matters
  required to be discussed by U.S. Statement on Auditing Standards No. 61
  relating to the conduct of the audit. 
  In particular, discuss:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                       | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                       | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                       | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Oversight of the Companys Relationship with the
  Independent Auditor
|                                                                      
|9.                                                                     | Review and evaluate the experience and
  qualifications of the lead partner of the independent auditor team.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.                                                                    | Obtain and review a report from the independent
  auditor at least annually regarding (a) the firms internal
  quality-control procedures, (b) any material issues raised by the most recent
  quality-control review, or peer review, of the firm, or by any inquiry or
  investigation by governmental or professional authorities within the preceding
  five years, respecting one or more independent audits carried out by the
  firm, (c) (to assess the auditors independence) all relationships between
  the independent auditor and its related entities and the Company and its
  related entities, and (c) any steps taken to deal with any such issues.  Discuss the report with the independent
  auditor, and evaluate the qualifications, performance and independence of the
  independent auditor, including considering whether the auditors quality
  controls are adequate and the provision of non-audit services is compatible
  with maintaining the auditors independence, and taking into account the
  opinions of management and the internal auditor.
|                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|11.                                                                    | Establish policies for the Companys hiring of
  employees or former employees of the independent auditor who were engaged on
  the Companys account.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                       | Oversight of the Companys Business Management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|12.                                                                    | Review and identify defaults in the business
  management of the Company, while consulting with the internal auditor and/or
  the independent auditor and prepare recommendations to the board of directors
  for correcting such defaults.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                       | Approval of Certain Actions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|13.                                                                    | Review and resolve whether to approve actions that
  according to the Companies Law require the approval and/or recommendation of
  the Audit Committee, including but not limited to the approval of certain
  actions carried out while breaching duty of loyalty and of transactions with
  interested parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

In addition to the
activities described above, the Audit Committee will perform such other
functions as necessary or appropriate in its opinion under applicable law, the
Companys organizational documents, and by-laws, and the resolutions and other
directives of the Board.

Limitation
of Audit Committee Role

While the Audit Committee has the responsibilities and powers set
forth in this Charter, it is not the duty of the Committee to plan or conduct
audits or to determine that the Companys financial statements and disclosures
are complete and accurate, fairly present the information shown or are in
accordance with GAAP and applicable rules and regulations.  These are the responsibilities of management
and the independent auditor.  Nor is it
the duty of the Audit Committee to conduct investigations or to assure
compliance with any law, regulation or NASD rules.

121

---

---

Top Image Systems Ltd.

Financial Statements
As at December 31, 2003

122

---

---

TOP IMAGE SYSTEMS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2003

IN U.S. DOLLARS

INDEX

|                                                | Page          
|----------------------------------------------- | --------------
|                                                |               
|                                                |               
|Auditors Report                                | 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         
|                                                |               
|Notes to Consolidated Financial Statements      | F - 9 - F - 35

- - - -
- - - - - - - - - - - - - - -

F - 1

---

---

TOP IMAGE SYSTEMS LTD.
AND ITS SUBSIDIARIES

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

AUDITORS REPORT

To the Shareholders of

TOP IMAGE SYSTEMS LTD.

We have
audited the accompanying consolidated balance sheet of Top Image Systems Ltd.
(the Company) and its subsidiaries as of December 31, 2003, and the related
consolidated statement of operations, changes in shareholders equity and cash
flow for the year then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and auditing standards generally
accepted in Israel, including those prescribed by the Israeli Auditors
Regulations (Mode of Performance) 1973. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

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 as of December 31, 2003 and the consolidated
results of their operations and cash flow for the year then ended, in
conformity with accounting principles generally accepted in Israel, which
differ in certain respects from those followed in the United States, as
described in Note 18 to the consolidated financial statements.

|Tel-Aviv,
  Israel | KOST FORER GABBAY & KASIERER    
|------------------ | --------------------------------
|March 3,
  2004    | A Member of Ernst & Young Global

F - 2

---

---

TOP IMAGE SYSTEMS LTD.
AND ITS SUBSIDIARIES

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

We have audited the accompanying
Consolidated Balance Sheets of Top Image Systems Ltd. and subsidiaries (the
Company) as of December 31, 2002, and the related consolidated Statements of
Operations, Changes in Shareholders Equity, and Cash Flows, for each of the years in
the two-year period ended December 31, 2002. These consolidated financial statements are
the responsibility of the Companys Board of Directors and of its Management. Our
responsibility is to express an opinion on these consolidated financial statements based
on our audits. We did not audit the financial statements of certain subsidiaries, which
statements reflect total assets constituting 1%, and total revenues constituting 0.04% and
6.4% in 2001 and 2000 of the related consolidated totals. Those were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for the financial statements of these subsidiaries, is based solely
on the report of the other auditors.

We conducted our audits in accordance
with 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 that
the financial statements are free of material misstatement. An audit includes examining on
a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates
made by the Board of Directors and by Management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

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

Accounting principles generally
accepted in Israel vary in certain significant respects from accounting principles
generally accepted in the United States of America. Information relating to the nature and
effect of such differences is summarized in Note 18 to the consolidated financial
statements.

Somekh Chaikin
Tel Aviv, Israel
Certified Public Accountants (Isr.)
A member firm of KPMG International

March 11, 2003

F - 3

---

---

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

|                                  |  |      |  | December 31, |           
|--------------------------------- |  | ---- |  | ------------ | ----------
|                                  |  |      |  |              |           
|                                  |  | Note |  | 2003         |           
|                                  |  |      |  |              |           
|ASSETS                            |  |      |  |              |           
|                                  |  |      |  |              |           
|CURRENT
  ASSETS:                 |  |      |  |              |           
|Cash
  and cash equivalents       |  |      |  | $            | 5,854,436 
|Marketable
  securities           |  | 3    |  |              | 276,515   
|Trade
  receivables, net          |  | 4    |  |              | 4,606,254 
|Other
  current assets            |  | 5    |  |              | 413,716   
|                                  |  |      |  |              |           
|                                  |  |      |  |              |           
|Total
  current assets            |  |      |  |              | 11,150,921
|                                  |  |      |  |              |           
|                                  |  |      |  |              |           
|LONG-TERM
  DEPOSITS              |  | 10   |  |              | 85,995    
|                                  |  |      |  |              |           
|                                  |  |      |  |              |           
|PROPERTY AND
  EQUIPMENT:         |  |      |  |              |           
|Cost                              |  | 6    |  |              | 1,778,512 
|Less
  - accumulated depreciation |  |      |  |              | (1,386,998
|                                  |  |      |  |              |           
|                                  |  |      |  |              |           
|                                  |  |      |  |              | 391,514   
|                                  |  |      |  |              |           
|                                  |  |      |  |              |           
|Total
  assets                    |  |      |  | $            | 11,628,430
|                                  |  |      |  |              |           

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

F - 4

---

---

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

|                                                                                                                                                                                                                          |  |      |  | December 31, |            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | ------------ | -----------
|                                                                                                                                                                                                                          |  |      |  |              |            
|                                                                                                                                                                                                                          |  | Note |  | 2003         |            
|                                                                                                                                                                                                                          |  |      |  |              |            
|LIABILITIES
  AND SHAREHOLDERS EQUITY                                                                                                                                                                                    |  |      |  |              |            
|                                                                                                                                                                                                                          |  |      |  |              |            
|CURRENT
  LIABILITIES:                                                                                                                                                                                                    |  |      |  |              |            
|Short-term
  bank loans                                                                                                                                                                                                   |  | 7    |  | $            | 1,592,020  
|Trade
  payables                                                                                                                                                                                                          |  |      |  |              | 305,953    
|Other
  payables and accruals                                                                                                                                                                                             |  | 8    |  |              | 1,899,835  
|                                                                                                                                                                                                                          |  |      |  |              |            
|                                                                                                                                                                                                                          |  |      |  |              |            
|Total
  current liabilities                                                                                                                                                                                               |  |      |  |              | 3,797,808  
|                                                                                                                                                                                                                          |  |      |  |              |            
|                                                                                                                                                                                                                          |  |      |  |              |            
|LONG-TERM
  LIABILITIES                                                                                                                                                                                                   |  |      |  |              |            
|Accrued
  severance pay, net                                                                                                                                                                                              |  | 9    |  |              | 190,916    
|                                                                                                                                                                                                                          |  |      |  |              |            
|                                                                                                                                                                                                                          |  |      |  |              |            
|COMMITMENTS,
  CONTINGENCIES AND CHARGES                                                                                                                                                                                  |  | 10   |  |              |            
|                                                                                                                                                                                                                          |  |      |  |              |            
|SHAREHOLDERS
  EQUITY:                                                                                                                                                                                                   |  | 11   |  |              |            
|Share
  capital:                                                                                                                                                                                                          |  |      |  |              |            
|Ordinary
  shares of NIS
  0.04 par value -                                                                                                                                                                               |  |      |  |              |            
|Authorized:
  125,000,000 shares at December 31, 2003
                 and
  2002; Issued and outstanding: 6,120,765 and
                 6,098,890
  shares at December 31, 2003 and 2002,
                 respectively |  |      |  |              | 73,274     
|Additional
  paid-in capital                                                                                                                                                                                              |  |      |  |              | 22,380,262 
|Accumulated
  deficit                                                                                                                                                                                                     |  |      |  |              | (14,813,830
|                                                                                                                                                                                                                          |  |      |  |              |            
|                                                                                                                                                                                                                          |  |      |  |              |            
|Total
  shareholders equity                                                                                                                                                                                              |  |      |  |              | 7,639,706  
|                                                                                                                                                                                                                          |  |      |  |              |            
|                                                                                                                                                                                                                          |  |      |  |              |            
|Total
  liabilities and shareholders equity                                                                                                                                                                              |  |      |  | $            | 11,628,430 
|                                                                                                                                                                                                                          |  |      |  |              |            

