SECURITIES AND EXCHANGE COMMISSION
                              Washington D.C. 20549

                                   FORM 20-F/A

[ ]   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
      OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

                                       OR

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
      THE SECURITIES EXCHANGE ACT OF 1934

              For the fiscal year ended December 31, 2004

                                       OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
      OF THE SECURITIES EXCHANGE ACT OF 1934

              For the transition period from _________ to _________

                         Commission file number: 0-28950

                        MER TELEMANAGEMENT SOLUTIONS LTD.
              (Exact name of Registrant as specified in its charter
               and translation of Registrant's name into English)
                                     Israel
                 (Jurisdiction of incorporation or organization)
                  22 Zarhin Street, Ra'anana 43662, Israel
                    (Address of principal executive offices)

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

Securities registered or to be registered pursuant to Section 12(g) of the Act:
                       Ordinary Shares, NIS 0.01 Par Value
                                (Title of Class)

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:

      Ordinary Shares, par value NIS 0.01 per share ............ 4,638,004
                            (as of December 31, 2004)

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

                                 Yes X No
                                         ---

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

                               Item 17 Item 18 X
                                              ---

This Report on Form 20-F/A is incorporated by reference into our Form S-8
Registration Statements File No. 333-12014 and 333-123321.

<PAGE>

                                EXPLANATORY NOTE
                                ----------------

      This Amendment No. 1 on Form 20-F/A is being filed solely to correct an
omission in Item 18 of Mer Telemanagement Solutions Ltd.'s Annual Report on Form
20-F for the fiscal year ended December 31, 2004, which was filed on June 30,
2005.

      Item 18 has been corrected to include the audited financial statements of
Jusan, S.A. ("Jusan"), the Registrant's 50% owned affiliate in Spain, as of
December 31, 2002, 2003 and 2004 and for the three years ended December 31,
2004, which financial statements were not filed with the original Form 20-F.

      This Amendment is not intended to revise other information presented in
the Registrant's Annual Report on Form 20-F for the fiscal year ended December
31, 2004 as originally filed and all such other information in the original
filing, which remains unchanged.

      This Amendment does not reflect events occurring after the filing of the
original Form 20-F and does not modify or update the disclosure therein in any
way other than as required to reflect the amendments discussed above. As a
result, this Amendment continues to speak as of June 30, 2005.


                                       i
<PAGE>


                                TABLE OF CONTENTS

                                                                     Page
                                                                     ----

PART III..............................................................1

ITEM 17.     FINANCIAL STATEMENTS.....................................1
ITEM 18.     FINANCIAL STATEMENTS.....................................1
ITEM 19.     EXHIBITS.................................................1

S I G N A T U R E S...................................................4






























                                       ii
<PAGE>

                                    PART III


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

      We have elected to furnish financial statements and related information
specified in Item 18.

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

Consolidated Financial Statements of Mer Telemanagement Solutions Ltd.

Index to Consolidated Financial Statements ...........................F-1

         Report of Independent Registered Public Accounting Firm......F-2

         Consolidated Balance Sheets..................................F-3-4

         Consolidated Statements of Operations........................F-5

         Statements of Changes in Shareholders' Equity................F-6

         Consolidated Statements of Cash Flows........................F-7-8

         Notes to Consolidated Financial Statements...................F-9-38

Financial Statements of Jusan, S.A. as of December 31, 2002,
2003 and 2004 and for the three years than ended

         Index to Financial Statements of Jusan, S.A..................F-39

         Report of Registered Public Accounting Firm..................F-40

         Report of Independent Auditors...............................F-41

         Balance Sheets...............................................F-42

         Statements of Income.........................................F-43

         Statements of Changes in Shareholders' Equity................F-44

         Statements of Cash Flows.....................................F-44

         Notes to Financial Statements................................F-46-55

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

         Index to Exhibits

                                       1
<PAGE>

         Exhibit      Description

           1.1    Memorandum of Association of the Registrant (1)

           1.2    Articles of Association of the Registrant (1)

           2.1    Specimen of Ordinary Share Certificate (1)

           4.1    Asset Purchase Agreement dated December 30, 2004 among the
                  Registrant and Teleknowledge Group Ltd. (5)

           4.2    1996 Employee Stock Option Plan (1)

           4.3    Section 102 Stock Option Plan (1)

           4.4    2003 Israeli Share Option Plan (2)

           4.5    Form of Consultant's Warrant (3)

           8.1    List of Subsidiaries of the Registrant *

          10.1    Consent of Kost Forer Gabbay & Kasierer, a Member of Ernst &
                  Young Global (relating to Mer Telemanagement Ltd.)

          10.2    Consent of BDO Audiberia Auditores, S.L.

          10.3    Consent of Kost Forer Gabbay & Kasierer, a Member of Ernst &
                  Young Global (relating to Jusan, S.A.)

          14.1    Code of Ethics (4)

          12.1    Certification of Chief Executive Officer pursuant to Rule
                  13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
                  as amended.

          12.2    Certification of Chief Financial Officer pursuant to Rule
                  13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
                  as amended.

          13.1    Certification of Chief Executive Officer pursuant to 18 U.S.C.
                  Section1350, as adopted pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.

          13.2    Certification of Chief Financial Officer pursuant to 18 U.S.C.
                  Section 1350, as adopted pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.

          -----------------

          (1)     Filed as an exhibit to our registration statement on Form F-1,
                  registration number 333-05814, filed with the Securities and
                  Exchange Commission, and incorporated herein by reference.

                                       2
<PAGE>

          (2)     Filed as Exhibit 10.3 to our Annual Report on Form 20-F for
                  the year ended December 31, 2003, and incorporated herein by
                  reference.

          (3)     Filed as Exhibit 10.5 to our Annual Report on Form 20-F for
                  the year ended December 31, 2002, and incorporated herein by
                  reference.

          (4)     Filed as Exhibit 14.1 to our Annual Report on Form 20-F for
                  the year ended December 31, 2003, and incorporated herein by
                  reference.

          (5)     Filed as Exhibit 4.1 to our Annual Report on Form 20-F for the
                  year ended December 31, 2004, and incorporated herein by
                  reference.

          *Previously filed.


                                       3
<PAGE>

             MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 2004

                            U.S. DOLLARS IN THOUSANDS


                                      INDEX

                                                                      Page
                                                                  --------------

Report of Independent Registered Public Accounting Firm                F-2

Consolidated Balance Sheets                                         F-3 - F-4

Consolidated Statements of Operations                                  F-5

Statements of Changes in Shareholders' Equity                          F-6

Consolidated Statements of Cash Flows                               F-7 - F-8

Notes to Consolidated Financial Statements                         F-9 - F-38


                               - - - - - - - - - -


                                      F-1
<PAGE>

[ERNST & YOUNG LOGO]
                          Kost Forer Gabbay & Kasierer     Phone: 972-3-6232525
                          3 Aminadav St.                   Fax:   972-3-5622555
                          Tel-Aviv 67067, Israel

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                             To the Shareholders of

                        Mer Telemanagement Solutions Ltd.

      We have  audited  the  accompanying  consolidated  balance  sheets  of Mer
Telemanagement  Solutions  Ltd.  ("the  Company")  and  its  subsidiaries  as of
December  31,  2003  and  2004,  and  the  related  consolidated  statements  of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2004. These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial  statements based on our audits. We did not audit the
financial  statements  of Jusan SA, a 50% owned  affiliate,  for the year  ended
December 31, 2004, whose Company's investments constitute $ 2,119 thousand as of
December 31, 2004 and its equity in revenues  constitute $ 225  thousand.  Those
statements  were audited by other auditors whose report has been furnished to us
and our opinion,  insofar as it relates to amounts  emanating from the financial
statements  of such investee  companies,  is based solely on the said reports of
the other auditors.

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

      In our opinion,  based on our audit and the report of the other  auditors,
the consolidated  financial  statements referred to above present fairly, in all
material  respects,  the consolidated  financial position of the Company and its
subsidiaries as of December 31, 2003 and 2004, and the  consolidated  results of
their  operations and their cash flows for each of the three years in the period
ended December 31, 2004, in conformity with U.S. generally  accepted  accounting
principles.

                                           /s/Kost Forer Gabbay and Kasierer
Tel-Aviv, Israel                              KOST FORER GABBAY & KASIERER
February 7, 2005                            A Member of Ernst & Young Global


                                      F-2
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                             -----------------------
                                                                                2003          2004
                                                                             ---------     ---------
<S>                                                                          <C>           <C>
     ASSETS

CURRENT ASSETS:
   Cash and cash equivalents                                                 $   8,684     $   3,814
   Marketable securities (Note 3)                                                1,644         1,057
   Trade receivables (net of allowance for doubtful accounts of $350 and
     $370 as of December 31, 2003 and 2004, respectively)                        1,391         1,348
   Other accounts receivable and prepaid expenses (Note 4)                         566           391
   Inventories (Note 5)                                                            193           178
                                                                             ---------     ---------

 Total current assets                                                           12,478         6,788
 -----                                                                       ---------     ---------

 LONG-TERM INVESTMENTS:
   Investments in an affiliate (Note 6)                                          1,859         2,119
   Long-term loans, net of current maturities (Note 7)                              95            45
   Severance pay fund                                                              564           535
   Other investments (Note 8)                                                      368           373
                                                                             ---------     ---------

 Total long-term investments                                                     2,886         3,072
 -----                                                                       ---------     ---------

 PROPERTY AND EQUIPMENT, NET (Note 9)                                              482           581
                                                                             ---------     ---------

 OTHER ASSETS:
   Goodwill (Note 10a)                                                           2,024         3,415
   Other intangible assets, net (Note 10b)                                         206         1,394
   Deferred income taxes (Note 13)                                                 106            73
                                                                             ---------     ---------

 Total other assets                                                              2,336         4,882
 -----                                                                       ---------     ---------

 Total assets                                                                $  18,182     $  15,323
 -----                                                                       =========     =========
</TABLE>

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


                                      F-3
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)

<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                              ------------------------
                                                                               *) 2003          2004
                                                                              ---------      ---------
<S>                                                                           <C>            <C>
     LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Current maturities of long-term loans                                       $       8      $      --
  Trade payables                                                                    393            719
  Accrued expenses and other liabilities (Note 11)                                1,421          2,042
  Deferred revenues                                                               1,219          1,254
                                                                              ---------      ---------

Total current liabilities                                                         3,041          4,015
-----                                                                         ---------      ---------

LONG-TERM LIABILITIES:
  Accrued severance pay                                                             677            651
                                                                              ---------      ---------

Total long-term liabilities                                                         677            651
-----                                                                         ---------      ---------

COMMITMENTS AND CONTINGENT LIABILITIES (Note 12)

SHAREHOLDERS' EQUITY (Note 15):
  Share capital -
    Ordinary shares of NIS 0.01 par value - Authorized: 12,000,000 shares
      as of December 31, 2003 and 2004; Issued: 4,631,471 and 4,648,804
      shares as of December 31, 2003 and 2004, respectively; Outstanding:
      4,624,471 and 4,638,004 shares as of December 31, 2003 and 2004,
      respectively                                                                   14             14
  Additional paid-in capital                                                     12,877         12,879
  Treasury shares (7,000 and 10,800 shares as of December 31, 2003 and
      2004, respectively)                                                           (20)           (29)
  Deferred stock compensation                                                      (274)          (208)
  Accumulated other comprehensive income                                             87            348
  Retained earnings (accumulated deficit)                                         1,780         (2,347)
                                                                              ---------      ---------

Total shareholders' equity                                                       14,464         10,657
-----                                                                         ---------      ---------

Total liabilities and shareholders' equity                                    $  18,182      $  15,323
-----                                                                         =========      =========
</TABLE>

*) Reclassification.

