Dear Shareholder,

I am pleased to address this letter to you at the end of a strategic - albeit challenging - calendar year.   In 2007, the management team made some difficult and critical decisions aimed at transforming Top Image Systems (TIS) into the global leader for document capture solutions.  As we stand at the foothills of 2008, the company is now more prepared than ever before to achieve its long term goals.  With this in mind, we will look back at some of the key challenges and accomplishments of 2007 that have left TIS extremely well-positioned to benefit from growth in the exciting and lucrative market in which we operate while delivering value to shareholders.

2007: A Challenging Year

Let us begin with the challenges.  The year 2007 was characterized by the start of increased global economic uncertainty.  As a result, our team reported lengthened sales cycles as managers put off making key investment decisions.  To put this in context, we tend to see faster sales cycles during both clear economic downturns and clear economic recoveries as our customers look to implement cost-saving software solutions.  By contrast, economic uncertainty can present a challenge for our sales teams.  In 2007, this hesitation caused shortfalls in some of our traditionally strong revenue centers such as the United Kingdom and Japan.  Total revenue did grow through acquisitions - 17% year-over-year to $23.7 million - but the company recorded a non-GAAP loss of $4.9 million, reflecting weaker-than-expected sales, delays in previously anticipated fourth quarter orders, restructuring expenses, and charges related to the acceleration of options.

Responding to Challenges: Restructuring the Business

In light of the challenges we faced during the year, management implemented a comprehensive restructuring plan in late 2007 that placed significant focus on streamlining the company’s operating model. In addition to replacing some key personnel in underperforming offices, the new strategy featured the following changes: decentralizing and reducing corporate headcount, implementing accountability measures for regional leadership, combining efforts of R&D across Israel and China, and taking advantage of synergies between regional business centers and acquired new entities.  Management expects that these modifications will reduce the company’s G&A run rate from 21% of revenue in 2007 to 17% of revenue in 2008.  The result will be a leaner and more nimble organization that is better positioned to exploit the vast market opportunity, leverage its strengths in target markets and deliver profitability.   

Seizing Opportunity: Gaining Strength in Target Markets

Let us move on to some of the exciting developments of 2007.  In April, the company announced the strategic acquisition of Capture Projects Ltd. (CPL), a leading provider of Document Capture and Knowledge Management solutions in the United Kingdom.  The successful integration of CPL’s leading technology and services components was completed by  June 2007 - 3 months ahead of schedule. Since then, we were able to convert several of our competitors’ customers into TIS customers as we began selling the eFLOW platform through the robust CPL distribution network.  At this juncture, our company is the leader of the European document capture market and as such is extremely well-positioned to seize the opportunity that this market represents. 
In line with this goal, over the course of 2007 TIS forged a number of additional strategic partnerships in order to further expand our distribution network and strengthen our technology offering. In August, the company announced a partnership with Elision Ltd., a system integrator specializing in electronic document management, document scanning and business process outsourcing, to bundle our technology with their solutions.  In December, we also announced a partnership with technology provider Contempus to expand our solution and offer European customers a more comprehensive, end-to-end solution that integrates with any ERP system. 
Our European operation is now stronger than ever, having generated record revenues in 2007 from leading customers such as Office Depot, Suzuki International Europe, Network Rail and Agfa. Management views the European operation as a key driver of organic growth for TIS in 2008 and will continue to focus on the lucrative market opportunity in this region.
Further expanding our global presence, in July 2007 the company also announced the acquisition of China-based Asiasoft Global Pte. Ltd. (ASG), taking a 51% ownership interest in the leading developer and distributor of document capture, content management and shared services software solutions in China and Asia Pacific (APAC).  The acquisition of ASG, which has over 300 customers across China, Singapore, Hong Kong and Malaysia, provides TIS with a comprehensive and established infrastructure in the region.  It positions TIS as one of the strongest players in APAC by increasing its sales offering to provide a more complete imaging platform. Further, it provides the company with a new base in the fastest growing market in the world for aggressive cross-selling and territorial expansion.  We have already gained traction toward this goal, boasting an impressive customer list, including some major Asian banks and governmental organizations, as well as big name brands such as Kodak, NEC and IBM.
Within the framework of our growth in this region, we are in the midst of a transition as we change the focus of ASG from mostly hardware and third party products to primarily capture software solutions built upon the eFLOW platform and ASG’s own software. Once this process is complete, we believe TIS will show gross margin improvements. Moreover, the pipeline in this region is very robust, and we expect that APAC will represent a significant growth driver for the company in 2008.
In line with our long term goal to become the world leader in document capture solutions, we are also laying the foundations to penetrate the lucrative American markets. As an illustration of our ability to compete in the Americas, TIS won the business of Hormel Foods, a US-based multinational manufacturer and marketer of branded consumer meat and food products, to streamline its entire invoice process. Further, the company announced an agreement with J&B Software, Inc., a premier provider of enterprise-wide payment system solutions and integration services. Through this agreement, J&B Software Inc. will provide TIS solutions to its large client base in the transaction processing and financial services industries and develop specific applications to target the healthcare claims market.  Shortly after establishing this relationship, the two companies demonstrated the power of their joint sales efforts by winning three major government, transportation and media projects, with an average deal size of over $300K.
In Latin America, the company also saw an increase of activity as macroeconomic conditions in that region improved over the course of 2007. The Columbian government selected TIS to facilitate the processing of ballots for the national elections last year.  In addition, we won our first invoice processing project in this market and our deal flow pipeline significantly increased.  We expect to harvest the fruits of this activity during 2008.