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                
|                                                     
|In U.S. dollars (except for share and per share data)

|                                                                                             |  |      |  | Year ended December 31, |          
|-------------------------------------------------------------------------------------------- |  | ---- |  | ----------------------- | ---------
|                                                                                             |  |      |  |                         |          
|                                                                                             |  | Note |  | 2003                    |          
|                                                                                             |  |      |  |                         |          
|                                                                                             |  |      |  |                         |          
|Revenues:                                                                                    |  | 16   |  |                         |          
|Product revenues                                                                             |  |      |  | $                       | 6,210,526
|Service
  revenues                                                                           |  |      |  |                         | 2,108,476
|                                                                                             |  |      |  |                         |          
|                                                                                             |  |      |  |                         |          
|Total
  revenues                                                                             |  |      |  |                         | 8,319,002
|                                                                                             |  |      |  |                         |          
|                                                                                             |  |      |  |                         |          
|Cost of revenues:                                                                            |  |      |  |                         |          
|Product costs                                                                                |  |      |  |                         | 1,794,880
|Service costs                                                                                |  |      |  |                         | 544,910  
|                                                                                             |  |      |  |                         |          
|                                                                                             |  |      |  |                         |          
|Total
  cost of revenues                                                                     |  |      |  |                         | 2,339,790
|                                                                                             |  |      |  |                         |          
|                                                                                             |  |      |  |                         |          
|Gross profit                                                                                 |  |      |  |                         | 5,979,212
|                                                                                             |  |      |  |                         |          
|Research and development costs                                                               |  |      |  |                         | 863,209  
|Selling and marketing expenses                                                               |  |      |  |                         | 3,768,901
|General and administrative expenses                                                          |  |      |  |                         | 2,049,525
|Restructuring costs and other special
  charges                                              |  | 12   |  |                         | -        
|                                                                                             |  |      |  |                         |          
|                                                                                             |  |      |  |                         |          
|                                                                                             |  |      |  |                         | 6,681,635
|                                                                                             |  |      |  |                         |          
|                                                                                             |  |      |  |                         |          
|Operating loss                                                                               |  |      |  |                         | (702,423 
|                                                                                             |  |      |  |                         |          
|Financial income, net                                                                        |  | 13   |  |                         | 98,376   
|Other income (expenses), net                                                                 |  | 14   |  |                         | -        
|                                                                                             |  |      |  |                         |          
|                                                                                             |  |      |  |                         |          
|Net loss for the year                                                                        |  |      |  | $                       | (604,047 
|                                                                                             |  |      |  |                         |          
|                                                                                             |  |      |  |                         |          
|Net loss per share                                                                           |  |      |  | $                       | (0.096   
|                                                                                             |  |      |  |                         |          
|                                                                                             |  |      |  |                         |          
|Weighted average number of shares outstanding
     used in the computation of loss per share |  |      |  |                         | 6,252,996
|                                                                                             |  |      |  |                         |          

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
|                                             
|In U.S. dollars (except for share data)      

|                                                                    |  | Share capital      |           | Additional
  paid-in
  capital |   | Accumulated
  deficit |  | Total |           
|------------------------------------------------------------------- |  | ------------------ | --------- | ------------------------------ | - | --------------------- |  | ----- | ----------
|                                                                    |  |                    |           |                                |   |                      
|                                                                    |  | Number of
  shares |           | Amount                         |   |                       |  |      
|                                                                    |  |                    |           |                                |   |                       |  |       |           
|                                                                    |  |                    |           |                                |   |                       |  |       |           
|Balance at January 1, 2001                                          |  |                    | 6,098,890 |                                | $ | 73,079                |  | $     | 22,197,372
|                                                                    |  |                    |           |                                |   |                       |  |       |           
|Amortization
  of deferred stock
     compensation                  |  |                    | -         |                                |   | -                     |  |       | 42,141    
|Acquisition
  of minority interest in
     subsidiary (see Note 1b) |  |                    | -         |                                |   | -                     |  |       | 90,000    
|Net loss                                                            |  |                    | -         |                                |   | -                     |  |       | -         
|                                                                    |  |                    |           |                                |   |                       |  |       |           
|                                                                    |  |                    |           |                                |   |                       |  |       |           
|Balance at
  December 31, 2001                                      |  |                    | 6,098,890 |                                |   | 73,079                |  |       | 22,329,513
|                                                                    |  |                    |           |                                |   |                       |  |       |           
|Amortization
  of deferred stock
     compensation                  |  |                    | -         |                                |   | -                     |  |       | 9,456     
|Net loss                                                            |  |                    | -         |                                |   | -                     |  |       | -         
|                                                                    |  |                    |           |                                |   |                       |  |       |           
|                                                                    |  |                    |           |                                |   |                       |  |       |           
|Balance at
  December 31, 2002                                      |  |                    | 6,098,890 |                                |   | 73,079                |  |       | 22,338,969
|                                                                    |  |                    |           |                                |   |                       |  |       |           
|Exercise of
  stock options                                         |  |                    | 21,875    |                                |   | 195                   |  |       | 40,761    
|Amortization
  of deferred stock
     compensation                  |  |                    | -         |                                |   | -                     |  |       | 532       
|Net loss                                                            |  |                    | -         |                                |   | -                     |  |       | -         
|                                                                    |  |                    |           |                                |   |                       |  |       |           
|                                                                    |  |                    |           |                                |   |                       |  |       |           
|Balance at December 31,
  2003                                      |  |                    | 6,120,765 |                                | $ | 73,274                |  | $     | 22,380,262
|                                                                    |  |                    |           |                                |   |                       |  |       |           

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      
|                                           
|In U.S. dollars                            

|                                                                                            |  | Year ended December 31, |           
|------------------------------------------------------------------------------------------- |  | ----------------------- | ----------
|                                                                                            |  |                         |           
|                                                                                            |  | 2003                    |           
|                                                                                            |  |                         |           
|Cash flows
  from operating activities:                                                     |  |                         |           
|                                                                                            |  |                         |           
|Net
  loss                                                                                  |  | $                       | (604,047  
|Adjustments
  to reconcile net loss to net cash used in
            operating
  activities: |  |                         |           
|Amortization
  of deferred stock compensation                                               |  |                         | 532       
|In
  process research and development costs                                                 |  |                         | -         
|Depreciation                                                                                |  |                         | 214,523   
|Accrued
  severance pay, net                                                                |  |                         | 29,767    
|Loss
  (gain) from sale of property and equipment, net                                      |  |                         | -         
|Currency
  fluctuations on marketable securities                                            |  |                         | (22,615   
|Loss
  (gain) from marketable securities, net                                               |  |                         | 21,050    
|Decrease
  (increase) in trade receivables                                                  |  |                         | (1,457,473
|Decrease (increase) in other receivables and prepaid
               expenses                |  |                         | (114,552  
|Increase
  (decrease) in trade payables                                                     |  |                         | (46,644   
|Increase
  (decrease) in other payables and accruals                                        |  |                         | (536,910  
|                                                                                            |  |                         |           
|                                                                                            |  |                         |           
|Net cash
  used in operating activities                                                     |  |                         | (2,516,369
|                                                                                            |  |                         |           
|                                                                                            |  |                         |           
|Cash flows
  from investing activities:                                                     |  |                         |           
|                                                                                            |  |                         |           
|Purchase
  of property and equipment                                                        |  |                         | (71,719   
|Proceeds
  from sale of property and equipment                                              |  |                         | -         
|Proceeds
  from sale of marketable securities                                               |  |                         | 253,377   
|Purchase
  of marketable securities                                                         |  |                         | -         
|Decrease
  (increase) in long-term deposits                                                 |  |                         | 3,592     
|                                                                                            |  |                         |           
|                                                                                            |  |                         |           
|Net cash
  provided by (used in) investing activities                                       |  |                         | 185,250   
|                                                                                            |  |                         |           
|                                                                                            |  |                         |           
|Cash flows
  from financing activities:                                                     |  |                         |           
|                                                                                            |  |                         |           
|Exercise
  of stock options                                                                 |  |                         | 40,956    
|Increase
  in short-term bank borrowings, net                                               |  |                         | 743,710   
|Repayment
  of long-term loans                                                              |  |                         | -         
|                                                                                            |  |                         |           
|                                                                                            |  |                         |           
|Net cash
  provided by financing activities                                                 |  |                         | 784,666   
|                                                                                            |  |                         |           
|                                                                                            |  |                         |           
|Decrease in
  cash and cash equivalents                                                     |  |                         | (1,546,453
|Cash and
  cash equivalents at beginning of the year                                        |  |                         | 7,400,889 
|                                                                                            |  |                         |           
|                                                                                            |  |                         |           
|Cash and
  cash equivalents at end of the year                                              |  | $                       | 5,854,436 
|                                                                                            |  |                         |           