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


                                      F-4
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)

<TABLE>
<CAPTION>
                                                                 Year ended December 31,
                                                       ---------------------------------------------
                                                           2002             2003             2004
                                                       -----------      -----------      -----------
<S>                                                    <C>              <C>              <C>
Revenues (Note 16):
  Products sales                                       $     7,397      $     6,944      $     7,070
  Services                                                   2,390            2,286            2,343
                                                       -----------      -----------      -----------

Total revenues                                               9,787            9,230            9,413
-----                                                  -----------      -----------      -----------

Cost of revenues:
  Products sales                                             1,655            1,523            2,407
  Services                                                     241              326              407
                                                       -----------      -----------      -----------

Total cost of revenues                                       1,896            1,849            2,814
-----                                                  -----------      -----------      -----------

Gross profit                                                 7,891            7,381            6,599
                                                       -----------      -----------      -----------

Operating expenses:
  Research and development                                   2,127            1,825            2,362
  Selling and marketing                                      3,954            3,916            6,300
  General and administrative                                 1,858            1,830            2,101
                                                       -----------      -----------      -----------

Total operating expenses                                     7,939            7,571           10,763
-----                                                  -----------      -----------      -----------

Operating loss                                                 (48)            (190)          (4,164)
Financial income, net (Note 17a)                               134              124               78
Other income (expenses), net (Note 17b)                       (140)               6               --
                                                       -----------      -----------      -----------

Loss before taxes on income                                    (54)             (60)          (4,086)
Taxes on income (Note 13)                                       52              198              266
                                                       -----------      -----------      -----------

Loss before equity in earnings of affiliate                   (106)            (258)          (4,352)
Equity in earnings of affiliate                                236              345              225
                                                       -----------      -----------      -----------

Net income (loss)                                      $       130      $        87      $    (4,127)
                                                       ===========      ===========      ===========

Net earnings (loss) per share:

Basic net earnings (loss) per Ordinary share           $      0.03      $      0.02      $     (0.89)
                                                       ===========      ===========      ===========

Diluted net earnings (loss) per Ordinary share         $      0.03      $      0.02      $     (0.89)
                                                       ===========      ===========      ===========

Weighted average number of Ordinary shares used in
   computing basic net earning (loss) per share          4,709,796        4,617,099        4,634,413
                                                       ===========      ===========      ===========

Weighted average number of Ordinary shares used in
   computing diluted net earning (loss) per share        4,709,796        4,628,249        4,634,413
                                                       ===========      ===========      ===========
</TABLE>

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


                                      F-5
<PAGE>

<TABLE>
<CAPTION>
                                                                                            MER TELEMANAGEMENT SOLUTIONS LTD.
                                                                                                         AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------------------
U.S. dollars in thousands

                                                                                                                 Accumulated
                                                                     Additional                    Deferred         other
                                                        Share         paid-in       Treasury        stock       comprehensive
                                                       capital        capital        shares      compensation   income (loss)
                                                    ------------   ------------   ------------   ------------   ------------
<S>                                                 <C>            <C>            <C>            <C>            <C>
Balance as of January 1, 2002                       $         15   $     12,846   $       (158)  $         --   $       (410)
  Purchase of treasury shares                                 --             --           (172)            --             --
  Other comprehensive income:
    Unrealized losses on available-for-sale
      marketable securities, net                              --             --             --             --             (3)
    Foreign currency translation adjustments                  --             --             --             --            202

  Total other comprehensive income
  Net income                                                  --             --             --             --             --
                                                    ------------   ------------   ------------   ------------   ------------
  Total comprehensive income

Balance as of December 31, 2002                               15         12,846           (330)            --           (211)
  Exercise of options                               *)        --             --             --             --             --
  Employee stock based compensation                           --   **)      487             --    **)    (487)             --
  Amortization of deferred stock compensation                 --             --             --            213             --
  Retirement of treasury shares                               (1)          (456)           457             --             --
  Purchase of treasury shares                                 --             --           (147)            --             --
  Other comprehensive income:
    Unrealized gains on available-for-sale
      marketable securities, net                              --             --             --             --            109
    Foreign currency translation adjustments                  --             --             --             --            196
    Loss from cash flows hedging transaction                  --             --             --             --             (7)

  Total other comprehensive income
  Net income                                                  --             --             --             --             --
                                                    ------------   ------------   ------------   ------------   ------------
  Total comprehensive income

Balance as of December 31, 2003                               14         12,877            (20)          (274)            87
  Exercise of options                               *)        --              2             --             --             --
  Amortization of deferred stock compensation                 --             --             --             66             --
  Purchase of treasury shares                                 --             --             (9)            --             --
  Other comprehensive income:
    Unrealized gains on available-for-sale
      marketable securities, net                              --             --             --             --             83
    Foreign currency translation adjustments                  --             --             --             --            171
    Gain from cash flows hedging transaction                  --             --             --             --              7

  Total other comprehensive income
  Net loss                                                    --             --             --             --             --
                                                    ------------   ------------   ------------   ------------   ------------
  Total comprehensive loss

Balance as of December 31, 2004                     $         14   $     12,879   $        (29)          (208)  $        348
                                                    ============   ============   ============   ============    ============

Accumulated unrealized gains from
  available-for-sale marketable securities                                                                      $         86
Accumulated foreign currency
  translation adjustments                                                                                                262
                                                                                                                ------------
                                                                                                                $        348
                                                                                                                ============

<CAPTION>
                                                      Retained
                                                      earnings        Total           Total
                                                    (accumulated   comprehensive   shareholders'
                                                      Deficit)     income (loss)     equity
                                                    ------------   ------------    ------------
<S>                                                 <C>            <C>             <C>
Balance as of January 1, 2002                       $      1,563                   $     13,856
  Purchase of treasury shares                                 --                           (172)
  Other comprehensive income:
    Unrealized losses on available-for-sale
      marketable securities, net                              --   $         (3)             (3)
    Foreign currency translation adjustments                  --            202             202
                                                                   ------------
  Total other comprehensive income                                          199
  Net income                                                 130            130             130
                                                    ------------   ------------    ------------
  Total comprehensive income                                       $        329
                                                                   ============
Balance as of December 31, 2002                            1,693                         14,013
  Exercise of options                                                              *)        --
  Employee stock based compensation                           --                             --
  Amortization of deferred stock compensation                 --                            213
  Retirement of treasury shares                               --                             --
  Purchase of treasury shares                                 --                           (147)
  Other comprehensive income:
    Unrealized gains on available-for-sale
      marketable securities, net                              --   $        109             109
    Foreign currency translation adjustments                  --            196             196
    Loss from cash flows hedging transaction                  --             (7)             (7)
                                                                   ------------
  Total other comprehensive income                                                          298
  Net income                                                  87             87              87
                                                    ------------   ------------    ------------
  Total comprehensive income                                       $        385
                                                                   ============
Balance as of December 31, 2003                            1,780                         14,464
  Exercise of options                                         --                              2
  Amortization of deferred stock compensation                 --                             66
  Purchase of treasury shares                                 --                             (9)
  Other comprehensive income:
    Unrealized gains on available-for-sale
      marketable securities, net                              --   $         83              83
    Foreign currency translation adjustments                  --            171             171
    Gain from cash flows hedging transaction                  --              7               7
                                                                   ------------
  Total other comprehensive income                                          261
  Net loss                                                (4,127)        (4,127)         (4,127)
                                                    ------------   ------------    ------------
  Total comprehensive loss                                         $     (3,866)
                                                                   ============
Balance as of December 31, 2004                     $     (2,347)                  $     10,657
                                                    ============                   ============
</TABLE>

*) Represents an amount lower than $1.
**) Reclassification.
The accompanying notes are an integral part of the consolidated financial
statements.


                                      F-6
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands

<TABLE>
<CAPTION>
                                                                              Year ended December 31,
                                                                      ---------------------------------------
                                                                         2002           2003           2004
                                                                      ---------      ---------      ---------
<S>                                                                   <C>            <C>            <C>
Cash flows from operating activities:
-------------------------------------
  Net income (loss)                                                   $     130      $      87      $  (4,127)
  Adjustments required to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
      Loss (gain) on sale of available-for-sale and trading
        marketable securities, net                                          140             (6)            --
      Loss on sale of property and equipment                                  6             39              1
      Equity in earnings of affiliate                                      (236)          (345)          (225)
      Proceeds from trading securities, net                                  81             --             --
      Depreciation and amortization                                         501            401            399
      Deferred income taxes, net                                             29             23             33
      Employee stock-based compensation                                      --            213             66
      Accrued severance pay, net                                             (2)           (47)             2
      Decrease (increase) in trade receivables                              (87)          (132)           144
      Decrease (increase) in other accounts receivable and
        prepaid expenses                                                    215            (89)           175
      Decrease in inventories                                                82             47             15
      Increase (decrease) in trade payables                                (149)            43            326
      Increase (decrease) in accrued expenses and other
        liabilities                                                        (419)           (99)           611
      Increase (decrease) in deferred revenues                              187             35            (41)
      Others                                                                 11             (7)            --
                                                                      ---------      ---------      ---------

Net cash provided by (used in) operating activities                         489            163         (2,621)
                                                                      ---------      ---------      ---------

Cash flows from investing activities:
-------------------------------------
  Changes in related parties account, net                                   108             --             20
  Proceeds from sale of property and equipment                               26              5             22
  Purchase of property and equipment                                       (166)          (171)          (293)
  Capitalization of research and development costs                           --             --           (386)
  Investment in leasing deposit                                              --             --             (5)
  Proceeds from realization of short-term bank deposits                   1,942             --             --
  Investment in available for sale marketable securities                 (1,512)          (969)          (220)
  Investment in held-to-maturity marketable securities                     (476)            --             --
  Proceeds from sale of available-for-sale marketable securities          2,508            318            891
  Proceeds from redemption of held-to-maturity marketable
    securities                                                              201            275             --
  Acquisition of certain assets and liabilities of Teleknowledge
    (a)                                                                      --             --         (2,445)
  Dividend from an affiliate                                                190            100            136
  Others                                                                    (12)            16             50
                                                                      ---------      ---------      ---------

Net cash provided by (used in) investing activities                       2,809           (426)        (2,230)
                                                                      ---------      ---------      ---------
</TABLE>

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


                                      F-7
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands

<TABLE>
<CAPTION>
                                                                    Year ended December 31,
                                                           ---------------------------------------
                                                              2002           2003           2004
                                                           ---------      ---------      ---------
<S>                                                        <C>            <C>            <C>
Cash flows from financing activities:
-------------------------------------
  Changes in related parties, net                                  4             51             --
  Repayment of long-term loans                                   (55)            (8)            (8)
  Proceeds from exercise of options and warrants                  --      *)     --              2
  Purchase of treasury shares                                   (172)          (147)            (9)
                                                           ---------      ---------      ---------

Net cash used in financing activities                           (223)          (104)           (15)
                                                           ---------      ---------      ---------

Effect of exchange rate changes on cash and cash
   equivalents                                                    --            (11)            (4)
                                                           ---------      ---------      ---------

Increase (decrease) in cash and cash equivalents               3,075           (378)        (4,870)
Cash and cash equivalents at the beginning of the year         5,987          9,062          8,684
                                                           ---------      ---------      ---------

Cash and cash equivalents at the end of the year           $   9,062      $   8,684      $   3,814
                                                           =========      =========      =========

Supplemental disclosure of cash flows activities:
-------------------------------------------------
  Cash paid during the year for:
  Interest                                                 $      10      $       1      $       1
                                                           =========      =========      =========

  Income taxes                                             $      58      $      49      $      25
                                                           =========      =========      =========

      (a)   In conjunction with acquisition,
            the fair values of assets acquired
            and liabilities assumed at the date
            of acquisition were as follow (see
            Note 1c):

      Working capital (excluding cash and cash
        equivalents)                                                                     $      24
      Estimated fair value of assets acquired and
        liabilities assumed at the acquisition date:
      Property and equipment                                                                    40
      Goodwill                                                                               1,391
      Developed technology                                                                     690
      Customer relationship                                                                    300
                                                                                         ---------

                                                                                         $   2,445
                                                                                         =========
</TABLE>

*) Represents an amount lower than $ 1.
The accompanying notes are an integral part of the consolidated financial
statements.


                                      F-8
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 1:- GENERAL

      a.    Mer  Telemanagement  Solutions  Ltd.  (the  "Company"  or "MTS") was
            incorporated  on December 27, 1995. MTS and its  subsidiaries  ("the
            Group") designs, develops, markets and supports a comprehensive line
            of telecommunication management and customer care & billing ("CC&B")
            solutions that enable business  organizations  and other enterprises
            to improve the efficiency and performance of all IP operations,  and
            reduce  associated costs. The Group products include call accounting
            and  management  products,  fault  management  systems and web based
            management  solutions  for  converged  voice,  voice  over  Internet
            Protocol,  IP data  and  video  and  CC&B  solutions.  As for  MTS's
            subsidiaries, see Note 18.

      b.    MTS's  products  are  designed  to  provide   telecommunication  and
            information  technology managers with tools to reduce  communication
            costs,  recover charges payable by third parties,  and to detect and
            prevent  abuse and  misuse of  telephone  networks  including  fault
            telecommunication usage.

            The Group  markets  its  products  worldwide  through  distributors,
            business telephone  switching systems  manufacturers and vendors and
            its direct  sales force.  Several  international  private  automatic
            branch exchange ("PBX") manufacturers market the Group's products as
            part of  their  PBX  selling  efforts  or on an  Original  Equipment
            Manufacturer  ("OEM") basis.  The Group is highly dependent upon the
            active  marketing  and  distribution  of its OEM's.  If the Group is
            unable to effectively  manage and maintain a  relationship  with its
            OEM  or any  event  negatively  affecting  such  dealer's  financial
            condition,  could  cause a material  adverse  effect on the  Group's
            results of operations  and  financial  position.  In 2002,  2003 and
            2004, one major  customer  generated 36%, 40% and 38% of the Group's
            revenues, respectively.

            Certain  components  and  subassemblies   included  in  the  Group's
            products are  obtained  from a single  source or a limited  group of
            suppliers and subcontractors.  If such supplier fails to deliver the
            necessary  components or subassemblies,  the Company may be required
            to seek  alternative  sources of supply.  A change in supplier could
            result in manufacturing delays, which could cause a possible loss of
            sales  and,  consequently,  could  adversely  affect  the  Company's
            results of operations and financial position.

            MTS's shares are listed for trade on the Nasdaq SmallCap Market.

      c.    On December  30,  2004,  the Company  and  Teleknowledge  Group Ltd.
            ("Teleknowledge")  consummated an Assets  Purchase  Agreement  ("the
            Agreement").  TeleKnowledge  is a leading  provider of carrier-class
            billing and rating  solutions.  The  integration of  Teleknowledge's
            billing  solution  enables MTS to offer an end-to-end  customer care
            and billing solution.  Under the terms of the Agreement, the Company
            acquired  certain assets and  liabilities of  Teleknowledge  for the
            following consideration:

            1.    An initial consideration of $2,374 in cash.

            2.    Additional  contingent  consideration  of up to an  amount  of
                  $3,650   based  on  post   acquisition   revenue   performance
                  (calculated as 10% of renewal  maintenance fees and 20% of all
                  other  revenues  from  sales  which   included   Teleknowledge
                  products), over a period of three years. Such payments will be
                  recorded  as  additional  goodwill,   during  the  contingency
                  period, when actual revenue performance will be evaluated.