Technology Evolution: Staying Ahead of the Curve

TIS’s signature solution, the eFLOW Unified Content Platform™ provides the common architectural infrastructure for our products and services.  

In mid 2007, we released eFLOW Version 4.0, providing our customers with an enhanced user experience, more powerful user-interface, increased efficiency and superior data recognition. Featuring a state-of-the art algorithm for unprecedented recognition accuracy, unique intelligent matching, freeform and secured character recognition and perfect document classification,  eFLOW4 provides users across the globe with greater efficiency and productivity than ever before.
In 2007, our newly combined research and development centres in Israel and China began designing and engineering an even more powerful version of the software, to be released during the third quarter of 2008. eFLOW4.5, will feature, among other technological advancements, a Web2.0- based interface that will allow users to process and index their documents from any location.

Building Shareholder Value

The management team and Board of Directors are extremely focused on building value for shareholders over the long term.  In pursuit of this goal, the Board approved the allocation of $2.5 million to repurchase outstanding Series A convertible debentures issued at the end of 2006.  We hope that this move adequately illustrates both our fervent commitment as a company to repay debt and improve the capital structure, and our firm belief that TIS will succeed in achieving its long term goal to become the world leader in document capture solutions.
Having expended a great deal of energy and focus digesting two major strategic acquisitions and restructuring the operating model in 2007, the company is better prepared now than ever to execute on its long term vision and strategy.  Broad-based regional successes have demonstrated that the company’s industry-leading technology is increasingly capturing the attention of senior-level decision makers across the globe.  Further, the solid foundation we built in 2007 as a clear leader in Europe and Asia puts us in a position of strength as we enter 2008.  The company’s evolved structure and growing directory of major multinational customers allows our local, specialized sales teams to extend their reach in existing markets and penetrate new markets with renewed vigor and motivation.  Meanwhile, our research and development teams in Israel and China continue to innovate at a high level to stay ahead of the curve in terms of technology evolution.
In conclusion, we are renewing our commitment to building shareholder value through intelligent, organic growth in 2008 as we focus on generating profit and leveraging the exciting progress that the company made during the course of 2007.

Sincerely,
Dr. Ido Schechter
Chief Executive Officer

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