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

F - 8

---

---

|TOP IMAGE
SYSTEMS LTD. 
AND ITS SUBSIDIARIES
|--------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
|                                            
|In U.S. dollars                             

|NOTE 1: | BUSINESS AND ORGANIZATION
|------- | -------------------------
|        |                          
|        | a.                       
|        |                          
|        |                          
|        |                          
|        |                          
|        |                          
|        | b.                       
|        |                          
|        | c.                       
|        |                          
|        |                          
|        |                          
|        |                          
|        |                          
|        |                          
|        |                          
|        |                          
|        |                          
|        |                          
|        |                          
|        |                          
|        |                          
|        |                          

| |                             |  | Percentage of holding
  and ownership |     
| | --------------------------- |  | ------------------------------------- | ----
| |                             |  |                                       |     
| | Company                     |  | December 31,                          |     
| |                             |  |                                       |     
| |                             |  | 2003                                  |     
| |                             |  |                                       |     
| | TIS America
  Inc.          |  |                                       | 100%
| | Top Image
  Systems B.V.    |  |                                       | 100%
| | E-Mobilis Ltd. (1)          |  |                                       | 100%
| | Tele Image Systems Ltd. (2) |  |                                       | 100%

| |  | (1) | In November 2001, the Company acquired the minority interest of
  E-Mobilis, and its operations were integrated into those of the Company.
| |  | --- | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | (2) | Non-active
  company.                                                                                                                     

F - 9

---

---

|TOP IMAGE SYSTEMS LTD.
AND ITS SUBSIDIARIES
|-------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
|                                           
|In U.S. dollars                            

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                            
|-------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                                                            
|         | These
  consolidated financial statements have been prepared in conformity with
  generally accepted accounting principles in Israel, which differ in certain
  respects from those followed in the United States, as described in Note 18.
|         |                                                                                                                                                                                                                                            
|         | a.                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                            
|         | b.                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                            
|         | c.                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                            
|         | d.                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                            
|         | e.                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                            

F - 10

---

---

|TOP IMAGE SYSTEMS LTD.
AND ITS SUBSIDIARIES
|-------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
|                                           
|In U.S. dollars                            

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         | f.                                     
|         |                                        
|         |                                        
|         |                                        
|         | g.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | h.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        

| |  |                                | %                                                                          | 
| |  | ------------------------------ | -------------------------------------------------------------------------- | 
| |  |                                |                                                                            | 
| |  |                                |                                                                            | 
| |  | Computers                      | 33                                                                         | 
| |  | Furniture and office equipment | 6 - 15                                                                     | 
| |  | Leasehold improvements         | Over the term of the lease
  or the life of the asset, by
  the shorter of | 

| | i. | Impairment
  of fixed assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | On
  January 1, 2003, the Company adopted Accounting Standard No. 15,
  Impairment of Assets. This Standard prescribes the accounting treatment and
  disclosures required in the event of impairment of assets. The Standard
  applies to all assets recognized in the balance sheet other than inventories,
  assets generated by construction contracts, assets generated by employee
  benefits, deferred tax assets and financial assets (except investments in
  investees that are not subsidiaries). According to the new Standard, whenever
  there is an indication that an asset may be impaired, the Company should
  determine if there has been an impairment of the asset by comparing the
  carrying amount of the asset to its recoverable amount. The recoverable
  amount is the higher of an assets net selling price or value in use, which
  is determined based on the present value of estimated future cash flows
  expected to be generated by the continuing use of an asset and by its
  disposal at the end of its useful life. If the carrying amount of an asset
  exceeds its recoverable amount, the impairment to be recognized is measured
  by the amount by which the carrying amount of the asset exceeds its fair
  value. An impairment loss recognized should be reversed only if there has
  been changes in the estimates used to determine the assets recoverable
  amount since the impairment loss was recognized. During 2003, no impairment
  expenses were recognized.

F - 11

---

---

|TOP IMAGE SYSTEMS LTD.
AND ITS SUBSIDIARIES
|-------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
|                                           
|In U.S. dollars                            

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         | j.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | k.                                     
|         |                                        
|         |                                        
|         |                                        
|         | l.                                     
|         |                                        
|         |                                        

F - 12

---

---

|TOP IMAGE SYSTEMS LTD.
AND ITS SUBSIDIARIES
|-------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
|                                           
|In U.S. dollars                            

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         | m.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | n.                                     
|         |                                        
|         |                                        
|         |                                        
|         | o.                                     
|         |                                        
|         |                                        
|         |                                        
|         | p.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        

F - 13

---

---

|                                           | TOP IMAGE SYSTEMS LTD.
  AND ITS SUBSIDIARIES
|------------------------------------------ | ---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|In U.S. dollars                           

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

| | q. | Concentrations
  of credit risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Financial
  instruments that potentially subject the Group to concentrations of credit
  risk consist principally of cash and cash equivalents and trade receivables.
  Cash and cash equivalents are deposited in major banks in US and Israel. Such
  deposits in the U.S. may be in excess of insured limits and are not insured
  in other jurisdictions. Management believes that the financial institutions
  that hold the Groups investments are financially sound, and, accordingly,
  minimal credit risk exists with respect to these investments. The Groups
  trade receivables derive mainly from sales to numerous customers in Israel,
  Far East, Africa, Europe and the United States. The Group has adopted credit
  policies and standards intended to accommodate industry growth and inherent
  risk. Management believes that credit risks are moderated by the diversity of
  its end customers. The Group performs ongoing credit evaluations of its
  customers financial condition and to date has not experienced any material
  losses. An allowance for doubtful accounts is determined with respect to those
  amounts that the Group has determined to be doubtful of collection.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | r. | Effects of
  new accounting standards on the financial statements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | In October
  2001, the Israel Accounting Standards Board published Accounting Standard No.
  12 with respect to the discontinuance of the adjustment of financial
  statements, and Accounting Standard No. 13 with respect to the effect of
  changes in foreign exchange rates. In December 2002, Accounting Standard No.
  17 was published with respect to the deferral of the effective date of
  Accounting Standards No. 12 and No. 13 to January 1, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | According to
  Accounting Standards No. 12 and No. 17, which deal with the discontinuance of
  the adjustment of financial statements, financial statements will cease to be
  adjusted for the changes in the general purchasing power of the Israeli
  currency beginning January 1, 2004. Accounting Standard No. 13
  prescribes principles with respect to the effect of changes in foreign
  exchange rates. This Standard allows the Company to report in U.S. dollars
  provided that the same circumstances and conditions discussed in paragraph b.
  above which presently permit adjustment of the financial statements for the
  changes in the exchange rate of the U.S. dollar continue to exist.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Accounting
  Standard No. 13 replaces Interpretations No. 8 and No. 9 of Opinion
  No. 36 of the Institute of Certified Public Accountants in Israel, which
  have been superseded upon the discontinuance of the adjustment of financial
  statements. The Standard deals with the translation of foreign currency
  transactions and with the translation of financial statements of foreign
  operations for incorporation into the financial statements of the reporting
  enterprise. The translation principles of Accounting Standard No. 13 are
  different from those applied to date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | The Company
  believes that the effect of Standard No. 13 on its results of operations,
  financial position and cash flows is not expected to be material.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F - 14

---

---

|                                           | TOP IMAGE SYSTEMS LTD.
  AND ITS SUBSIDIARIES
|------------------------------------------ | ---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|In U.S. dollars                           

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

| |                                                                                    |  | December
  31, |        
| | ---------------------------------------------------------------------------------- |  | -------------- | -------
| |                                                                                    |  |                |        
| |                                                                                    |  | 2003           |        
| |                                                                                    |  |                |        
| | Mutual fund participation certificates - linked
  mainly to the
       U.S. dollar |  | $              | 276,515
| | Corporate bonds in U.S. dollars                                                    |  |                | -      
| |                                                                                    |  |                |        
| |                                                                                    |  |                |        
| |                                                                                    |  | $              | 276,515
| |                                                                                    |  |                |        

|NOTE 4:- | TRADE RECEIVABLES, NET
|-------- | ----------------------

| | Trade receivables               |  | $ | 4,945,749 |   | $ | 3,617,306 |  
| | ------------------------------- |  | - | --------- | - | - | --------- | -
| | Allowance for doubtful accounts |  |   | (339,495  | ) |   | (468,525  | )
| |                                 |  |   |           |   |   |           |  
| |                                 |  |   |           |   |   |           |  
| |                                 |  | $ | 4,606,254 |   | $ | 3,148,781 |  
| |                                 |  |   |           |   |   |           |  

|NOTE 5:- | OTHER CURRENT ASSETS
|-------- | --------------------

| | Employees              |  | $ | 9,352   |  | $ | 48,364  | 
| | ---------------------- |  | - | ------- |  | - | ------- | 
| | Government authorities |  |   | 228,901 |  |   | 170,695 | 
| | Prepaid expenses       |  |   | 175,463 |  |   | 37,924  | 
| | Other                  |  |   | -       |  |   | 42,181  | 
| |                        |  |   |         |  |   |         | 
| |                        |  |   |         |  |   |         | 
| |                        |  | $ | 413,716 |  | $ | 299,164 | 
| |                        |  |   |         |  |   |         | 

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

| | Cost:                            |  |   |           |  |   |           | 
| | -------------------------------- |  | - | --------- |  | - | --------- | 
| | Computers                        |  | $ | 1,270,039 |  | $ | 1,195,611 | 
| | Furniture and office
  equipment |  |   | 407,345   |  |   | 397,947   | 
| | Leasehold
  improvements         |  |   | 101,128   |  |   | 101,128   | 
| |                                  |  |   |           |  |   |           | 
| |                                  |  |   |           |  |   |           | 
| |                                  |  |   | 1,778,512 |  |   | 1,694,686 | 
| |                                  |  |   |           |  |   |           | 
| | Accumulated depreciation:        |  |   |           |  |   |           | 
| | Computers                        |  |   | 1,098,933 |  |   | 938,141   | 
| | Furniture and office
  equipment |  |   | 231,610   |  |   | 176,874   | 
| | Leasehold
  improvements         |  |   | 56,455    |  |   | 45,353    | 
| |                                  |  |   |           |  |   |           | 
| |                                  |  |   |           |  |   |           | 
| |                                  |  |   | 1,386,998 |  |   | 1,160,368 | 
| |                                  |  |   |           |  |   |           | 
| |                                  |  |   |           |  |   |           | 
| | Depreciated cost                 |  | $ | 391,514   |  | $ | 534,318   | 
| |                                  |  |   |           |  |   |           | 

| | As to
  charges, see Note 10c(1).                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                             
| | Depreciation
  expenses amounted to $ 214,523, $ 304,390 and $ 307,995 for the years ended
  December 31, 2003, 2002 and 2001, respectively.