                                      F-9
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 1:- GENERAL (Cont.)

            3.    In addition,  the Company incurred  transaction costs totaling
                  $71.

            Prior  to  the  acquisition,   MTS  and  Teleknowledge  had  an  OEM
            relationship.  The commercial  arrangements  and  transactions  were
            settled before the date of the acquisition.

            The  acquisition  was  accounted  for under the  purchase  method of
            accounting  in  accordance  with  SFAS 141,  "Business  Combination"
            ("SFAS 141"). Accordingly,  the purchase price has been allocated to
            the  assets  acquired  and  the  liabilities  assumed  based  on the
            estimated fair value at the date of  acquisition.  The excess of the
            purchase  price  over the  estimated  fair  value of the net  assets
            acquired has been recorded as goodwill.

            Based  upon  a  valuation  of the  tangible  and  intangible  assets
            acquired and the liabilities  assumed, the Company has allocated the
            total cost of the acquisition to  Teleknowledge's  net assets at the
            date of acquisition, as follows:

               Trade receivables                                       $   100
               Property and equipment                                       40
                Intangible assets:
                   Developed technology (four-year useful life)            690
                   Customer relationship (six-year useful life)            300
                   Goodwill                                              1,391
                                                                       -------

                Total assets acquired                                    2,521
                                                                       -------
                Liabilities assumed:
                   Deferred revenues                                       (76)
                                                                       -------

                Total liabilities assumed                                  (76)
                                                                       -------

                Net assets acquired                                    $ 2,445
                                                                       =======

            The valuation of the Company's developed technology was based on the
            income  approach,  which reflects the future economic  benefits from
            Teleknowledge  products. The value assigned to customer relationship
            was based on the cost approach.  Under this  approach,  the customer
            relationship  was valued by calculating the savings  realized by the
            Company through  obtaining a pre-existing  customer  relationship of
            Teleknowledge.


                                      F-10
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 1:- GENERAL (Cont.)

            Pro forma results:

            The following  unaudited  proforma  information  does not purport to
            represent what the Company's  results of operations  would have been
            had the acquisitions  occurred on January 1, 2003 and 2004, nor does
            it purport to represent the results of operations of the Company for
            any future period.

<TABLE>
<CAPTION>
                                                                          Year ended December 31,
                                                                       ---------------------------
                                                                           2003            2004
                                                                       -----------     -----------
<S>                                                                    <C>             <C>
             Revenues                                                  $    10,128     $    10,542
                                                                       ===========     ===========

             Net loss from continuing operations                       $   (10,247)    $ *) (4,931)
                                                                       ===========     ===========
             Basic and diluted net loss per share for continuing
               operations                                              $     (2.22)    $     (1.06)
                                                                       ===========     ===========
            Weighted average number of Ordinary shares in
               computation of basic and diluted net loss per share       4,617,099       4,634,413
                                                                       ===========     ===========
</TABLE>

            *) Net of capital gain from sale of Teleknowledge to MTS.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

      The  consolidated  financial  statements  have been prepared in accordance
      with generally accepted accounting  principles in the United States ("U.S.
      GAAP").

      a.    Use of estimates:

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

      b.    Financial statements in U.S. dollars:

            The  majority  of the  revenues  of the  Company  and certain of its
            subsidiaries are generated in U.S.  dollars  ("dollar") or linked to
            the dollar. In addition,  a substantial portion of the Company's and
            certain of its subsidiaries' costs is incurred in dollars. Company's
            management  believes that the dollar is the primary  currency of the
            economic  environment  in  which  the  Company  and  certain  of its
            subsidiaries operate. Thus, the functional and reporting currency of
            the Company and certain of its subsidiaries is the dollar.

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


                                      F-11
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

            The financial  statements of foreign  subsidiaries  and  affiliates,
            whose  functional  currency  has been  determined  to be their local
            currency,  have been translated into dollars. Assets and liabilities
            have  been  translated  using  the  exchange  rates in effect at the
            balance  sheet date.  Statements  of  operations  amounts  have been
            translated  using the  average  exchange  rate for the  period.  The
            resulting  translation  adjustments  are  reported as a component of
            shareholders'  equity  in  accumulated  other  comprehensive  income
            (loss).

      c.    Principles of consolidation:

            The consolidated  financial  statements  include the accounts of MTS
            and its  wholly-owned  subsidiaries.  Intercompany  transactions and
            balances, including profits from intercompany sales not yet realized
            outside the Group, have been eliminated upon consolidation.

      d.    Cash equivalents:

            The Company considers all short-term highly liquid  investments that
            are readily  convertible  to cash with original  maturities of three
            months or less to be cash equivalents.

      e.    Marketable securities:

            The Company  accounts for investments in debt and equity  securities
            (other  than  those   accounted  for  under  the  equity  method  of
            accounting)  in accordance  with  Statement of Financial  Accounting
            Standard No. 115,  "Accounting  for Certain  Investments in Debt and
            Equity Securities" ("SFAS No. 115").

            Management   determines   the   classification   of  investments  in
            marketable  debt and equity  securities  at the time of purchase and
            reevaluates such designations as of each balance sheet date.

            As of December 31, 2004 and 2003,  all  marketable  securities  were
            designated as available-for-sale.  Accordingly, these securities are
            stated at fair value,  with unrealized  gains and losses reported in
            accumulated other comprehensive  income (loss), a separate component
            of shareholders'  equity, net of taxes. Realized gains and losses on
            sales of  investments,  as determined  on a specific  identification
            basis, are included in the consolidated Statement of Operations.

      f.    Inventories:

            Inventories  are  stated  at the  lower  of  cost or  market  value.
            Inventories write-offs are provided to cover risks arising from slow
            moving items or  technological  obsolescence.  Cost is determined as
            follows: Raw materials - using the "first in, first out" method with
            the addition of allocable  indirect  manufacturing  costs.  Finished
            products  are  recorded on the basis of direct  manufacturing  costs
            with the addition of allocable indirect manufacturing costs.


                                      F-12
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

      g.    Investments in an affiliate:

            In these financial  statements,  affiliated  company is company held
            50% (which is not a  subsidiary),  where the  Company  can  exercise
            significant  influence  over  operating and financial  policy of the
            affiliate.

            The investment in affiliated  company is accounted for by the equity
            method, in accordance with Accounting Principle Board Opinion No.18,
            "The Equity Method of Accounting  for  Investments in Common Stock",
            ("APB No.18").  Profits on intercompany  sales, not realized through
            sales to third parties, were eliminated.  The excess of the purchase
            price over the fair value of net tangible  assets  acquired has been
            attributed to goodwill.

            Goodwill is no longer  amortized,  but is reviewed annually (or more
            frequently if  circumstances  indicate  impairment has occurred) for
            impairment  in  accordance  with  the  provisions  of  Statement  of
            Financial   Accounting   Standard  No.  142,   "Goodwill  and  Other
            Intangible Assets" ("SFAS No. 142"). Before the adoption of SFAS No.
            142, goodwill was amortized on a straight-line  basis over 10 years,
            in accordance with APB Opinion No.17, "Intangible Assets".

            Under APB 18, a loss in value of an  investment  accounted for under
            the equity method,  which is other than a temporary decline,  should
            be recognized as a realized loss,  establishing a new carrying value
            for the  investment.  Factors the Company  considers  in making this
            evaluation  include:  the length of time and the extent to which the
            market value has been less than cost,  the  financial  condition and
            near-term  prospects  of the  issuer,  including  cash  flows of the
            investee and any specific  events which may influence the operations
            of the issuer and the  intent and  ability of the  Company to retain
            its  investments  for a period of time  sufficient  to allow for any
            anticipated  recovery in market  value.  A current  fair value of an
            investment that is less than its carrying amount may indicate a loss
            in value of the  investment.  No  impairment  losses  were  recorded
            during 2004.

      h.    Investment in other companies:

            The investment in these companies is stated at cost, since the Group
            does not have the ability to  exercise  significant  influence  over
            operating and financial policies of those investments. The Company's
            investments in other companies are reviewed for impairment  whenever
            events or changes in circumstances indicate that the carrying amount
            of an investment  may not be  recoverable,  in  accordance  with APB
            No.18. As of December 31, 2004,  based on  management's  most recent
            analyses, no impairment losses have been identified.


                                      F-13
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

      i.    Property and equipment:

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

                                                                  %
                                                      --------------------------

            Computers and peripheral equipment                    33
            Office furniture and equipment                      6 - 20
            Motor vehicles                                        15
            Leasehold improvements                     Over the shorter term of
                                                      the lease agreement or the
                                                          life of the asset

      j.    Impairment of long-lived assets:

            The Company's long-lived assets and certain identifiable intangibles
            are  reviewed  for  impairment  in  accordance   with  Statement  of
            Financial   Accounting   Standard  No.  144,   "Accounting  for  the
            Impairment  or  Disposal of  Long-Lived  Assets"  ("SFAS No.  144"),
            whenever  events  or  changes  in  circumstances  indicate  that the
            carrying amount of an asset may not be  recoverable.  Recoverability
            of assets to be held and used is  measured  by a  comparison  of the
            carrying  amount of an asset to the future  undiscounted  cash flows
            expected  to  be  generated  by  the  assets.  If  such  assets  are
            considered  to be  impaired,  the  impairment  to be  recognized  is
            measured  by the amount by which the  carrying  amount of the assets
            exceeds the fair value of the assets.  As of December 31,  2004,  no
            impairment losses have been identified.

      k.    Goodwill and other intangible assets:

            Goodwill  represents  excess  of the  costs  over the net  assets of
            business  acquired.  Under  SFAS No.  142,  goodwill  acquired  in a
            business  combination  on  or  after  July  1,  2001,  will  not  be
            amortized.  Goodwill that arose from  acquisitions  prior to July 1,
            2001 was amortized  until  December 31, 2001,  by the  straight-line
            method, over 10 years.

            SFAS No.  142  requires  goodwill  to be tested  for  impairment  on
            adoption and at least annually thereafter or between annual tests in
            certain circumstances,  and written down when impaired,  rather than
            being amortized as previous accounting standards required.  Goodwill
            is  tested  for  impairment  by  comparing  the  fair  value  of the
            reporting  unit with its carrying  value.  Fair value is  determined
            using  discounted  cash  flows.  Significant  estimates  used in the
            methodologies   include  estimates  of  future  cash  flows,  future
            short-term and long-term  growth rates, and weighted average cost of
            capital.  As of December 31, 2004,  no  impairment  losses have been
            identified. As for application of SFAS No. 142, see Note 10a.

            Developed  technology is amortized  over a weighted  average of four
            years and customer relationship is amortized over a weighted average
            of six years .


                                      F-14
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

      l.    Revenue recognition:

            The Company generates  revenues from licensing the rights to use its
            software  products  directly to  end-users  and  indirectly  through
            resellers and OEM's (who are considered end users). The Company also
            generates  revenues from rendering  maintenance,  service bureau and
            support.

            Revenues from software  license  agreements are recognized  when all
            criteria  outlined in  Statement  of Position  No.  97-2,  "Software
            Revenue  Recognition"  ("SOP No. 97-2") as amended are met.  Revenue
            from  license  fees is  recognized  when  persuasive  evidence of an
            agreement  exists,   delivery  of  the  product  has  occurred,   no
            significant  obligations with regard to implementation  remain,  the
            fee is fixed or determinable  and  collectibility  is probable.  The
            Company generally does not grant a right of return to its customers.

            Where software  arrangements  involve multiple elements,  revenue is
            allocated  to each  undelivered  element  based on  vendor  specific
            objective  evidence  ("VSOE") of the fair values of each undelivered
            element in the arrangement, in accordance with the "residual method"
            prescribed by SOP No. 98-9,  "Modification of SOP No. 97-2, Software
            Revenue Recognition With Respect to Certain Transactions".  The VSOE
            used by the Company to allocate the sales price to support  services
            and  maintenance  is based on the renewal  rate  charged  when these
            elements are sold separately. License revenues are recorded based on
            the  residual  method.   Under  the  residual  method,   revenue  is
            recognized for the delivered  elements when (1) there is VSOE of the
            fair  values of all the  undelivered  elements,  and (2) all revenue
            recognition  criteria of SOP No. 97-2,  as amended,  are  satisfied.
            Under  the  residual  method  any  discount  in the  arrangement  is
            allocated to the delivered element.

            Revenues from  maintenance and support  services are recognized over
            the life of the  maintenance  agreement  or at the time that support
            services are rendered.

            Deferred   revenues   include   unearned   amounts   received  under
            maintenance and support contracts, not yet recognized as revenues.

      m.    Research and development costs:

            Statement of Financial  Accounting Standards No. 86, "Accounting for
            the Costs of  Computer  Software  to be Sold,  Leased  or  Otherwise
            Marketed"  ("SFAS  No.  86"),  requires  capitalization  of  certain
            software  development  costs  subsequent  to  the  establishment  of
            technological   feasibility.   Based  on  the   Company's   and  its
            subsidiaries product development process,  technological feasibility
            is established upon completion of a working model.


                                      F-15
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

            Research and development costs incurred in the process of developing
            product  improvements  or new  products,  are  generally  charged to
            expenses  as  incurred,  net of  participation  of the Office of the
            Chief Scientist of Israel's Ministry of Industry and Trade.

            Significant  costs  incurred  by the  Company  and its  subsidiaries
            between  completion  of the working model and the point at which the
            product is ready for general release, have been capitalized.

            Capitalized  software  costs are  amortized  by the  greater  of the
            amount  computed  using the: 1) ratio of the current gross  revenues
            from sales of the  software to the total of current and  anticipated
            future  gross  revenues  from  sales  of  that  software,  or 2) the
            straight-line  method over the estimated  useful life of the product
            (three  years).  The Company  assesses  the  recoverability  of this
            intangible  asset on a  regular  basis by  determining  whether  the
            amortization  of the asset over its remaining  life can be recovered
            through  undiscounted  future operating cash flows from the specific
            software product sold. Based on its most recent analyses, management
            believes  that no  impairment of  capitalized  software  development
            costs exists as of December 31, 2004.

      n.    Government grants:

            Royalty-bearing  grants  from the  Government  of Israel for funding
            certain approved research and development projects are recognized at
            the time the Company is entitled to such grants, on the basis of the
            related  costs  incurred and recorded as a deduction of research and
            development costs.

      o.    Income taxes:

            The Company  accounts for income taxes, in accordance with Statement
            of Financial  Accounting  Standard No. 109,  "Accounting  for Income
            Taxes" ("SFAS No. 109").  This  statement  prescribes the use of the
            liability method whereby  deferred tax assets and liability  account
            balances  are  determined  based on  differences  between  financial
            reporting and tax bases of assets and  liabilities  and are measured
            using the enacted tax rates and laws that will be in effect when the
            differences  are  expected  to  reverse.  Valuation  allowances  are
            provided to reduce deferred tax assets to their estimated realizable
            value.

      p.    Accounting for stock-based compensation:

            The  Company  has  elected  to follow  Accounting  Principles  Board
            Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No.
            25")  and  FASB  Interpretation  No.  44,  "Accounting  for  Certain
            Transactions   Involving  Stock  Compensation"  ("FIN  No.  44")  in
            accounting  for its employee  stock option plans.  Under APB No. 25,
            when the exercise price of the Company's  stock options is less than
            the  market  price of the  underlying  shares  on the date of grant,
            compensation expense is recognized.


                                      F-16
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

            The  Company   adopted  the   disclosure   provisions  of  Financial
            Accounting  Standards  Board  Statement  No.  148,  "Accounting  for
            Stock-Based  Compensation  - Transition and  Disclosure"  ("SFAS No.
            148"),  which  amended  certain  provisions  of SFAS 123 to  provide
            alternative  methods of  transition  for an entity that  voluntarily
            changes to the fair value based method of accounting for stock-based
            employee  compensation,  effective  as of the  beginning  2003.  The
            Company  continues  to  apply  the  provisions  of APB  No.  25,  in
            accounting for stock-based compensation.

            Pro forma information  regarding the Company's net income (loss) and
            net  earnings  (loss) per share is  required by SFAS No. 123 and has
            been  determined  as if the Company had  accounted  for its employee
            stock  options  under the fair value method  prescribed  by SFAS No.
            123.

            The  fair  value  for  options  granted  in  2002,  2003 and 2004 is
            amortized  over their  vesting  period and  estimated at the date of
            grant using a Black-Scholes options pricing model with the following
            weighted average assumptions:

<TABLE>
<CAPTION>
                                                                Year ended December 31,
                                                        -----------------------------------------
                                                           2002            2003            2004
                                                        ---------       ---------       ---------
<S>                                                     <C>             <C>             <C>
            Dividend                                            0%              0%              0%
            Average risk-free interest rates                    2%              2%           2.79%
            Average expected life (in years)                    4             2.5            4.71
            Volatility                                       66.8%           71.8%          53.37%

            Pro forma information under SFAS No. 123, is as follows:

<CAPTION>
                                                                Year ended December 31,
                                                        -----------------------------------------
                                                           2002            2003            2004
                                                        ---------       ---------       ---------
<S>                                                     <C>             <C>             <C>
            Net income (loss), available to
              ordinary shares as reported               $     130       $      87       $  (4,127)
            Add: Stock-based employee compensation
              - intrinsic value                                --             213              66
            Deduct: Total stock-based compensation
              expense determined under fair value
              method for all awards, net of related
              tax effect                                     (177)           (346)           (274)
                                                        ---------       ---------       ---------

            Pro forma net loss                          $     (47)      $     (46)      $  (4,335)
                                                        =========       =========       =========
            Basic and diluted net earnings (loss)
              per share, as reported                    $    0.03       $    0.02       $   (0.89)
                                                        =========       =========       =========
            Basic and diluted net loss per share,
              pro forma                                 $   (0.01)      $      --       $   (0.94)
                                                        =========       =========       =========
</TABLE>


                                      F-17
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

            The Company applies Statement of Financial  Accounting  Standard No.
            123, "Accounting for Stock-Based  Compensation" ("SFAS No. 123") and
            Emerging Issues Task Force No. 96-18 ("EITF No. 96-18"), "Accounting
            for Equity  Instruments  That are Issued to Other Than Employees for
            Acquiring,  or in Conjunction with Selling,  Goods or Services" with
            respect to options  issued to  non-employees.  SFAS No. 123 requires
            use of an option  valuation  model to measure  the fair value of the
            options at the measurement date.

      q.    Warranty costs:

            The Company  provides free warranty for up to one year for end-users
            and up to 15  months  for the "OEM"  distributors.  A  provision  is
            recorded for probable costs in connection  with these services based
            on the Company's experience.

            The Company estimates the costs that may be incurred under its basic
            limited warranty and records a liability in the amount of such costs
            at the time product  revenue is recognized.  Factors that affect the
            Company's  warranty  liability  include  the  number of sold  units,
            historical and anticipated  rates of warranty  claims,  and cost per
            claim.  The  Company  periodically  assesses  the  adequacy  of  its
            recorded warranty  liabilities and adjusts the amounts as necessary.
            No changes in the Company's  product  liability were recorded during
            the period and the provision  for the year ending  December 31, 2004
            amounted to $ 22.

      r.    Fair value of financial instruments:

            The  following  methods  and  assumptions  were used by the Group in
            estimating its fair value disclosures for financial instruments:

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

            The fair value for  marketable  securities is based on quoted market
            prices (see Note 3).

            Long-term loans - The carrying  amounts of the Company's  borrowings
            under its long-term agreements,  both as a lender and as a borrower,
            approximate their fair value.

      s.    Severance pay:

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


                                      F-18
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

            The deposited  funds may be withdrawn  only upon the  fulfillment of
            the  obligation  pursuant  to  Israel's  Severance  Pay Law or labor
            agreements.  The value of the  deposited  funds is based on the cash
            surrendered  value  of  these  policies,   and  includes  immaterial
            profits.

            Severance  expenses for the years ended December 31, 2002,  2003 and
            2004 amounted to approximately $ 104, $ 13 and $ 164, respectively.

      t.    Concentrations of credit risk:

            Financial  instruments  that  potentially  subject  the  Company  to
            concentrations  of credit risk consist  principally of cash and cash
            equivalents, trade receivables,  marketable securities and long-term
            loans.

            Cash and cash  equivalents  are deposited with major banks in Israel
            and major banks in United  States.  Such deposits in the U.S. may be
            in  excess  of   insured   limit  and  are  not   insured  in  other
            jurisdictions.  Management believes that the financial  institutions
            that hold the  Company's  investments  are  financially  sound,  and
            accordingly,  minimal  credit  risk  exists  with  respect  to these
            investments.

            The trade  receivables  of the Company are mainly derived from sales
            to  customers  in the U.S.  and Europe  (see Note 16).  The  Company
            performs ongoing credit evaluations of its customers.  The allowance
            for doubtful  accounts is determined  with respect to specific debts
            that are doubtful of collection  according to management  estimates.
            In certain circumstances, the Company may require letters of credit,
            other collateral or additional guarantees.

            The Company's  marketable  securities  include mainly investments in
            corporate  debts and  mutual  funds.  Management  believes  that the
            portfolio is well diversified, and accordingly,  minimal credit risk
            exists with respect to these marketable securities.

            The Company has no  off-balance-sheet  concentration  of credit risk
            such as  foreign  exchange  contracts,  option  contracts  or  other
            foreign hedging arrangements.

      u.    Basic and diluted net earnings (loss) per share:

            Basic  net  earnings  (loss)  per  share  is  computed  based on the
            weighted average number of Ordinary shares  outstanding  during each
            year. Diluted net earnings (loss) per share is computed based on the
            weighted average number of Ordinary shares  outstanding  during each
            year, plus potential  Ordinary shares considered  outstanding during
            the year,  in  accordance  with  Statement of  Financial  Accounting
            Standard No. 128, "Earnings Per Share" ("SFAS No. 128").

            The total  number  of  shares  related  to the  outstanding  options
            excluded  from the  calculation  of diluted net earnings  (loss) per
            share was 757,580  766,141 and 667,101 for the years ended  December
            31, 2002, 2003 and 2004, respectively.


                                      F-19
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

      v.    Derivatives and hedging:

            To protect  against the  reduction  in value of  forecasted  foreign
            currency cash flows  resulting from export sales over the next year,
            the Company hedged portions of its forecasted revenue denominated in
            foreign currencies with forward contracts.  During 2004, the Company
            realized all its forward derivatives.

            Financial  Accounting Standards Board Statement No. 133, "Accounting
            for Derivative Instruments and Hedging Activities" ("SFAS No. 133"),
            requires companies to recognize all of their derivative  instruments
            as either  assets  or  liabilities  in the  statement  of  financial
            position at fair value. The accounting for changes in the fair value
            (i.e.,  gains or  losses)  of a  derivative  instrument  depends  on
            whether it has been  designated  and  qualifies as part of a hedging
            relationship and further, on the type of hedging  relationship.  For
            those  derivative  instruments  that are  designated  and qualify as
            hedging   instruments,   a  company  must   designate   the  hedging
            instrument,  based upon the exposure  being hedged,  as a fair value
            hedge,  cash flow hedge or a hedge of a net  investment in a foreign
            operation.

            For derivative instruments that are designated and qualify as a cash
            flow hedge (i.e.,  hedging the exposure to  variability  in expected
            future cash flows that is  attributable to a particular  risk),  the
            effective  portion of the gain or loss on the derivative  instrument
            is  reported  as a  component  of  other  comprehensive  income  and
            reclassified into earnings in the same line item associated with the
            forecasted  transaction  in the same period or periods  during which
            the hedged transaction affects earnings.  The remaining gain or loss
            on the derivative  instrument in excess of the cumulative  change in
            the present  value of future cash flows of the hedged item,  if any,
            is recognized in other income/expense in current earnings during the
            period of change.

            During  2004 and 2003,  there  were no  significant  gains or losses
            recognized in earning for hedge ineffectivness.

      w.    Impact of recently issued accounting standards:

            On December16, 2004, the FASB issued FASB Statement No. 123 (revised
            2004), "Share Based Payment",  which is a revision of FASB Statement
            No.  123,  "Accounting  for Stock Based  Compensation".  SFAS 123(R)
            supersedes  APB  Opinion  No. 25,  "Accounting  for Stock  Issued to
            Employees",  and amends FASB  Statement  No. 95,  "Statement of Cash
            Flow". Generally,  the approach adopted by SFAS 123(R) is similar to
            the  approach  described  in  Statement  123.  However,  SFAS 123(R)
            requires all share-based payments to employees,  including grants of
            employee  stock  options,  to be recognized in the income  statement
            based on their  fair  value.  Pro forma  disclosure  is no longer an
            alternative.

            SFAS  123(R)  must be adopted  by no later than July 1, 2005.  Early
            adoption is permitted in periods in which financial  statements have
            not yet been  issued.  The  Company  expects to adopt SFAS 123(R) on
            July 1, 2005.


                                      F-20
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

            SFAS 123(R) permits  companies to adopt its requirement using one of
            the two methods:

            1.    A "modified  prospective" method in which compensation cost is
                  recognized  beginning with the effective date (a) based on the
                  requirements  of  SFAS  123(R)  for all  share-based  payments
                  granted  after  the  effective  date  and  (b)  based  on  the
                  requirements   of  SFAS  123(R)  for  all  awards  granted  to
                  employees prior to the effective date of SFAS 123R that remain
                  unvested on the effective date.

            2.    A  "modified   retrospective"   method   which   includes  the
                  requirements  of the  modified  prospective  method  described
                  above,  but also  permits  entities  to  restate  based on the
                  amounts  previously  recognized under SFAS 123(R) for purposes
                  of  pro  forma  disclosures  either:  (a)  all  prior  periods
                  presented or (b) prior interim period of the year of adoption.

                  As permitted by SFAS 123, the Company  currently  accounts for
                  share based  payments to employees  using the APB 25 intrinsic
                  value   method  and,   as  such,   generally   recognizes   no
                  compensation cost for employee stock options. Accordingly, the
                  adoption  of  SFAS  123(R)  fair  value  method  will  have  a
                  significant  impact on the  Company's  result  of  operations,
                  although  it will  have no  impact  on the  Company's  overall
                  financial position.  The impact of the adoption of SFAS 123(R)
                  cannot be  predicted  at this time  because it will  depend on
                  levels of share based payments granted in the future. However,
                  had the  Company  adopted  SFAS 123(R) in prior  periods,  the
                  impact of that Standard would have  approximated the impact of
                  SFAS 123 as  described  in the  disclosure  of pro  forma  net
                  income and earnings (loss) per share in above.