F - 15

---

---

|                                           | TOP IMAGE SYSTEMS LTD.
  AND ITS SUBSIDIARIES
|------------------------------------------ | ---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|In U.S. dollars                           

|NOTE 7:- | SHORT-TERM BANK LOANS
|-------- | ---------------------

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

| |                                       |  | December
  31, |          
| | ------------------------------------- |  | -------------- | ---------
| |                                       |  |                |          
| |                                       |  | 2003           |          
| |                                       |  |                |          
| |                                       |  |                |          
| | Short-term bank loans in NIS          |  | $              | 502,991  
| | Short-term bank loans in U.S. dollars |  |                | 1,089,029
| |                                       |  |                |          
| |                                       |  |                |          
| |                                       |  | $              | 1,592,020
| |                                       |  |                |          

|         | b.                          | The Company
  has a revolving line of credit with banks for total borrowing of up to
  $ 1,500,000 net, based on 75% of its trade receivables.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------- | --------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                             | Borrowings
  under the revolving line of credit in NIS bearing interest at a rate of prime
  + 0.3% to 1% for 2003 and 0.25% to 1% for 2002 (As of December 31, 2003 and
  2002 prime rate is 6.7% and 10.4%, respectively). Borrowings under the
  revolving line of credit in U.S. dollars bearing interest at a rate of Libor
  + 2% for 2003 and 2002 (As of December 31, 2003 and 2002 - Libor rate is
  1.125% and 1.375%, respectively). Borrowings under the on-call line of credit
  in NIS bearing interest of 1.7% + bank cost (4.6%). The financing
  arrangements are secured - see Note 10c(2).
|         |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                             | Interest
  expense amounted to $ 68,119 and $ 73,104 for the years ended 2003 and 2002,
  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|NOTE 8:- | OTHER PAYABLES AND ACCRUALS

| |                                                |  | December
  31, |          
| | ---------------------------------------------- |  | -------------- | ---------
| |                                                |  |                |          
| |                                                |  | 2003           |          
| |                                                |  |                |          
| |                                                |  |                |          
| | Employees                                      |  | $              | 135,860  
| | Government authorities                         |  |                | 315,010  
| | Accrued expenses                               |  |                | 844,996  
| | Provision for vacation pay                     |  |                | 218,494  
| | Deferred revenues                              |  |                | 94,581   
| | Other payables                                 |  |                | 44,309   
| | Provision for non-recurring retirement benefit |  |                | 246,585  
| |                                                |  |                |          
| |                                                |  |                |          
| |                                                |  | $              | 1,899,835
| |                                                |  |                |          

|NOTE 9:- | ACCRUED SEVERANCE PAY, NET
|-------- | --------------------------

| | a. | 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, in case of dismissal, to one months salary for each year of
  employment or a portion thereof.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                               
| |    | The
  Companys liability for required severance payments is covered by insurance
  policies. The accrual for severance pay reflected in the balance sheets is in
  respect of the uncovered liability.                                                                                                                                                       

F - 16

---

---

|                                           | TOP IMAGE SYSTEMS LTD.
  AND ITS SUBSIDIARIES
|------------------------------------------ | ---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|In U.S. dollars                           

|NOTE 9:- | ACCRUED SEVERANCE PAY, NET (Cont.)
|-------- | ----------------------------------

| |  | The amounts
  deposited with insurance companies are not under the control of the Company,
  and therefore, are not included in the Companys financial statements.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                    
| |  | The balance
  of the liability is presented net of the amount deposited with a recognized
  severance pay fund as follows:                                         

| |                       |  | December
  31, |        
| | --------------------- |  | -------------- | -------
| |                       |  |                |        
| |                       |  | 2003           |        
| |                       |  |                |        
| |                       |  |                |        
| | Accrued severance pay |  | $              | 693,162
| | Less - amounts funded |  |                | 502,246
| |                       |  |                |        
| |                       |  |                |        
| |                       |  | $              | 190,916
| |                       |  |                |        

|          | b.                                     | Severance
  pay expenses amounted to $ 56,839, $ 234,819 and $ 290,953 for the years ended
  December 31, 2003, 2002 and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--------- | -------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|NOTE 10:- | COMMITMENTS, CONTINGENCIES AND CHARGES
|          |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          | a.                                     | Legal
  proceedings:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          |                                        | As of
  December 31, 2003, the company was named as a defendant in a case brought by
  a patent holder, Millennium LP in the district court for the Southern
  District of New York. In that case Millennium was asserting that certain
  image processing systems sold or offered for sale by the Company in the U.S.
  infringe certain U.S. patents held by Millennium. Subsequent to the reporting
  period, the Company has settled the matter for $ 250,000, which will be paid
  as follows: $ 100,000 at the time the settlement agreement was finalized and
  a monthly payment of $ 6,250 for 24 months. According to the settlement
  agreement, the abovementioned payment was for the release for past and
  covenant for the future. The settlement gave the Company a full release and
  discharge under the patents for all the companys products sold by the
  company or its customers up to the date of the settlement agreement and from
  then on until the last patent expires.
|          |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          | 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! 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.
| |  | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                            
| |  |    | The Companys
  total outstanding obligation in respect of royalty-bearing government
  participation received or accrued, net of royalties paid or accrued, amounted
  to $ 15,985 as of December 31, 2003.                                                                                                                                                                               
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                            
| |  |    | Royalties
  payable to the Office of the Chief Scientist of the Israeli Ministry of
  Industry and Trade (the OCS) are classified as part of cost of revenues.                                                                                                                                                                                                                           

F - 17

---

---

|                                                      | TOP IMAGE SYSTEMS LTD.
  AND ITS SUBSIDIARIES
|----------------------------------------------------- | ---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS           
|                                                     
|In U.S. dollars (except for share and per share data)

|NOTE 10:- | COMMITMENTS, CONTINGENCIES AND CHARGES (Cont.)
|--------- | ----------------------------------------------

| |    | 2.       | The Company
  has entered into an operating lease with Eldan Ltd. for the lease of a fleet
  of 23 vehicles. The leasing deposits are presented in the long-term deposits.
  Each lease is for a period of three years with monthly payments linked to the
  Israeli CPI. As of December 31, 2003, commitments are as follows:                                 
| | -- | -------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |          |                                                                                                                                                                                                                                                                                                                                                                
| |    |          | 2004                                                                                                                                                                                                                                                                                                                                                           
| |    |          | 2005                                                                                                                                                                                                                                                                                                                                                           
| |    |          | 2006                                                                                                                                                                                                                                                                                                                                                           
| |    |          |                                                                                                                                                                                                                                                                                                                                                                
| |    |          |                                                                                                                                                                                                                                                                                                                                                                
| |    |          | Total                                                                                                                                                                                                                                                                                                                                                          
| |    |          |                                                                                                                                                                                                                                                                                                                                                                
| |    |          |                                                                                                                                                                                                                                                                                                                                                                
| |    | 3.       | The Company
  leases offices for its activities. The remaining obligation periods range
  from one year to four years including extension periods. As of December 31,
  2003, commitments for such leases are as follows:                                                                                                                                      
| |    |          |                                                                                                                                                                                                                                                                                                                                                                
| |    |          | 2004                                                                                                                                                                                                                                                                                                                                                           
| |    |          | 2005                                                                                                                                                                                                                                                                                                                                                           
| |    |          | 2006                                                                                                                                                                                                                                                                                                                                                           
| |    |          | 2007                                                                                                                                                                                                                                                                                                                                                           
| |    |          |                                                                                                                                                                                                                                                                                                                                                                
| |    |          |                                                                                                                                                                                                                                                                                                                                                                
| |    |          | Total                                                                                                                                                                                                                                                                                                                                                          
| |    |          |                                                                                                                                                                                                                                                                                                                                                                
| |    |          |                                                                                                                                                                                                                                                                                                                                                                
| |    |          | Part of the
  lease agreements is secured by a bank guarantee in the amount of
  $ 51,963.                                                                                                                                                                                                                                                                     
| |    |          |                                                                                                                                                                                                                                                                                                                                                                
| |    | 4.       | The Company
  has committed to pay annual license fees to a vendor at a minimum amount of $
  300,000 per year, for the two years ended December 31, 2004.                                                                                                                                                                                                     
| |    |          |                                                                                                                                                                                                                                                                                                                                                                
| | c. | Charges:
| |    |          |                                                                                                                                                                                                                                                                                                                                                                
| |    | 1.       | To secure
  compliance with the conditions related to the Companys Approved Enterprise
  status, the Company registered a floating charge on machinery, equipment and
  other assets. The charges are unlimited in amount and it was agreed that the
  said assets might not be further pledged or transferred without prior consent
  of the beneficiaries.
| |    |          |                                                                                                                                                                                                                                                                                                                                                                
| |    | 2.       | To secure
  revolving credit facilities from a bank, the Company registered a floating
  charge on its plant, assets and goodwill in favor of this bank.                                                                                                                                                                                                       

|NOTE 11:- | SHAREHOLDERS EQUITY
|--------- | --------------------

| | a. | Stock
  options:
| | -- | ----------------
| |    |                 
| |    | 1.              
| |    |                 
| |    |                 
| |    |                 
| |    |                 