                  In November  2004,  the FASB  issued  Statement  of  Financial
                  Accounting Standard No. 151, "Inventory Costs, an Amendment of
                  ARB No. 43, Chapter 4" ("SFAS151"). SFAS 151 amends Accounting
                  Research  Bulletin  ("ARB") No. 43, Chapter 4, to clarify that
                  abnormal  amounts of idle facility  expense,  freight handling
                  costs and wasted materials  (spoilage) should be recognized as
                  current-period  charges.  In addition,  SFAS 151 requires that
                  allocation  of  fixed  production  overheads  to the  costs of
                  conversion  be  based on  normal  capacity  of the  production
                  facilities. SFAS 151 is effective for inventory costs incurred
                  during fiscal years beginning after June 15, 2005. The Company
                  does not  expect  that the  adoption  of SFAS 151 will  have a
                  material  effect  on its  financial  position  or  results  of
                  operations.

                  Reclassification:

                  Certain  amounts  from prior years  referring  to the employee
                  stock based  compensation  have been  reclassified  to conform
                  current periods representation.


                                      F-21
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 3:- MARKETABLE SECURITIES

      The  following  is a summary of the  Company's  investment  in  marketable
      securities:

<TABLE>
<CAPTION>
                                             December 31, 2003                                    December 31, 2004
                            ---------------------------------------------------   -------------------------------------------------
                                            Gross        Gross                                    Gross       Gross
                             Amortized    unrealized   unrealized    Fair market  Amortized    unrealized   unrealized   Fair market
                               cost         gains        losses         value        cost         gains       losses        value
                            ----------   ----------    ----------    ----------   ----------   ----------   ----------   ----------
<S>                         <C>          <C>           <C>           <C>          <C>          <C>          <C>          <C>
      Available-for-sale:
       Mutual funds         $      623   $        5    $       --    $      628   $      506   $       60   $       --   $      566
       Equity securities            51           12            --            63           25            8           33
       Corporate bonds             702           --            (8)          694          368            8           --          376
       Israeli Government
        debts                      265           --            (6)          259           72           10                        82
                            ----------   ----------    ----------    ----------   ----------   ----------   ----------   ----------

                            $    1,641   $       17    $      (14)   $    1,644   $      971   $       86   $       --   $    1,057
                            ==========   ==========    ==========    ==========   ==========   ==========   ==========   ==========
</TABLE>

      The  gross  realized   gains  (losses)  on  sales  of   available-for-sale
      securities  totaled  $ 6 and $ 0 in 2003 and 2004,  respectively.  The net
      adjustment to  unrealized  holding  gains  (losses) on  available-for-sale
      securities  included  as a separate  component  of  shareholders'  equity,
      "Accumulated other  comprehensive  gains (losses)" amounted to $ 109 and $
      83 in 2003 and 2004, respectively.

      The amortized cost and fair value of debt and marketable equity securities
      as of December 31, 2004, by contractual maturity, are shown below.

                                                          December 31, 2004
                                                       -----------------------
                                                       Amortized    Fair market
                                                          cost         value
                                                       ----------   ----------

      Matures in one year                              $      368   $      376
      Matures after one year through nine years                72           82
      Equity securities and mutual funds                      531          599
                                                       ----------   ----------

      Total                                            $      971   $    1,057
                                                       ==========   ==========


                                      F-22
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 4:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

                                                            December 31,
                                                       -----------------------
                                                           2003         2004
                                                       ----------   ----------

      Government authorities                            $      232   $      117
      Prepaid expenses                                         103          149
      Deferred income taxes (1)                                 66           66
      Others                                                   165           59
                                                        ----------   ----------

                                                        $      566   $      391
                                                        ==========   ==========

      (1) See Note 13f

NOTE 5:- INVENTORIES

      Raw materials                                     $       73   $       76
      Finished products                                        120          102
                                                        ----------   ----------

                                                        $      193   $      178
                                                        ==========   ==========

      The Company  periodically  assesses its inventory  valuation in accordance
      with its revenues forecasts,  technological  obsolescence,  and the market
      conditions.  Marked down  inventory that is expected to be sold at a price
      lower than the carrying value is not material.

NOTE 6:- INVESTMENTS IN AFFILIATE

      a.    Composed as follows:

                                                                December 31,
                                                           ---------------------
                                                              2003        2004
                                                           ---------   ---------

        Investment in Jusan S.A. (50% owned)
          Equity, net (1)                                  $   1,824   $   2,084
          Goodwill                                                35          35
                                                           ---------   ---------

                                                           $   1,859   $   2,119
                                                           =========   =========

        (1) Investment as of purchase date                 $   1,171   $   1,171
            Foreign currency translation adjustments             143         316
            Accumulated net earnings                             510         597
                                                           ---------   ---------

                                                           $   1,824   $   2,084
                                                           =========   =========

        Dividend received from Jusan S.A. during the year  $     100   $     136
                                                           =========   =========


                                      F-23
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 6:- INVESTMENTS IN AFFILIATE (Cont.)

      b.    Summarized financial information of Jusan S.A. (50% owned):

                                                             December 31,
                                                        ----------------------
                                                           2003         2004
                                                        ---------    ---------

         Current assets                                 $   5,266    $   5,552
         Non-current assets                             $      99    $      68
         Current liabilities                            $  (1,861)   $  (1,438)

                                                  Year ended December 31,
                                           ------------------------------------
                                              2002         2003         2004
                                           ----------   ----------   ----------

         Revenues                          $    6,848   $    6,049   $    6,892
         Gross profit                      $    3,260   $    3,079   $    3,158
         Net income                        $      708   $      594   $      444

NOTE 7:- LONG-TERM LOANS

      a.    Composed as follows:

                                                              December 31,
                                                        -----------------------
                                                           2003         2004
                                                        ----------   ----------

            Loans to others in NIS - unlinked (1)       $      131   $       84
            Less - current maturities (2)                       36           39
                                                        ----------   ----------
                                                        $       95   $       45
                                                        ==========   ==========

            (1)   The weighted average interest rate for the year ended December
                  31, 2004 and 2003 is 6.375%.

            (2)   Included in other accounts receivable.

      b.    As  of  December  31,  2004,  the  aggregate  annual  maturities  of
            long-term loans are as follows:

                                                                    December 31,
                                                                    -----------

            2005 (current maturities)                               $        39
            2006                                                             36
            2007                                                              9
                                                                    -----------
                                                                    $        84
                                                                    ===========


                                      F-24
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 8:- OTHER INVESTMENTS

                                                              December 31,
                                                        -----------------------
                                                           2003          2004
                                                        ----------   ----------

            Long-term leasing deposits (1)              $       21   $       26
            Investment in other companies                      347          347
                                                        ----------   ----------
                                                        $      368   $      373
                                                        ==========   ==========

            (1)   Linked to the Israeli CPI.

NOTE 9:- PROPERTY AND EQUIPMENT, NET

            Cost:
              Computers and peripheral equipment       $    2,528   $    2,838
              Office furniture and equipment                  536          558
              Motor vehicles                                   96           62
              Leasehold improvements                          100          112
                                                       ----------   ----------
                                                            3,260        3,570
                                                       ----------   ----------
            Accumulated depreciation:
              Computers and peripheral equipment            2,300        2,454
              Office furniture and equipment                  358          407
              Motor vehicles                                   64           55
              Leasehold improvements                           56           73
                                                       ----------   ----------
                                                            2,778        2,989
                                                       ----------   ----------
            Depreciated cost                           $      482   $      581
                                                       ==========   ==========

            The depreciation expense for the years ended December 31, 2002, 2003
            and 2004 was $ 347, $ 247 and $ 211, respectively.


                                      F-25
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 10:- GOODWILL AND OTHER ASSETS

      a.    Goodwill:

            The changes in the  carrying  amount of goodwill  for the year ended
            December 31, 2004 are as follows:

            Balance as of December 31, 2003                          $    2,024
            Goodwill acquired during year (see Note 1c)                   1,391
            Impairment losses                                                --
                                                                     ----------
            Balance as of December 31, 2004                          $    3,415
                                                                     ==========

      b.    Other intangibles consist of the following:

                                                              December 31,
                                                        -----------------------
                                                            2003        2004
                                                        ----------   ----------

              Cost:
              Development technology                    $      750   $    1,440
              Capitalized software developed costs              --          386
              Customer relationship                             --          300
                                                        ----------   ----------
                                                               750        2,126
                                                        ----------   ----------
            Accumulated amortization:
              Development technology                           544          700
              Capitalized software developed costs              --           32
              Customer relationship                             --           --
                                                        ----------   ----------
                                                               544          732
                                                        ----------   ----------
                                                        $      206   $    1,394
                                                        ==========   ==========

      c.    Amortization expenses amounted to $ 154, $ 154 and $ 188 for each of
            the years ended December 31, 2002, 2003 and 2004.

      d.    Estimated amortization expenses for the years ended:

            December 31,
            ------------

            2005                                    273
            2006                                    223
            2007                                    222
            2008                                    222
            2009 and further                        100


                                      F-26
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 11:- ACCRUED EXPENSES AND OTHER LIABILITIES

                                                              December 31,
                                                        -----------------------
                                                            2003         2004
                                                        ----------   ----------

            Employees and payroll accruals              $      473   $      799
            Income tax payable                                 242          330
            Accrued expenses                                   456          646
            Customer advances                                  203          204
            Related parties                                     47           63
                                                        ----------   ----------
                                                        $    1,421   $    2,042
                                                        ==========   ==========

NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES

      a.    Lease commitments:

            The facilities of the Company are rented under operating  leases for
            periods ending in 2006.

            Future  minimum lease  commitments  under  non-cancelable  operating
            leases as of December 31 are as follows:

            2005                    $   399
            2006                        130
                                    -------
                                    $   529
                                    =======

            Lease expenses for the years ended December 31, 2002, 2003 and 2004,
            were approximately $ 446, $ 372 and $ 334, respectively.

      b.    Royalty commitments:

            1.    The Company is committed to pay royalties to the Office of the
                  Chief  Scientist  of the  Ministry  of  Trade  ("OCS")  of the
                  Government  of  Israel  on  proceeds  from  sales of  products
                  resulting from the research and development  projects in which
                  the Government participated.  In the event that development of
                  a  specific   product  in  which  the  OCS   participated   is
                  successful,  the Company will be obligated to repay the grants
                  through royalty  payments at the rate of 3% to 5% based on the
                  sales of the Company,  up to 100%-150% of the grants  received
                  linked to the dollar. As of December 31, 2004, the Company has
                  a  contingent  liability  to pay  royalties in the amount of $
                  7,429.  The  obligation  to pay these  royalties is contingent
                  upon actual sales of the products  and, in the absence of such
                  sales, no payment is required.

                  The  Company  has  paid or  accrued  royalties  in its cost of
                  revenues  relating  to the  repayment  of such  grants  in the
                  amount of $ 132, $ 146 and $ 181 for the years ended  December
                  31, 2002, 2003 and 2004, respectively.


                                      F-27
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

            2.    The Israeli Government,  through the Fund for Encouragement of
                  Marketing   Activities,   awarded  the   Company   grants  for
                  participation in foreign  marketing  expenses.  The Company is
                  committed  to pay  royalties at the rate of 3% of the increase
                  in  export  sales,  up to the  amount of the  grants  received
                  linked  to the U.S.  dollar.  As of  December  31,  2004,  the
                  Company has a contingent  obligation  to pay  royalties in the
                  amount of $ 259. During the three years ending on December 31,
                  2004, the Company accrued royalties in the amount of $129.

      c.    Claim and demand:

            In April 2000, the tax authorities in Israel issued to the Company a
            demand for a tax payment, for the period of 1997-1999, in the amount
            of approximately NIS 6 million ($ 1,350).

            The Company has appealed to the Israeli district court in respect of
            the  abovementioned  tax  demand.  Based on the opinion of its legal
            counsel,  the Company  believes that certain  defenses can be raised
            against the demand of the tax authorities. The Company believes that
            the outcome of this matter will not have a material  adverse  effect
            on its financial  position or results of operations and, the Company
            provided a  provision  in the amount of $464 , based on the  current
            evidence and on the basis of the said  opinion of its legal  counsel
            that, in the opinion of Company, is an adequate provision.

NOTE 13:- TAXES ON INCOME

      a.    Tax  benefits  under  the  Law  for  the  Encouragement  of  Capital
            Investments, 1959 ("the Law"):

            MTS was granted the status of an "Approved Enterprise" under the Law
            in respect of expansion projects. According to the provisions of the
            Law, MTS elected to enjoy the  "alternative  benefits " - the waiver
            of grants in return for a tax  exemption  and,  accordingly,  income
            derived from the "Approved Enterprise" is tax-exempt for a period of
            two years,  commencing  with the year it first earns taxable income,
            and subject to corporate tax at the rate of 10%- 25%, for additional
            periods of five to eight years.

            The expansion programs which are assigned to MTS are as follows:

            1.    One  program  entitled  MTS to  tax-exemption  for a  two-year
                  period ended  December  31, 1999,  and is subject to a reduced
                  tax rate of 10%-25%  for a five to eight years  period  ending
                  December 31, 2004.

            2.    The current  program  entitles MTS to tax  exemption for a two
                  year  period and it is subject to a tax rate of 10%-25% for an
                  additional  period of five to eight  years . The  benefits  in
                  respect of this program have not yet commenced.