F - 18

---

---

|                                                      | TOP IMAGE SYSTEMS LTD.
  AND ITS SUBSIDIARIES
|----------------------------------------------------- | ---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS           
|                                                     
|In U.S. dollars (except for share and per share data)

|NOTE 11:- | SHAREHOLDERS EQUITY (Cont.)
|--------- | ----------------------------

| |  |  | b) | Employee
  stock option plan (1996):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |  | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |  |    | In September
  1996, the Board of Directors of the Company adopted, and the shareholders
  approved, the Employee stock option plan (1996) (the ESOP 96). The ESOP 96
  authorizes the granting of options to purchase up to 250,000 Ordinary shares,
  consisting of options intended to qualify as incentive stock options within
  the meaning of Section 422 of the United States Internal Revenue Code of
  1986, as amended, and options not intended to satisfy the requirements for
  incentive stock options.                                                               
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |  |    | As of
  December 31, 2003, options to purchase 143,875 Ordinary shares are
  outstanding under the plan at exercise prices between $ 0.52 and $ 5 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.                                                                                                                                                                                                                                                                    
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |  | c) | Employee
  stock option plan (2000):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |  |    | The Employee
  stock option plan (2000) (ESOP 2000) is designed to benefit from, and is
  made pursuant to the provisions of Section 102 of the Israeli Income Tax
  Ordinance (New Version) 1961 and the rules promulgated thereunder (Section
  102).                                                                                                                                                                                                                                                                                                                              
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |  |    | A total of
  240,000 shares have been reserved for the purposes of ESOP 2000. As of
  December 31, 2003, 158,000 options are outstanding. All of the options vest
  over a three-year period, and have exercise prices between $ 0.99 and $ 4.125
  per share.                                                                                                                                                                                                                                                                                                                           
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |  | d) | Employee
  stock option plan (2003):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |  |    | The Employee
  stock option plan (2003) (ESOP 2003) is designed to benefit from, and is made
  pursuant to the provisions of Section 102 of the Israeli Income Tax
  Ordinance.                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |  |    | The Company
  has reserved the minimum number of 181,242, for the purpose of the ESOP 2003.
  The minimum number may be increased by a number of shares that shall reflect
  the number of expired Old Options, as defined below. Any Shares which
  remain unissued and which are not subject to the outstanding Options at the
  termination of the ESOP 2003 shall cease to be reserved for the purpose of
  the ESOP 2003, but until termination of the ESOP 2003 the Company shall at
  all times reserve sufficient number of Shares to meet the requirements of the
  ESOP 2003.
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |  |    | For the
  purpose of this Plan, Old Options mean options granted out of the Companys
  terminated option plans ESOP 2000 and ESOP 96. which are currently
  outstanding and shall expire within their original lifetime. The number of
  Old Options shall not exceed 539,242.                                                                                                                                                                                                                                                                                                          
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |  |    | As of
  December 31, 2003, 116,000 options are outstanding. All of the options have
  an exercise price between $ 1.31 and $ 2.67 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                             

F - 19

---

---

|                                                      | TOP IMAGE SYSTEMS LTD.
  AND ITS SUBSIDIARIES
|----------------------------------------------------- | ---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS           
|                                                     
|In U.S. dollars (except for share and per share data)

|NOTE 11:- | SHAREHOLDERS EQUITY (Cont.)
|--------- | ----------------------------

| |  | 2. | The
  following is a summary of the Companys stock options granted among the
  various plans (not including non-plan grants):
| |  | -- | ------------------------------------------------------------------------------------------------------------------------------

| |                                                                                 |  | Year ended
  December 31, 2003 |          | Year ended
  December 31, 2002        |   | Year ended
  December 31, 2001 | 
| | ------------------------------------------------------------------------------- |  | ------------------------------ | -------- | ------------------------------------- | - | ------------------------------ | 
| |                                                                                 |  |                                |          |                                       |   |                                | 
| |                                                                                 |  | Number of
  options            |          | Weighted
  average
  exercise
  price |   | Number of
  options            | 
| |                                                                                 |  |                                |          |                                       |   |                                | 
| | Outstanding
  at the
     beginning of the
     year                            |  |                                | 434,500  |                                       | $ | 2.81                           | 
| | Granted                                                                         |  |                                | 116,000  |                                       | $ | 1.34                           | 
| | Exercised                                                                       |  |                                | (6,875   | )                                     | $ | 1.59                           | 
| | Forfeited                                                                       |  |                                | (125,750 | )                                     | $ | 2.70                           | 
| |                                                                                 |  |                                |          |                                       |   |                                | 
| | Outstanding
  at the end
     of the year                                       |  |                                | 417,875  |                                       | $ | 2.46                           | 
| |                                                                                 |  |                                |          |                                       |   |                                | 
| | Exercisable
  at the end
     of the year                                       |  |                                | 246,000  |                                       |   |                                | 
| |                                                                                 |  |                                |          |                                       |   |                                | 
| | Weighted
  average fair
     value of options
     granted during the
     year |  |                                |          |                                       | $ | 1.15                           | 
| |                                                                                 |  |                                |          |                                       |   |                                | 

| |  |  | The options
  outstanding as of December 31, 2003, have been separated into ranges of
  exercise price as follows:
| |  |  | ------------------------------------------------------------------------------------------------------------------

| | Range of
  exercise
  price |             | Options
  outstanding
  as of
  December 31,
  2003 |  | Weighted
  average
  remaining
  contractual
  life (years) |  | Weighted
  average
  exercise
  price |      | Options
  exercisable
  as of
  December 31,
  2003 |  | Weighted
  average
  exercise
  price of
  options
  exercisable |     
| | --------------------------- | ----------- | --------------------------------------------------- |  | ----------------------------------------------------------- |  | ------------------------------------- | ---- | --------------------------------------------------- |  | ---------------------------------------------------------------- | ----
| |                             |             |                                                     |  |                                                             |  |                                       |      |                                                     |  |                                                                  |     
| | $                           | 0.52-1.7    |                                                     |  | 176,875                                                     |  |                                       | 5.87 |                                                     |  | $                                                                | 1.3 
| | $                           | 2.08-2.85   |                                                     |  | 146,500                                                     |  |                                       | 3.37 |                                                     |  |                                                                  | 2.68
| | $                           | 3
  - 4.125 |                                                     |  | 78,500                                                      |  |                                       | 3.76 |                                                     |  |                                                                  | 4.13
| | $                           | 5           |                                                     |  | 16,000                                                      |  |                                       | 3.00 |                                                     |  |                                                                  | 5.00
| |                             |             |                                                     |  |                                                             |  |                                       |      |                                                     |  |                                                                  |     
| |                             |             |                                                     |  |                                                             |  |                                       |      |                                                     |  |                                                                  |     
| |                             |             |                                                     |  | 417,875                                                     |  |                                       |      |                                                     |  |                                                                  | $   
| |                             |             |                                                     |  |                                                             |  |                                       |      |                                                     |  |                                                                  |     

| |  | 3. | Share
  purchase agreement:                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |    | In
  consideration for the purchase of 990,000 of E - Mobilis shares, the Board of
  Directors of the Company granted the sellers on November 8, 2001, options to
  purchase 100,000 Ordinary shares that vested immediately, at an exercise
  price of $ 2 per share. The options will expire three years from the
  date of grant and will be cancelled and returned to the Company if not
  exercised by November 7, 2004. As of 31 December, 2003, 15,000 options have
  been exercised.
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |    | The option
  shares were valued using the Black Scholes valuation model.                                                                                                                                                                                                                                                                                                                                                                                                                    

F - 20

---

---

|                                                      | TOP IMAGE SYSTEMS LTD.
  AND ITS SUBSIDIARIES
|----------------------------------------------------- | ---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS           
|                                                     
|In U.S. dollars (except for share and per share data)

|NOTE 11:- | SHAREHOLDERS EQUITY (Cont.)
|--------- | ----------------------------

|          |                                               | 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Options to
  directors:                                                                                                                                                                                                                                                                                                                                                               
|--------- | --------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                       
|          |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | On November
  25, 2002, the shareholders of the Company approved the grant of an option to
  purchase 20,000 fully vested Ordinary shares at an exercise price of $ 0.46
  per share, to the Chairman of the Board of Directors at a purchase price
  equal to the market price of the shares on the date of the grant. As of
  December 31, 2003, none of the options were exercised.
|          |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                       
|          | b.                                            | Dividends:                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                       
|          |                                               | Dividends
  may be paid by the Company only out of the Israeli Company earnings and other
  surpluses in Israeli currency as defined in the Companies Law as of the end
  of the most recent fiscal year or as accrued over a period of the last two
  years whichever is higher. Such dividends will be declared and paid in NIS.
  There are no restrictions on the transfer of funds to non-resident
  shareholders for the payment of dividends.                  
|          |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                       
|NOTE 12:- | RESTRUCTURING COSTS AND OTHER SPECIAL CHARGES
|          |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                       
|          | a.                                            | As of
  December 31, 2001, in accordance with an agreement with an officer of the
  Company, upon termination of employment, the officer was entitled to receive
  certain benefits which amount to approximately $ 706,000 which was paid over
  an 18-month period.                                                                                                                                                                                                 
|          |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          | b.                                            | During
  October 2002, the Companys management adopted and began the execution of a
  restructuring plan. According to such plan, the Companys personnel was reduced
  in size. Furthermore, certain positions were cancelled, while certain other
  positions were altered. According to the plan, the Company implemented
  lay-offs mainly in the Companys headquarters located in Israel that
  included, among others, four employees in management positions.
|          |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          |                                               | Costs
  related to the restructuring plan consist mainly of employee salaries and
  vehicle expenses during the advance notice period. Management estimates these
  expenses will amount to approximately $ 314,000.                                                                                                                                                                                                                                                  
|          |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|NOTE 13:- | FINANCIAL INCOME, NET                        

| |                                            |  | Year ended
  December 31, |        
| | ------------------------------------------ |  | ------------------------- | -------
| |                                            |  |                           |        
| |                                            |  | 2003                      |        
| |                                            |  |                           |        
| |                                            |  |                           |        
| | Interest income                            |  | $                         | 60,794 
| | Exchange rate gain (loss) and bank charges |  |                           | 58,632 
| | Income (loss) from marketable securities   |  |                           | (21,050
| |                                            |  |                           |        
| |                                            |  |                           |        
| |                                            |  | $                         | 98,376 
| |                                            |  |                           |        

F - 21

---

---

|                                           | TOP IMAGE SYSTEMS LTD.
  AND ITS SUBSIDIARIES
|------------------------------------------ | ---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|In U.S. dollars                           

|NOTE 14:- | OTHER INCOME (EXPENSES), NET
|--------- | ----------------------------

| |                                                             |  | Year ended
  December 31, |  
| | ----------------------------------------------------------- |  | ------------------------- | -
| |                                                             |  |                           |  
| |                                                             |  | 2003                      |  
| |                                                             |  |                           |  
| | Gain (loss) from sale of property and equipment,
       net |  | $                         | -
| | Other                                                       |  |                           | -
| |                                                             |  |                           |  
| |                                                             |  |                           |  
| |                                                             |  | $                         | -
| |                                                             |  |                           |  

|NOTE 15:- | TAXES ON INCOME
|--------- | ---------------

| | a. | The Law for
  the Encouragement of Capital Investments 1959 (the Law):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The
  Companys production facilities in Israel have been granted an Approved
  Enterprise status under the above law. 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 two years of tax
  exempt and five years of reduced tax rate (25%). Additionally, the Company is
  a foreign investors company, as defined by that law and, as such, is
  entitled to additional reduction of the tax to 15% - 20% (based on the
  percentage of foreign ownership in each taxable year) and extension of three
  years of the benefit period. Since the Company has had no taxable income, the
  benefits have not yet commenced for all programs.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The period
  of tax benefits, detailed above, is subject to limit of 12 years from the
  commencement of production, or 14 years from the approval date, whichever
  earlier. The Company received approval in May 1990.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | 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 instruments of approval for the specific investments in
  approved enterprises. In the event of failure to comply with these
  conditions, the benefits may be canceled and the Company may be required to
  refund the amount of the benefits, in whole or in part, including interest.
  As of December 31, 2003, management believes that the Company is meeting all
  of the aforementioned conditions.                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The
  tax-exempt income attributable to the Approved Enterprise can be
  distributed to shareholders without subjecting the Company to taxes only upon
  the complete liquidation of the Company. If these retained tax-exempt profits
  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 system of benefits,
  currently between 15%-20% for an Approved Enterprise. As of December 31,
  2003, the accumulated deficit of the Company does not include tax-exempt
  profits earned by the Companys Approved Enterprise.                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | If a
  dividend were to be distributed out of tax-exempt profits deriving from an
  expansion program, the Company would be liable for corporate tax at a rate of
  25%. The Company does not anticipate paying dividends in the foreseeable
  future.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Income from
  sources other than the Approved Enterprise during the benefit period will
  be subject to tax at the regular corporate tax rate of 36%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F - 22

---

---

|                                           | TOP IMAGE SYSTEMS LTD.
  AND ITS SUBSIDIARIES
|------------------------------------------ | ---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|In U.S. dollars                           

|NOTE 15:- | TAXES ON INCOME (Cont.)
|--------- | -----------------------

| | b. | Taxation
  under inflation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The
  provisions of the Income Tax (Inflationary Adjustments) Law, 1985 apply to
  the Company and certain of its Israeli investees. According to the law, the results
  for tax purposes are measured based on the changes in the Israeli CPI. In
  November 2001, an amendment to the Income Tax (Inflationary Adjustments) Law
  (Amendment No. 14), 2001 was passed by the Knesset (Israeli parliament),
  pursuant to which until February 28 of the year following the reported tax
  year, the Minister of Finance, with the approval of the finance committee of
  the Knesset, is entitled to determine by the issuance of an order that the
  provisions of the aforesaid law, in whole or in part, will not apply with
  respect to a certain tax year if the Israeli CPI in that year did not
  increase by more than 3%. The Company decided to apply the implementation
  instructions of the Income Tax Commission, according to which if for the
  entire tax year there was a decrease in the Israeli CPI, it is considered by
  the law as if the Israeli CPI had not changed.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | c. | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | d. | The Company
  has received final tax assessments through the 1999 tax year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | e. | A
  reconciliation of the theoretical tax expense, assuming all income was taxed
  at the regular tax rate applicable to an Israeli company and the actual tax
  expense is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

| |                                                                                          |  | Year ended
  December 31, |           
| | ---------------------------------------------------------------------------------------- |  | ------------------------- | ----------
| |                                                                                          |  |                           |           
| |                                                                                          |  | 2003                      |           
| |                                                                                          |  |                           |           
| |                                                                                          |  |                           |           
| | Income (loss) before taxes on income                                                     |  | $                         | (604,047  
| |                                                                                          |  |                           |           
| |                                                                                          |  |                           |           
| | Theoretical tax expense (benefit) computed
     at the Israeli statutory tax rate of 36% |  | $                         | (217,457  
| | Increase (decrease) in taxes resulting from:                                             |  |                           |           
| | Tax-exempt income                                                                        |  |                           | -         
| | Non-deductible expenses                                                                  |  |                           | 12,496    
| | Losses carryforward which deferred taxes
     were not recorded                          |  |                           | 2,324,844 
| | Temporary differences in respect of which
     deferred taxes were not recorded          |  |                           | (258,337  
| | Tax adjustments in respect of inflation in
     Israel and others *)                     |  |                           | (1,861,546
| |                                                                                          |  |                           |           
| |                                                                                          |  |                           |           
| | Actual tax expense                                                                       |  | $                         | -         
| |                                                                                          |  |                           |           

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

F - 23

---

---

|                                           | TOP IMAGE SYSTEMS LTD.
  AND ITS SUBSIDIARIES
|------------------------------------------ | ---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|In U.S. dollars                           

|NOTE 15:- | TAXES ON INCOME (Cont.)
|--------- | -----------------------

|          | f.                                     | Carryforward
  losses:                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--------- | -------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          |                                        | As of
  December 31, 2003, the Company had, for tax purposes, operating loss
  carryforward in the amount of $ 6,738,488. The amount of the companys
  carryforward operating losses will be offset against taxable future income
  for an indefinite period.                                                                                                                                                                                                               
|          |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          |                                        | As of
  December 31, 2003, the subsidiaries had, for tax purposes, an operating loss
  carryforward in the amount of $ 8,623,863. A portion of such losses expires
  over a period from 2005 through 2017.                                                                                                                                                                                                                                                                   
|          |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          | g.                                     | Deferred
  taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          |                                        | Due to the
  Groups history of losses, management currently believes that it is more
  likely than not that the deferred tax assets regarding loss carryforwards and
  other temporary differences will not be realized, therefore, no deferred
  taxes were recorded.                                                                                                                                                                                                      
|          |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|NOTE 16:- | SELECTED STATEMENTS OF OPERATIONS DATA
|          |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          | a.                                     | Business
  segment, geographical areas and foreign operations:                                                                                                                                                                                                                                                                                                                                                                                                               
|          |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          |                                        | The Company
  operates in a single business segment with facilities in Israel, the United
  States, Germany, Netherlands and the United Kingdom. The Company reports
  under one segment the operations of all its marketing due to the fact that
  this economic activity constitutes a direct continuity of the operation in
  Israel. Therefore, the Company considered all sales except those made in
  Israel as export sales of the primary activity located in Israel.
|          |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          |                                        | Total revenues are attributed to geographic areas based on the
  location of the customer.                                                                                                                                                                                                                                                                                                                                                                                   