            3.    During  2004 the  Company  received  an  additional  expansion
                  program  which  entitles MTS to tax  exemption  for a two year
                  period and to a reduced  tax rate of  10%-25%  for a five year
                  period.  The  benefits in respect of this program have not yet
                  commenced.


                                      F-28
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 13:- TAXES ON INCOME (Cont.)

            The period of tax benefits  detailed  above is subject to a limit of
            the earlier of 12 years from the  commencement  of  production or 14
            years from receiving the approval.

            The  entitlement  to the above  benefits is  conditional  upon MTS's
            fulfilling the conditions  stipulated by the above Law,  regulations
            published  thereunder  and the letters of approval  for the specific
            investment  in  "Approved  Enterprises".  In the event of failure to
            comply with these  conditions,  the benefits may be canceled and MTS
            may be required to refund the amount of the benefits, in whole or in
            part,  including  interest.  As of  December  31,  2004,  management
            believes that MTS is meeting all of the aforementioned conditions.

            The tax-exempt  income  attributable  to the "Approved  Enterprise",
            amounting to $2,250 as of December 31, 2004,  can be  distributed to
            shareholders  without subjecting MTS to taxes only upon the complete
            liquidation of MTS. MTS has determined that such  tax-exempt  income
            will not be  distributed  as dividends and  permanently  re-invested
            these profits.  Accordingly, no deferred taxes have been nor will be
            provided on income attributable to MTS's "Approved Enterprise".

            Should the retained  tax-exempt  income be  distributed  in a manner
            other than in the complete  liquidation of MTS, it would be taxed at
            the corporate tax rate  applicable to such profits as if MTS had not
            elected the  alternative  tax  benefits  (currently - 10%-25% for an
            "Approved Enterprise").

            Should MTS and its Israeli  subsidiary  derive  income from  sources
            other than an "Approved Enterprise",  they will be subject to tax at
            the regular rate of 35%.

            Since MTS is operating more than one "Approved Enterprise" and since
            part of its taxable income is not entitled to tax benefits under the
            abovementioned  law and is taxed at the regular  corporate tax rate,
            its  effective tax rate is the result of a weighted  combination  of
            the various applicable rate and tax exemptions,  and the computation
            is made  for  income  derived  from  each  program  on the  basis of
            formulas specified in the law and in the approvals.

      b.    Measurement  of results  for tax  purposes  under the Income Tax Law
            (Inflationary Adjustments), 1985:

            Results for tax  purposes  are  measured in terms of earnings in NIS
            after  certain  adjustments  for  increases in the Israeli  Consumer
            Price  Index  ("CPI").  As  explained  in  Note  2b,  the  financial
            statements  are  presented in dollars.  The  difference  between the
            annual change in the CPI and in the NIS/dollar  exchange rate causes
            a further  difference  between  taxable income and the income before
            taxes  presented in the financial  statements.  In  accordance  with
            paragraph 9(f) of SFAS 109, MTS and its Israeli  subsidiary have not
            provided for deferred  income  taxes on the  difference  between the
            functional currency and the tax bases of assets and liabilities.


                                      F-29
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 13:- TAXES ON INCOME (Cont.)

      c.    Tax  benefits  under  the  Law  for the  Encouragement  of  Industry
            (Taxation), 1969:

            MTS is currently  qualified  as an  "industrial  company"  under the
            above 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
            intangible property rights as a deduction for tax purposes.

      d.    Net operating losses carryforwards:

            As of December 31, 2004, the Company and its subsidiaries in Israel,
            Asia,  U.S. and Holland have an estimated  total amount of available
            carryforward tax losses of $5,717, $ 290, $210 and $ 0, respectively
            to offset against future taxable profits.

            The tax loss  carryforward  in  Israel  may be  offset  indefinitely
            against  operating income.  The operating loss  carryforwards of MTS
            and its Israeli subsidiary, which can be used indefinitely, amounted
            to approximately $5,717.

      e.    Tax assessments:

            Regarding  the claim from the tax  authorities  in Israel,  see Note
            12c. The Company has received final tax  assessments  until the 1996
            tax year.

      f.    Deferred income taxes:

            Deferred taxes reflect the net tax effects of temporary  differences
            between the carrying amounts of assets and liabilities for financial
            reporting  purposes  and the amounts  used for income tax  purposes.
            Significant components of the Company's deferred tax liabilities and
            assets are as follows:

<TABLE>
<CAPTION>
                                                                                December 31,
                                                                         ------------------------
                                                                             2003          2004
                                                                         ----------    ----------

<S>                                                                      <C>           <C>
            Tax loss carryforwards of the Company                        $      845    $    1,291

            Allowances for doubtful accounts and accruals for employee
              benefits                                                          121           122
            In respect of marketable securities                                  84            76
            Capitalized software and other intangible assets                    134            93
            Other                                                                 5           190
                                                                         ----------    ----------

            Net deferred tax asset before valuation allowance                 1,189         1,772
            Valuation allowance                                              (1,017)       (1,633)
                                                                         ----------    ----------

            Net deferred income taxes                                    $      172    $      139
                                                                         ==========    ==========
            Presented as follows:
              Current assets - foreign                                   $       66    $       66
                                                                         ==========    ==========

              Other assets - foreign                                     $       73    $       73
                                                                         ==========    ==========

              Other assets - domestic                                    $       33    $       --
                                                                         ==========    ==========
</TABLE>


                                      F-30
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 13:- TAXES ON INCOME (Cont.)

            MTS  and  certain  of  its  subsidiaries  have  provided   valuation
            allowances in respect of deferred tax assets resulting from tax loss
            carryforward  and other  temporary  differences,  since  they have a
            history of losses over the past years. Management currently believes
            that it is more  likely  than  not  that  part of the  deferred  tax
            regarding the loss  carryforward  in the Company and other temporary
            differences will not be realized in the foreseeable future.

      g.    A reconciliation  between the theoretical tax expense,  assuming all
            income is taxed at the  statutory  tax rate  applicable to income of
            the Company and the actual tax expense as reported in the statements
            of operations, is as follows:

<TABLE>
<CAPTION>
                                                                       Year ended December 31,
                                                               ----------------------------------------
                                                                   2002          2003           2004
                                                               ----------     ----------     ----------
<S>                                                            <C>            <C>            <C>
             Loss before taxes as reported in the statements
               of operations                                   $      (54)    $      (60)    $   (4,086)
                                                               ==========     ==========     ==========

             Tax rates                                                 36%            36%            35%
                                                               ==========     ==========     ==========

             Theoretical tax benefit                           $      (19)    $      (22)    $   (1,430)
             Increase in taxes resulting from:
               Effect of different tax rates and "Approved
                Enterprise" benefit                                   200             --              2
               Tax adjustment in respect of inflation in
                Israel and others                                     (61)           (22)            12
               Utilization of carryforward tax losses for
                which valuation allowance was provided               (246)           (86)           (21)
               Non-deductible expenses and tax exempt income          (24)             9             --
               Taxes in respect of previous years                      --            175            223
               Deferred taxes for which valuation allowance
                was  provided                                         202            144          1,480
                                                               ----------     ----------     ----------
               Taxes on income as reported in the
               statements of operations                        $       52     $      198     $      266
                                                               ==========     ==========     ==========

      h.    Loss before income taxes is comprised as follows:

            Domestic                                           $     (841)    $     (312)    $   (3,918)
            Foreign                                                   787            252           (168)
                                                               ----------     ----------     ----------
                                                               $      (54)    $      (60)    $   (4,086)
                                                               ==========     ==========     ==========
</TABLE>


                                      F-31
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 13:- TAXES ON INCOME (Cont.)

      i.    Taxes on income are comprised as follows:

<TABLE>
<CAPTION>
                                                        Year ended December 31,
                                                 -------------------------------------
                                                     2002         2003         2004
                                                 ----------   ----------    ----------
<S>                                              <C>          <C>           <C>
            Current taxes                        $       23   $       --    $       10
            Deferred taxes                               29           23            33
            Taxes in respect of previous years           --          175           223
                                                 ----------   ----------    ----------
                                                 $       52   $      198    $      266
                                                 ==========   ==========    ==========

            Domestic                             $       29   $      322    $      256
            Foreign                                      23         (124)           10
                                                 ----------   ----------    ----------
                                                 $       52   $      198    $      266
                                                 ==========   ==========    ==========
</TABLE>

NOTE 14:- RELATED PARTIES TRANSACTIONS

      a.    On November 8, 1999, the board of directors and the audit  committee
            approved,  subject to  shareholders'  approval,  an  increase in the
            monthly salary of the Chairman of the Board of Directors from $ 5 to
            $ 7 per month and the grant of options to purchase  98,824  ordinary
            shares.  The options  were  granted to him at his request in lieu of
            salary for the twelve month  period  ending  December 31, 2000.  The
            exercise  price of the options is $ 6 per share,  expected  dividend
            yield is 0%, and the risk free interest rate is 6%. The options will
            vest ratably over an eight-month  period  beginning  January 1, 2000
            and will  terminate  five years from the date of grant.  The options
            were forfeited by the end of the year 2004.

            The wife of the Chairman of the Board of Directors  provides ongoing
            legal  services to the Company and receives a monthly  retainer of $
            5. The  conditions  for  retaining her services were approved by the
            Company's Board of Directors and audit committee.

            MTS's subsidiaries, MTS Asia Ltd. and MTS IntegraTRAK,  entered into
            an  agreement  with C. Mer,  pursuant to which they  distribute  and
            support certain of C. Mer's (company under common control)  products
            and provide certain services on behalf of C. Mer. Generally,  C. Mer
            compensates MTS Asia Ltd. for these  activities at cost plus 10% and
            compensates MTS IntegraTRAK at cost plus 5%.


                                      F-32
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 14:- RELATED PARTIES TRANSACTIONS (Cont.)

      b.    In 2003 and 2004, the balance with C. Mer reflects  short-term  debt
            and other receivable.  Due to the short-term nature, no interest was
            charged by or paid to C. Mer through December 31, 2003 and 2004.

      c.    Transactions with related parties were as follows:

<TABLE>
<CAPTION>
                                                                  Year ended December 31,
                                                           --------------------------------------
                                                              2002           2003         2004
                                                           ----------    ----------    ----------
<S>                                                        <C>           <C>           <C>
            Sales through related parties                  $       65    $       28    $       15
                                                           ==========    ==========    ==========

            Amounts charged by related parties:
               Cost of revenues                            $      239    $       34    $       32
               Research and development                             8            --            --
               Selling and marketing                                2            --            --
               General and administrative                           4             5             7
                                                           ----------    ----------    ----------

                                                           $      253    $       39    $       39
                                                           ==========    ==========    ==========
            Amounts charged by MTS Integra TRAK
               and MTS Asia to related parties:
               Selling and marketing                       $        2    $       --    $       18
                                                           ==========    ==========    ==========
               Payments from (repayments to) the related
                 parties, net                              $     (172)   $      (48)   $       20
                                                           ==========    ==========    ==========
</TABLE>

      d.    Amounts due from an affiliate:

                                                            December 31,
                                                      ------------------------
                                                          2003         2004
                                                      ----------    ----------

            Jusan S.A                                 $       (2)   $      (21)
                                                      ==========    ==========

NOTE 15:- SHAREHOLDERS' EQUITY

      a.    Share capital:

            The  Ordinary  shares  entitle  their  holders  the right to receive
            notice to  participate  and vote in general  meetings of MTS and the
            right to receive cash dividends, if declared.

      b.    Share Option Plan:

            MTS has  authorized,  through its 1996 Incentive  Share Option plan,
            the  grant  of  options  to  officers,  management,   employees  and
            directors  of MTS or any  subsidiary  of up to  1,900,000  of  MTS's
            Ordinary shares.  Up to 1,500,000 options shall be granted under the
            option  plan  pursuant  to  section  102 of the  Israel  Income  Tax
            Ordinance.  Any  option,  which  is  canceled  or  forfeited  before
            expiration, will become available for future grants.


                                      F-33
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 15:- SHAREHOLDERS' EQUITY (Cont.)

            Each option granted under the Plan is exercisable  until the earlier
            of four  years  from the  date of the  grant  of the  option  or the
            expiration  dates of the  option  plan.  The  exercise  price of the
            options  granted  under the  plans may not be less than the  nominal
            value of the shares  into which such  options  were  exercised.  The
            options  vest  primarily  gradually  over  three  or four  years  of
            employment.

            In 2003, Section 102 of the Israeli Income Tax Ordinance was amended
            effective as of January 1, 2003.  Therefore MTS has  rolled-over the
            remaining options available,  at that time for grant into a new plan
            that conforms  with the newly  amended  provisions of Section 102 of
            the Israel Income Tax  Ordinance.  The  Incentive  Share Option Plan
            will terminate in 2013,  unless cancelled  earlier by MTS's board of
            directors.

            As of December 31, 2004,  672,025  options are  available for future
            grant.