F - 24

---

---

|                                           | TOP IMAGE SYSTEMS LTD.
  AND ITS SUBSIDIARIES
|------------------------------------------ | ---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|In U.S. dollars                           

|NOTE 16:- | SELECTED
  STATEMENTS OF OPERATIONS (Cont.)
|--------- | -------------------------------------------
|          |                                            
|          | b.                                         

| |                                                          |  | Year ended
  December 31, |          
| | -------------------------------------------------------- |  | ------------------------- | ---------
| |                                                          |  |                           |          
| |                                                          |  | 2003                      |          
| |                                                          |  |                           |          
| | Product sales:                                           |  |                           |          
| | Israel                                                   |  | $                         | 10,271   
| | Far East (excluding
  Japan)                             |  |                           | 1,315,888
| | Europe                                                   |  |                           | 4,279,397
| | North America                                            |  |                           | 43,125   
| | South America                                            |  |                           | 506,000  
| | Africa                                                   |  |                           | 55,845   
| | Middle East
  (excluding Israel)                         |  |                           | -        
| | Japan                                                    |  |                           | -        
| | Other                                                    |  |                           | -        
| |                                                          |  |                           |          
| |                                                          |  |                           |          
| |                                                          |  |                           | 6,210,526
| |                                                          |  |                           |          
| | Service revenues:                                        |  |                           |          
| | Israel                                                   |  |                           | 20,387   
| | Far East (excluding
  Japan)                             |  |                           | 139,238  
| | Europe                                                   |  |                           | 1,449,099
| | North America                                            |  |                           | 348,874  
| | South America                                            |  |                           | 10,000   
| | Africa                                                   |  |                           | 88,379   
| | Middle East
  (excluding Israel)                         |  |                           | 1,160    
| | Japan                                                    |  |                           | 51,339   
| | Other                                                    |  |                           | -        
| |                                                          |  |                           |          
| |                                                          |  |                           |          
| |                                                          |  |                           | 2,108,476
| |                                                          |  |                           |          
| |                                                          |  |                           |          
| | Total revenues                                           |  | $                         | 8,319,002
| |                                                          |  |                           |          
| |                                                          |  |                           |          
| | Sales to single customers exceeding 10% of
       sales: |  |                           |          
| | Customer A                                               |  |                           | -        
| |                                                          |  |                           |          
| |                                                          |  |                           |          
| | Customer B                                               |  |                           | 17%      
| |                                                          |  |                           |          

| | The
  Companys substantial long-lived assets are located in Israel.
| | --------------------------------------------------------------------

|NOTE 17:- | TRANSACTIONS AND BALANCES WITH RELATED PARTIES                                                                  
|--------- | ----------------------------------------------------------------------------------------------------------------
|          |                                                                                                                 
|          | The
  following transactions between the Company and related parties are included
  in the financial statements:

| |                                                                                      |  | Year ended
  December 31, |       
| | ------------------------------------------------------------------------------------ |  | ------------------------- | ------
| |                                                                                      |  |                           |       
| |                                                                                      |  | 2003                      |       
| |                                                                                      |  |                           |       
| | Salaries and benefits expenses to officers who are
       directors and shareholders |  | $                         | 24,383
| |                                                                                      |  |                           |       
| |                                                                                      |  |                           |       
| | Directors fees *)                                                                    |  | $                         | 32,264
| |                                                                                      |  |                           |       

| | *) | The Company
  has seven directors.
| | -- | ----------------------------------

F - 25

---

---

|TOP IMAGE SYSTEMS LTD. 
  AND ITS SUBSIDIARIES
|----------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              
|In U.S. dollars                               

|NOTE 18:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
  PRINCIPLES IN ISRAEL AND IN THE UNITED STATES
|--------- | --------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                     
|          | a.                                                                                                                  
|          |                                                                                                                     
|          |                                                                                                                     
|          |                                                                                                                     
|          |                                                                                                                     
|          |                                                                                                                     
|          |                                                                                                                     
|          |                                                                                                                     
|          |                                                                                                                     
|          |                                                                                                                     
|          |                                                                                                                     
|          |                                                                                                                     
|          |                                                                                                                     
|          |                                                                                                                     
|          |                                                                                                                     
|          |                                                                                                                     
|          |                                                                                                                     
|          |                                                                                                                     
|          |                                                                                                                     
|          |                                                                                                                     
|          |                                                                                                                     

F - 26

---

---

|TOP IMAGE SYSTEMS LTD. 
  AND ITS SUBSIDIARIES
|----------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              
|In U.S. dollars                               

|NOTE 18:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
  PRINCIPLES IN ISRAEL AND IN THE UNITED STATES (Cont.)
|--------- | ----------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             

| |                                                                                                           |  | Year ended
  December 31, |         
| | --------------------------------------------------------------------------------------------------------- |  | ------------------------- | --------
| |                                                                                                           |  |                           |         
| |                                                                                                           |  | 2003                      |         
| |                                                                                                           |  |                           |         
| | Net loss:                                                                                                 |  |                           |         
| | U.S. GAAP as reported in Note 18b(2)                                                                      |  | $                         | (593,588
| |                                                                                                           |  |                           |         
| | Add - Stock-based employee
       compensation - intrinsic value                                          |  |                           | 532     
| |                                                                                                           |  |                           |         
| |                                                                                                           |  |                           |         
| | Deduct - Stock-based compensation
       expense determined under fair value
       method for all awards |  |                           | (104,172
| |                                                                                                           |  |                           |         
| |                                                                                                           |  |                           |         
| | Pro forma net loss                                                                                        |  | $                         | (697,228
| |                                                                                                           |  |                           |         
| |                                                                                                           |  |                           |         
| | Pro forma basic and diluted net loss per
       share                                                     |  | $                         | (0.114  
| |                                                                                                           |  |                           |         
| |                                                                                                           |  |                           |         
| | Basic and diluted loss per share as
       reported under U.S. GAAP in Note
       18b(3)                 |  | $                         | (0.097  
| |                                                                                                           |  |                           |         

F - 27

---

---

|TOP IMAGE SYSTEMS LTD. 
  AND ITS SUBSIDIARIES
|----------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              
|In U.S. dollars                               

|NOTE 18:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
  PRINCIPLES IN ISRAEL AND IN THE UNITED STATES (Cont.)
|--------- | ----------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             

F - 28

---

---

|TOP IMAGE SYSTEMS LTD. 
  AND ITS SUBSIDIARIES
|----------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              
|In U.S. dollars                               

|NOTE 18:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
  PRINCIPLES IN ISRAEL AND IN THE UNITED STATES (Cont.)
|--------- | ----------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             

F - 29

---

---

|TOP IMAGE SYSTEMS LTD. 
  AND ITS SUBSIDIARIES
|----------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              
|In U.S. dollars                               

|NOTE 18:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
  PRINCIPLES IN ISRAEL AND IN THE UNITED STATES (Cont.)
|--------- | ----------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             

| |                                                                      |  | December
  31, |           
| | -------------------------------------------------------------------- |  | -------------- | ----------
| |                                                                      |  |                |           
| |                                                                      |  | 2003           |           
| |                                                                      |  |                |           
| |                                                                      |  |                |           
| | Carryforward
  losses                                                |  | $              | 5,530,446 
| | Severance
  pay                                                      |  |                | 68,730    
| | Vacation pay                                                         |  |                | 78,658    
| | Allowance
  for doubtful accounts                                    |  |                | 122,218   
| | Provision
  for restructuring costs and other
       special charges |  |                | 88,771    
| |                                                                      |  |                |           
| |                                                                      |  |                |           
| | Net deferred
  tax assets before valuation
       allowance          |  |                | 5,888,823 
| | Valuation
  allowance                                                |  |                | (5,888,823
| |                                                                      |  |                |           
| |                                                                      |  |                |           
| | Net deferred
  tax assets                                            |  | $              | -         
| |                                                                      |  |                |           

| |  |    |                                                   | The Group
  provided valuation allowances in respect of deferred tax assets resulting
  from losses carryforward and other temporary differences, since it has a
  history of losses over the past three years. Management currently believes
  that it is more likely than not that the deferred taxes will not be realized.
| |  | -- | ------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                                                   |                                                                                                                                                                                                                                                                                                                              
| |  | 8. | Income
  (loss) before taxes on income:          
| |  |    |                                                   |                                                                                                                                                                                                                                                                                                                              
| |  |    | Additional
  disclosure required under U.S. GAAP:

| |          |  | Year ended
  December 31, |         
| | -------- |  | ------------------------- | --------
| |          |  |                           |         
| |          |  | 2003                      |         
| |          |  |                           |         
| |          |  | In thousands              |         
| |          |  |                           |         
| |          |  |                           |         
| | Domestic |  | $                         | (57,698 
| | Foreign  |  |                           | (546,349
| |          |  |                           |         
| |          |  |                           |         
| |          |  | $                         | (604,047
| |          |  |                           |         

F - 30

---

---

|TOP IMAGE SYSTEMS LTD. 
  AND ITS SUBSIDIARIES
|----------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              
|In U.S. dollars                               

|NOTE 18:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
  PRINCIPLES IN ISRAEL AND IN THE UNITED STATES (Cont.)
|--------- | ----------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             

F - 31

---

---

|TOP IMAGE SYSTEMS LTD. 
  AND ITS SUBSIDIARIES
|----------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              
|In U.S. dollars                               

|NOTE 18:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
  PRINCIPLES IN ISRAEL AND IN THE UNITED STATES (Cont.)
|--------- | ----------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                             
|          | b.                                                                                                                          
|          |                                                                                                                             
|          |                                                                                                                             

| |                                              |  | December
  31, |          
| | -------------------------------------------- |  | -------------- | ---------
| |                                              |  |                |          
| |                                              |  | 2003           |          
| |                                              |  |                |          
| | Long-term investments under Israeli GAAP     |  | $              | -        
| | Amounts funded with respect of severance pay |  |                | 502,246  
| |                                              |  |                |          
| |                                              |  |                |          
| | Long-term investments under U.S. GAAP        |  | $              | 502,246  
| |                                              |  |                |          
| |                                              |  |                |          
| | Total liabilities under Israeli GAAP         |  | $              | 3,988,724
| | Amounts funded in respect of severance pay   |  |                | 502,246  
| |                                              |  |                |          
| |                                              |  |                |          
| | Total liabilities under U.S. GAAP            |  | $              | 4,490,970
| |                                              |  |                |          

| |  | 2. | On
  statements of operation items:                                                  
| |  | -- | -------------------------------------------------------------------------------------
| |  |    |                                                                                      
| |  |    | Loss from
  securities defined as available for sale should be reconciled as follows:

| |                                                                                                                              |  | Year ended
  December 31, |         
| | ---------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | --------
| |                                                                                                                              |  |                           |         
| |                                                                                                                              |  | 2003                      |         
| |                                                                                                                              |  |                           |         
| |                                                                                                                              |  |                           |         
| | Net loss for the year - Israeli GAAP                                                                                         |  | $                         | (604,047
| | Net adjustment to comprehensive
       income in respect of unrealized
       gains (losses) on marketable
       securities |  |                           | 10,459  
| |                                                                                                                              |  |                           |         
| |                                                                                                                              |  |                           |         
| | Net loss for the year - U.S. GAAP                                                                                            |  | $                         | (593,588
| |                                                                                                                              |  |                           |         

F - 32

---

---

|TOP IMAGE SYSTEMS LTD. 
  AND ITS SUBSIDIARIES
|----------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              
|In U.S. dollars                               

|NOTE 18:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
  PRINCIPLES IN ISRAEL AND IN THE UNITED STATES (Cont.)
|--------- | ----------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             

| |                                                                                                                   |  | Year ended
  December 31, |          
| | ----------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ---------
| |                                                                                                                   |  |                           |          
| |                                                                                                                   |  | 2003                      |          
| |                                                                                                                   |  |                           |          
| |                                                                                                                   |  | In thousands              |          
| |                                                                                                                   |  |                           |          
| |                                                                                                                   |  |                           |          
| | Net
  income (loss)                                                                                               |  | $                         | (593,588 
| |                                                                                                                   |  |                           |          
| |                                                                                                                   |  |                           |          
| | Numerator for basic and diluted earnings
       (loss) per share - income (loss)
       available to shareholders |  | $                         | (593,588 
| |                                                                                                                   |  |                           |          
| |                                                                                                                   |  |                           |          
| | Weighted
  average shares outstanding:                                                                            |  |                           |          
| |                                                                                                                   |  |                           |          
| | Denominator
  for basic net earnings
            (loss) per share                                                 |  |                           | 6,102,496
| | Effect
  of dilutive securities                                                                                   |  |                           | (*    -  
| |                                                                                                                   |  |                           |          
| |                                                                                                                   |  |                           |          
| | Denominator
  for diluted net earnings
            (loss) per share                                               |  |                           | 6,102,496
| |                                                                                                                   |  |                           |          
| |                                                                                                                   |  |                           |          
| | Basic
  and diluted net earnings (loss)
            per share                                                     |  | $                         | (0.097   
| |                                                                                                                   |  |                           |          

| |  | *) | Anti
  dilutive.
| |  | -- | ----------------

F - 33

---

---

|TOP IMAGE SYSTEMS LTD. 
  AND ITS SUBSIDIARIES
|----------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              
|In U.S. dollars                               

|NOTE 18:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
  PRINCIPLES IN ISRAEL AND IN THE UNITED STATES (Cont.)
|--------- | ----------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                             
|          |                                                                                                                             

| |                                                                        |  | Amount |        | Capital
  surplus |   | Accumulated
  deficit |  | Accumulated
  other
  comprehensive
  income |             | Total | 
| | ---------------------------------------------------------------------- |  | ------ | ------ | ----------------- | - | --------------------- |  | -------------------------------------------- | ----------- | ----- | 
| |                                                                        |  |        |        |                   |   |                       |  |                                              |             |       | 
| | Balance
  at January 1,
       2001                                    |  | $      | 73,079 |                   | $ | 22,197,372            |  | $                                            | (7,600,260  | )     | 
| | Net
  loss                                                             |  |        | -      |                   |   | -                     |  |                                              | (2,791,914  | )     | 
| | Net
  unrealized change
       on available for sale
       securities |  |        | -      |                   |   | -                     |  |                                              | -           |       | 
| | Comprehensive
  loss                                                   |  |        | -      |                   |   | -                     |  |                                              | -           |       | 
| | Amortization
  of
       deferred stock
       compensation            |  |        | -      |                   |   | 42,141                |  |                                              | -           |       | 
| | Acquisition
  of
       minority interest in
       subsidiary         |  |        | -      |                   |   | 90,000                |  |                                              | -           |       | 
| |                                                                        |  |        |        |                   |   |                       |  |                                              |             |       | 
| |                                                                        |  |        |        |                   |   |                       |  |                                              |             |       | 
| | Balance
  at
       December 31, 2001                                  |  |        | 73,079 |                   |   | 22,329,513            |  |                                              | (10,392,174 | )     | 
| | Net
  loss                                                             |  |        | -      |                   |   | -                     |  |                                              | (3,825,545  | )     | 
| | Net
  unrealized change
       on available for sale
       securities |  |        | -      |                   |   | -                     |  |                                              | -           |       | 
| | Comprehensive
  loss                                                   |  |        | -      |                   |   | -                     |  |                                              | -           |       | 
| | Amortization
  of
       deferred stock
       compensation            |  |        | -      |                   |   | 9,456                 |  |                                              | -           |       | 
| |                                                                        |  |        |        |                   |   |                       |  |                                              |             |       | 
| |                                                                        |  |        |        |                   |   |                       |  |                                              |             |       | 
| | Balance
  at
       December 31, 2002                                  |  |        | 73,079 |                   |   | 22,338,969            |  |                                              | (14,217,719 | )     | 
| | Net
  loss                                                             |  |        | -      |                   |   | -                     |  |                                              | (593,588    | )     | 
| | Net
  unrealized change
       on available for sale
       securities |  |        | -      |                   |   | -                     |  |                                              | -           |       | 
| | Comprehensive
  loss                                                   |  |        | -      |                   |   | -                     |  |                                              | -           |       | 
| | Exercise
  of stock
       options                                     |  |        | 195    |                   |   | 40,761                |  |                                              | -           |       | 
| | Amortization
  of
       deferred stock
       compensation            |  |        | -      |                   |   | 532                   |  |                                              | -           |       | 
| |                                                                        |  |        |        |                   |   |                       |  |                                              |             |       | 
| |                                                                        |  |        |        |                   |   |                       |  |                                              |             |       | 
| | Balance
  at     December 31, 2003                                     |  | $      | 73,274 |                   | $ | 22,380,262            |  | $                                            | (14,811,307 | )     | 
| |                                                                        |  |        |        |                   |   |                       |  |                                              |             |       | 

F - 34

---

---

|TOP IMAGE SYSTEMS LTD. 
  AND ITS SUBSIDIARIES
|----------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              
|In U.S. dollars                               

|NOTE 18:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
  PRINCIPLES IN ISRAEL AND IN THE UNITED STATES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|NOTE 19:- | RECENT PRONOUNCEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          | In January
  2003, the FASB issued Interpretation No. 46, Consolidation of Variable
  Interest Entities (FIN 46). The objective of FIN 46 is to improve
  financial reporting by companies involved with variable interest entities. A
  variable interest entity is a corporation, partnership, trust, or any other
  legal structure used for business purposes that either (a) does not have
  equity investors with voting rights or (b) has equity investors that do not
  provide sufficient financial resources for the entity to support its
  activities. FIN 46 requires a variable interest entity to be consolidated by
  a company if that company is subject to a majority of the risk of loss from
  the variable interest entitys activities or entitled to receive a majority
  of the entitys residual returns or both. FIN 46 also requires disclosures
  about variable interest entities that the company is not required to
  consolidate but in which it has a significant variable interest. The
  consolidation requirements of FIN 46 apply immediately to variable interest
  entities created after January 31, 2003. The consolidation requirements apply
  to older entities in the first fiscal year or interim period ending after
  March 15, 2004. Certain of the disclosure requirements apply in all financial
  statements issued after January 31, 2003, regardless of when the variable
  interest entity was established. As of December 31, 2003, the Company does
  not expect the adoption of FIN 46 to have a material impact on its
  consolidated financial statements.
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          | In
  November 2002, Emerging Issues Task Force (EITF) reached a consensus on
  Issue No. 00-21, `Revenue Arrangements with Multiple Deliverables. EITF
  Issue No. 00-21 provides guidance on how to account for arrangements that
  involve the delivery or performance of multiple products, services and/or
  rights to use assets. The provisions of EITF Issue No. 00-21 applied to
  revenue arrangements entered into in fiscal periods beginning after June 15,
  2003. Additionally, companies will be permitted to apply the consensus
  guidance in this issue to all existing arrangements as the cumulative effect
  of a change in accounting principle in accordance with APB Opinion No. 20,
  Accounting Changes. The adoption of EITF Issue No. 00-21 did not have a
  material impact upon the Companys financial position, cash flows or results
  of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F - 35

---

---

|TOP IMAGE SYSTEMS LTD. 
  AND ITS SUBSIDIARIES
|----------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              
|In U.S. dollars                               

|NOTE 19:- | RECENT PRONOUNCEMENTS (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | In
  December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104,
  Revenue Recognition, (SAB No. 104) which revises or rescinds certain
  sections of SAB No. 101, Revenue Recognition, in order to make this
  interpretive guidance consistent with current authoritative accounting and
  auditing guidance and SEC rules and regulations. The changes noted in SAB No.
  104 did not have a material effect on the Companys consolidated results of
  operations, consolidated financial position or consolidated cash flows.
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|NOTE 20:- | SUBSEQUENT EVENTS (UNAUDITED)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | On June 10,
  2004, the company signed an agreement for the private placement of 2,563,300
  Ordinary Shares of the Company at a purchase price of $3.16 per share to
  institutional investors for a consideration of approximately $8.1 million. As
  part of the agreement, the investors will be granted a warrant to purchase
  1,281,650 Ordinary Shares at an exercise price of $4.26 per share.                                                                                                                                              

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F - 36

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