            Summary of MTS's stock options activity and related  information for
            the three years ended December 31 is as follows:

<TABLE>
<CAPTION>
                                                        Options         Number                         Weighted
                                                       available      of options       Options         average
                                                       for grant     outstanding     exercisable    exercise price
                                                     --------------  -------------  --------------  ---------------
<S>                                                    <C>             <C>          <C>             <C>
            Options exercisable at January 1, 2002                                      800,887     $      4.48
                                                                                    ===========
              Balance on January 1, 2002                 531,609       1,227,141                    $      3.74
              Options granted                            (35,000)         35,000                    $      1.2
              Options forfeited                          504,561        (504,561)                   $      4.19
                                                     -----------     -----------

            Options exercisable at December 31, 2002                                    502,644     $      3.76
                                                                                    ===========
              Balance on December 31, 2002             1,001,170         757,580                    $      3.32
              Options granted                           (434,500)        434,500                    $      1.85
              Options exercised                               --        (133,333)                   $        --
              Options forfeited                          260,106        (260,106)                   $      2.91
                                                     -----------     -----------

            Options exercisable at December 31, 2003                                    355,413     $      3.68
                                                                                    ===========     ===========

            Balance on December 31, 2003                 826,776         798,641                    $      2.85
              Options granted                           (226,000)        226,000                    $      2.29
              Options exercised                               --         (17,333)                   $      0.08
              Options forfeited                          251,708        (251,708)                   $      4.62
              Options forfeited from old plan           (180,459)             --                    $        --
                                                     -----------     -----------                    -----------

            Options exercisable at December 31, 2004                                    301,812     $      2.01
                                                                                    ===========     ===========

            Balance on December 31, 2004                 672,025         755,600                    $      2.11
                                                     ===========     ===========                    ===========
</TABLE>


                                      F-34
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 15:- SHAREHOLDERS' EQUITY (Cont.)

            The options  outstanding as of December 31, 2004 have been separated
            into ranges of exercise prices, as follows:

<TABLE>
<CAPTION>
                                   Options          Weighted                                           Weighted
                                 outstanding        average          Weighted                          average
                                    as of          remaining         average                        exercise price
                Exercise         December 31,     contractual        exercise         Options       of exercisable
                 price               2004        life (in years)      price         exercisable        options
            -----------------  ----------------- ---------------  ---------------  ---------------  ---------------
<S>                                <C>                <C>         <C>                  <C>          <C>
               $ 0.93-1.3            31,500           1.08        $     1.18             20,998     $     1.18
                $ 1.844             250,000           3.92        $     1.844            62,500     $     1.844
               $ 1.9-2.05           186,300           0.39        $     1.95            186,300     $     1.95
               $ 2.2-2.35           184,000           4.71        $     2.27                  -     $     -
               $ 2.9-2.95            98,800           3.92        $     2.9              27,014     $     2.9
                 $ 4.5                2,000           0.08        $     4.5               2,000     $     4.5
                $ 5.9375              3,000           0.75        $     5.9375            3,000     $     5.9375
                               ------------                                        ------------
                                    755,600                       $     2.11            301,812     $     2.01
                               ============                       ============     ============     ============
</TABLE>

      c.    The weighted  average fair value of options  granted during 2003 and
            2004, whose exercise price equals the fair value of the stock on the
            date of grant, was $ 1.20 and $ 0.781 per option, respectively.

            During  2004,  the  Company  granted  226,000  options at a weighted
            average exercise price of $ 2.29 per share (the fair market value of
            the shares on the date of grant).

            The Company has recorded  deferred  stock  compensation  expense for
            options  issued in 2003 with an exercise price below the fair market
            value of the shares;  the deferred  stock  compensation  expense has
            been amortized and recorded as compensation expense ratably over the
            vesting period of the options. Compensation expense of approximately
            $ 60 and $ 66 was recognized during 2003 and 2004, respectively.

            During 2003 the Company reduced the exercise price of 83,000 options
            to zero resulting in a compensation expense of approximately $ 153.

      d.    In January  2000,  MTS  granted  98,824  options  to Mr.  Chaim Mer,
            chairman  of the  Company,  having an  exercise  price of $ 6.00 per
            share.  These  options were granted in lieu of Mr. Mer's salary ($ 7
            per month) in 2000.  The  options  were  exercisable  for five years
            commencing  January  1, 2000 and  forfeited  by the end of year 2004
            (see Note 14a).

      e.    On  February  7, 2001,  MTS issued  five-year  warrants  to purchase
            25,000 Ordinary shares of MTS to Investec Bank  (Mauritius)  Ltd. in
            connection  with  certain  financial  services  performed  on  MTS's
            behalf.  The warrants have an exercise price of $ 4.95 per share for
            warrants  exercised  until  February  2004 and $ 5.625 per share for
            warrants  exercised  until  February  2006.  The  fair  value of the
            warrants,  at the date of the grant,  using a  Black-Scholes  option
            pricing model was immaterial and therefore no compensation  expenses
            were recorded.


                                      F-35
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 15:- SHAREHOLDERS' EQUITY (Cont.)

      f.    Treasury shares:

            During 2002, 2003 and 2004, the Company purchased  195,183,  130,510
            and 3,800 treasury shares in  consideration  of $ 172, $ 147 $ 9 and
            respectively,  according  to the  stock  repurchase  program,  which
            authorized  the  Company's  officers  to  repurchase  up to  600,000
            Ordinary  shares of MTS and was approved by the  Company's  Board of
            Directors.

            During  2003,  MTS  cancelled  $457 of its  treasury  shares,  which
            represent 384,610 Ordinary shares.

      g.    Dividends:

            Dividends,   if  any,  will  be  paid  in  NIS.  Dividends  paid  to
            shareholders  outside Israel will be converted into dollars,  on the
            basis of the exchange rate prevailing at the date of payment.

NOTE 16:- GEOGAPHIC INFORMATION AND CLASSES OF PRODUCTS

      The Company adopted  Statement of Financial  Accounting  Standard No. 131,
      "Disclosures  About  Segments of an  Enterprise  and Related  Information"
      ("SFAS No. 131"). The Company operates in one reportable segment (see Note
      1 for a brief description of the Company's  business).  The total revenues
      are attributed to geographic areas based on the location of the customer.

      The following is a summary of revenues  within  geographic  areas based on
      end customer location and long-lived assets:

<TABLE>
<CAPTION>
                                                               Year ended December 31,
                                                        ------------------------------------
                                                            2002         2003        2004
                                                        ----------   ----------   ----------
<S>                                                     <C>          <C>          <C>
            Revenues from sales:
               Israel                                   $      217   $      186   $      256
               United States                                 6,449        4,917        4,967
               Germany                                       1,130        1,826        1,724
               Holland                                         756          924          798
               Europe (excluding Germany and Holland)          296          516          471
               Asia                                            469          364          635
               South America                                   328          368          423
               Others                                          142          129          139
                                                        ----------   ----------   ----------
                                                        $    9,787   $    9,230   $    9,413
                                                        ==========   ==========   ==========
</TABLE>


                                      F-36
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 16:- GEOGAPHIC INFORMATION AND CLASSES OF PRODUCTS(Cont.)

                                                       December 31,
                                           ------------------------------------
                                               2002         2003        2004
                                           ----------   ----------   ----------
            Long-lived assets:
               Israel                      $      624   $      394   $    3,103
               United States                    2,302        2,268        2,244
               Holland                             10            8            7
               Asia                                29           16            9
               South America                       22           27           27
                                           ----------   ----------   ----------
                                           $    2,987   $    2,713   $    5,390
                                           ==========   ==========   ==========

      Total  revenues  from  external  customers  divided  on the  basis  of the
      Company's product lines are as follows:

                                                   Year ended December 31,
                                           ------------------------------------
                                               2002         2003         2004
                                           ----------   ----------   ----------

            TABS                           $    9,787   $    9,230   $    9,327
            Application suite                      --           --           86
                                           ----------   ----------   ----------
                                           $    9,787   $    9,230   $    9,413
                                           ==========   ==========   ==========

NOTE 17:- SELECTED STATEMENTS OF OPERATIONS DATA

      a.    Financial income, net

<TABLE>
<CAPTION>
                                                                Year ended December 31,
                                                        --------------------------------------
                                                           2002           2003         2004
                                                        ----------    ----------    ----------
<S>                                                     <C>           <C>           <C>
            Financial expenses:

            Interest expenses                           $     (205)   $      (64)   $       --
            Other expenses                                      (7)           --           (24)
            Foreign currency translation differences            --           (11)           --
                                                        ----------    ----------    ----------
                                                              (212)          (75)          (24)
                                                        ----------    ----------    ----------
            Financial income:

            Interest income                                    310           186            83
            Other income                                         1            13            --
            Foreign currency translation differences            35            --            19
                                                        ----------    ----------    ----------
                                                               346           199           102
                                                        ----------    ----------    ----------
                                                        $      134    $      124    $       78
                                                        ==========    ==========    ==========

            Other income (expenses):

            Gain (loss) on marketable securities, net   $     (140)   $        6    $       --
                                                        ==========    ==========    ==========
</TABLE>


                                      F-37
<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 18:- SUBSIDIARIES AND AFFILIATES

<TABLE>
<CAPTION>
                                                                       Percentage of        Jurisdiction of
                                                                         ownership           incorporation
                                                                       -------------        ---------------
            Subsidiaries:
            -------------
<S>                                                                       <C>                <C>
            MTS IntegraTRAK Inc.                                          100%                  Delaware

            MER Fifth Avenue Realty Inc. (a subsidiary of
               MTS IntegraTRAK Inc.)                                      100%                  New York

            MTS Asia Ltd.                                                 100%                  Hong Kong

            Telegent Ltd.                                                 100%                   Israel

            Jaraga B.V.                                                   100%               The Netherlands
            Verdura B.V. (a subsidiary of Jaraga B.V.)                    100%               The Netherlands
            Voltera  Technologies  V.O.F. (a partnership held
               99% by Jaraga B.V. and 1% by Verdura B.V.)                 100%               The Netherlands
            Bohera B.V. (a subsidiary of Jaraga B.V.)                     100%               The Netherlands
            Tabs Brazil Ltd. (a subsidiary of Jaraga B.V.)                100%                   Brazil

            Affiliate:
            ----------

            Jusan S.A. (a subsidiary of Jaraga B.V.)                      50%                     Spain
</TABLE>

NOTE 19:- SUBSEQUENT EVENTS

            On April 18,  2005,  Amdocs  (Israel)  Ltd.  and  Amdocs  Ltd.  (the
            "Plaintiffs")  filed a complaint  with the Tel Aviv  District  Court
            against the  Company,  its Chief  Executive  Officer and others (the
            "Defendants")  alleging,  among other things,  that professional and
            commercial  information  belonging to the Plaintiffs was transferred
            to the Defendants for use in the Company's activity.  The Plaintiffs
            are seeking an injunction prohibiting the Defendants from making any
            use of  the  information  and  trade  secrets  that  were  allegedly
            transferred,  injunctions  requiring the return of such  information
            and estimated damages of NIS 14,775  (approximately  $3,360). Due to
            the preliminary  stage of the litigation,  the Company and its legal
            advisors cannot  currently  advise as to its outcome or its possible
            adverse  effect on the  Company's  financial  position or results of
            operations. The company intends to vigorously defend this action.

                              - - - - - - - - - - -


                                      F-38

<PAGE>

                                   JUSAN, S.A.


                              FINANCIAL STATEMENTS


                               EUROS IN THOUSANDS




                                      INDEX

<TABLE>
<CAPTION>
                                                                               Page
                                                                          ---------------
<S>                                                                      <C>
Report of Registered Public Accounting Firm                                    F-40

Report of Independent Auditors                                                 F-41

Balance Sheets as of December 31, 2002, 2003 and 2004                          F-42

Statements of Income for the three years ended December 31, 2004               F-43

Statements of Changes in Shareholders' Equity for the three
years ended December 31, 2004                                                  F-44

Statements of Cash Flows for the three years ended December 31, 2004           F-45

Notes to Financial Statements                                              F-46 - F-55
</TABLE>




                                      F-39
<PAGE>

[LOGO] BDO     BDO Audiberia    Juan Bravo, 3-B, 6a  28006 Madrid - Espana
               Auditores        Telefono:     00 34-914 364 190
                                Fax:          00 34-914 364 191/192
                                Email:        bdo@bdo.es



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------

Board of Directors and Stockholders of Jusan, S.A.:

1.    We have audited the accompanying balance sheet of Jusan, S.A. as of
      December 31, 2004 and the related statements of income, stockholders'
      equity and cash flows for the year ended December 31, 2004. These
      financial statements are the responsibility of the Company's management.
      Our responsibility is to express an opinion on these financial statements
      based on our audit. The consolidated financial statements of the Company
      as of December 31, 2003 were audited by other auditors whose report dated
      January 14, 2004, expressed an unqualified opinion on those statements.

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

3.    In our opinion, the financial statements referred to above present fairly,
      in all material respects, the financial position of Jusan, S.A. as of
      December 31, 2004 and the results of its operations and its cash flows for
      the year then ended in conformity with accounting principles generally
      accepted in the United States of America.

BDO Audiberia


/s/ Peter D. Cook
------------------------
Peter D. Cook
Madrid, March 3, 2005






                                      F-40
<PAGE>

[LOGO] ERNST & YOUNG  |X| Kost Forer Gabbay & Kasierer
                          3 Aminadav St.                |X| Phone: 972-3-6232525
                          Tel-Aviv 67067, Israel            Fax:   972-3-5622555






                         REPORT OF INDEPENDENT AUDITORS

                             To the Shareholders of

                                   JUSAN, S.A.

      We have audited the accompanying balance sheets of JUSAN, S.A. ("the
Company") as of December 31, 2003 and 2002, and the related statements of
income, changes in shareholders' equity and cash flows for each of the two years
in the period ended December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

      We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
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 financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2003 and 2002, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States.






                                             /s/ Kost Forer Gabbay and Kasierer
 Tel-Aviv, Israel                            KOST FORER GABBAY & KASIERER
 January 14, 2004                            A Member of Ernst & Young Global



                                      F-41
<PAGE>

                                                                     JUSAN, S.A.
BALANCE SHEETS
--------------------------------------------------------------------------------
Euros in thousands


<TABLE>
<CAPTION>
                                                                                  December 31,
                                                              ---------------------------------------------
                                                                  2002            2003            2004
                                                              ------------    ------------    -------------
     ASSETS
<S>                                                          <C>             <C>               <C>
 CURRENT ASSETS:
 Cash and cash equivalents                                    (euro)   338    (euro)    953   (euro)    589
 Short-term bank deposits                                              402              450             450
 Trade receivables (net of allowance for doubtful
   accounts of 6 euros as of December 31, 2002 and
   2003 and 43 euros as of December 31, 2004, and
   net of provision for returns of 7 euros as of
   December 31, 2003, and 4 euros as of December 31, 2004)           1,578            1,732           2,065
 Other accounts receivable and prepaid expenses (Note 3)               262              240             178
 Inventories (Note 4)                                                  900              793             912
                                                              ------------    -------------   -------------

 Total current assets                                                3,480            4,168           4,194
 -----                                                        ------------    -------------   -------------


 PROPERTY AND EQUIPMENT, NET (Note 5)                                  118               78              50
                                                              ------------    -------------   -------------

 Total assets                                                 (euro) 3,598    (euro)  4,246   (euro)  4,244
 -----                                                        ============    =============   =============

     LIABILITIES AND SHAREHOLDERS' EQUITY

 CURRENT LIABILITIES:
 Short-term bank debt (Note 6)                                (euro)    16    (euro)     38   (euro)     18
 Trade payables                                                        623              795             659
 Accrued expenses and other liabilities (Note 7)                       386              408             361
 Deferred revenues                                                     126              232              60
                                                              ------------    -------------   -------------

 Total current liabilities                                           1,151            1,473           1,098
 -----                                                        ------------    -------------   -------------

 COMMITMENTS (NOTE 8)

 SHAREHOLDERS' EQUITY (Note 11):
 Share capital -
   15,052 Ordinary shares of (euro) 0.0042 par value -
   Authorized, issued and outstanding as of December 31,
   2002, 2003 and 2004                                                  63               63              63
 Retained earnings                                                   2,384            2,710           3,083
                                                              ------------    -------------   -------------

 Total shareholders' equity                                          2,447            2,773           3,146
 -----                                                        ------------    -------------   -------------

 Total liabilities and shareholders' equity                   (euro) 3,598    (euro)  4,246    (euro) 4,244
 -----                                                        ============    =============   =============

</TABLE>

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

                                      F-42
<PAGE>

                                                                     JUSAN, S.A.
STATEMENTS OF INCOME
--------------------------------------------------------------------------------
Euros in thousands (except share and per share data)

<TABLE>
<CAPTION>
                                                                Year ended December 31,
                                                -------------------------------------------------------
                                                      2002               2003                2004
                                                ----------------    ---------------    ----------------
<S>                                             <C>                <C>                <C>
 Revenues (Note 12):
   Product sales                                (euro)     6,060    (euro)    5,353    (euro)     5,154
   Services                                                  819                707                 640
                                                ----------------    ---------------    ----------------

 Total revenues                                            6,879              6,060               5,794
                                                ----------------    ---------------    ----------------

 Cost of revenues:
   Product sales                                           3,336              2,797               2,658
   Services                                                  658                538                 447
                                                ----------------    ---------------    ----------------

 Total cost of revenues                                    3,994              3,335               3,105
                                                ----------------    ---------------    ----------------

 Gross profit                                              2,885              2,725               2,689
                                                ----------------    ---------------    ----------------

 Operating expenses:
   Research and development                                  470                425                 454
   Selling and marketing                                     718                770                 872
   General and administrative                                892                882                 849
                                                ----------------    ---------------    ----------------

 Total operating expenses                                  2,080              2,077               2,175
                                                ----------------    ---------------    ----------------

 Operating income                                            805                648                 514
 Financial income, net (Note 13)                               7                  9                   2
                                                ----------------    ---------------    ----------------

 Income before taxes on income                               812                657                 516
 Income taxes (Note 9)                                       185                131                 143
                                                ----------------    ---------------    ----------------

 Net income                                     (euro)       627    (euro)      526    (euro)       373
                                                ================    ===============    ================

 Basic and diluted net earnings per share       (euro)      41.7    (euro)    34.95    (euro)     24.78
                                                ================    ===============    ================

 Weighted average number of shares used in
 computing basic and diluted net earnings
 per share                                                15,052             15,052              15,052
                                                ================    ===============    ================
</TABLE>


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

                                      F-43
<PAGE>

                                                                     JUSAN, S.A.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
Euros in thousands


<TABLE>
<CAPTION>
                                          Number                                            Total
                                       of Ordinary       Share         Retained          shareholders'
                                          Shares        Capital        earnings            Equity
                                     -------------   -------------   ---------------   -----------------
<S>                                 <C>               <C>         <C>             <C>
 Balance as of January 1, 2002              15,052   (euro)     63   (euro)    2,437   (euro)     2,500

   Dividends                                     -               -              (680)              (680)
   Net income                                    -               -               627                627
                                     -------------   -------------   ---------------   -----------------

 Balance as of December 31, 2002            15,052              63             2,384              2,447

   Dividends                                     -               -              (100)              (100)
   Accrued dividend                              -               -              (100)              (100)
   Net income                                    -               -               526                526
                                     -------------   -------------   ----------------  -----------------

 Balance as of December 31, 2003            15,052              63             2,710              2,773

   Net income                                    -               -               373                373
                                     -------------   -------------   ----------------  -----------------

 Balance as of December 31, 2004          15,052     (euro)     63   (euro)    3,083   (euro)     3,146
                                     =============   =============   ================  =================
</TABLE>






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












                                      F-44
<PAGE>

                                                                     JUSAN, S.A.
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
Euros in thousands

<TABLE>
<CAPTION>
                                                                                      Year ended December 31,
                                                                      -------------------------------------------------------
                                                                            2002               2003                2004
                                                                      ----------------    ---------------    ----------------
<S>                                                                   <C>                 <C>               <C>
Cash flows from operating activities:
-------------------------------------
Net income                                                            (euro)      627    (euro)      526    (euro)       373
 Adjustments to reconcile net income to net cash provided by
   (used in) operating activities:
   Depreciation                                                                     63                 64                  47
   Increase in trade receivables                                                  (236)              (154)               (333)
   Decrease (increase) in other accounts receivable and prepaid
     expenses                                                                      (51)                22                  62
   Decrease (increase) in inventories                                             (252)               107                (119)
   Increase (decrease) in trade payables                                          (264)               172                (136)
   Increase (decrease) in accrued expenses and other liabilities                  (218)               (78)                 53
   Increase (decrease) in deferred revenues                                        126                106                (172)
                                                                      ----------------    ---------------    ----------------

 Net cash provided by (used in) operating activities                              (205)               765                (225)
                                                                      ----------------    ---------------    ----------------

 Cash flows from investing activities:
 -------------------------------------
 Investment in short-term bank deposits                                            702                (48)                  -
 Purchase of property and equipment                                                (94)               (24)                (19)
                                                                      ----------------    ---------------    ----------------

 Net cash provided by (used in) investing activities                               608                (72)                (19)
                                                                      ----------------    ---------------    ----------------

 Cash flows from financing activities:
 -------------------------------------
 Dividend paid                                                                    (680)              (100)               (100)
 Short-term bank debt                                                              (61)                22                 (20)
                                                                      ----------------    ---------------    ----------------

 Net cash used in financing activities                                            (741)               (78)               (120)
                                                                      ----------------    ---------------    ----------------

 Increase (decrease) in cash and cash equivalents                                 (338)               615                (364)
 Cash and cash equivalents at the beginning of the year                            676                338                 953
                                                                      ----------------    ---------------    ----------------

 Cash and cash equivalents at the end of the year                     (euro)       338    (euro)      953    (euro)       589
                                                                      ================    ===============    ================

Non-cash financing information:
-------------------------------
 Accrued dividend                                                                    -    (euro)      100                   -
                                                                      ================    ===============    ================

 Supplemental disclosure of cash flows activities:
 -------------------------------------------------
   Cash paid during the year for:
   Interest                                                           (euro)         9    (euro)        8    (euro)         2
                                                                      ================    ===============    ================

   Income taxes                                                       (euro)       183    (euro)      184    (euro)       143
                                                                      ================    ===============    ================
</TABLE>


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

                                      F-45
<PAGE>
                                                                     JUSAN, S.A.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Euros in thousands

NOTE 1:-    ORGANIZATION AND OPERATIONS

            a.    JUSAN, S.A. ("the Company") was incorporated in Spain on June
                  19, 1959. The Company is engaged in development, manufacturing
                  and assembly, sales and distribution, and maintenance of vocal
                  server and call billing applications, as well as is in the
                  television rental business.

            b.    The Company has two major customers (see also Note 12a).

            c.    In accordance with company law the administrators present, for
                  comparative purposes, each of the balance sheet and profit and
                  loss account, the figures for the previous financial year, in
                  addition to those for the financial year 2004. The financial
                  statements refer exclusively to the annual accounts for the
                  financial year 2004.


NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES

            The financial statements have been prepared in accordance with
            generally accepted accounting principles in the United States ("US
            GAAP").

            a.    Use of estimates:

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

            b.    Financial statements in euros

                  Monetary accounts maintained in currencies other than the Euro
                  are remeasured into Euros in accordance with Statement of
                  Financial Accounting Standard No. 52, "Foreign Currency
                  Translation" ("SFAS No. 52"). All effects of foreign currency
                  remeasurement of monetary balance sheet items are reflected in
                  the statements of operations as financial income or expenses,
                  as appropriate.

            c.    Cash equivalents:

                  The Company considers all highly liquid investments originally
                  purchased with maturities of three months or less to be cash
                  equivalents.

                  There are no restrictions for cash and cash equivalents.

            d.    Short-term bank deposits:

                  Short-term bank deposits are deposits with maturities of more
                  than three months but less than one year. The deposits are in
                  Euro and bear interest at an average rate of 2%. The
                  short-term deposits are presented at their cost, including
                  accrued interest.

                                      F-46
<PAGE>
                                                                     JUSAN, S.A.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Euros in thousands

NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES (Cont.)

            e.    Inventories:

                  Inventories are stated at the lower of cost or market value.
                  Cost is determined as follows: Raw materials, parts and
                  supplies -using the weighted average cost method. Work in
                  progress and finished products are recorded on the basis of
                  direct manufacturing costs. Inventories write-offs are
                  provided to cover risks arising from slow moving items or
                  technological obsolescence.

            f.    Property and equipment:

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

                                                                          %
                                                                     ----------
                  Computers and peripheral equipment                     33
                  Office furniture and equipment                         20
                  Motor vehicles                                         20

                  The Company's long-lived assets are reviewed for impairment in
                  accordance with Statement of Financial Accounting Standard No.
                  144 "Accounting for the Impairment or Disposal of Long- Lived
                  Assets" ("SFAS No. 144") whenever events or changes in
                  circumstances indicate that the carrying amount of an asset
                  may not be recoverable. Recoverability of assets to be held
                  and used is measured by a comparison of the carrying amount of
                  an asset to the future undiscounted cash flows expected to be
                  generated by the assets. If such assets are considered to be
                  impaired, the impairment to be recognized is measured by the
                  amount by which the carrying amount of the assets exceeds the
                  fair value of the assets.

            g.    Research and development costs:

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

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

                                      F-47
<PAGE>
                                                                     JUSAN, S.A.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Euros in thousands

NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES (Cont.)

            h.    Income taxes:

                  The Company accounts for income taxes in accordance with
                  Statement of Financial Accounting Standard No. 109,
                  "Accounting for Income Taxes" ("SFAS No. 109"). This statement
                  prescribes the use of the liability method whereby deferred
                  tax assets and liability account balances are determined based
                  on differences between financial reporting and tax bases of
                  assets and liabilities and are measured using the enacted tax
                  rates and laws that will be in effect when the differences are
                  expected to reverse. Valuation allowances are provided to
                  reduce deferred tax assets to their estimated realizable
                  value.

            i.    Revenue recognition:

                  The Company generates revenues from selling software-based
                  products through resellers and distributors who are considered
                  end-users. The Company also generates revenues from rendering
                  maintenance and support services.

                  Revenues are recognized when all criteria outlined in
                  Statement of Position No. 97-2 "Software Revenue Recognition"
                  ("SOP No. 97-2") as amended are met. Revenue from products is
                  recognized when persuasive evidence of an agreement exists,
                  delivery of the product has occurred, no significant
                  obligations with regard to implementation remain, the fee is
                  fixed or determinable and collectibility is probable.

                  Where the arrangements involve multiple elements, revenue is
                  allocated to each element based on vendor specific objective
                  evidence ("VSOE") of the relative fair values of each element
                  in the arrangement, in accordance with the "residual method"
                  prescribed by SOP No. 98-9, "Modification of SOP No. 97-2,
                  Software Revenue Recognition With Respect to Certain
                  Transactions". The VSOE used by the Company to allocate the
                  sales price to support services and maintenance is based on
                  the renewal rate charged when these elements are sold
                  separately. Revenues from products are recorded based on the
                  residual method. Under the residual method, revenue is
                  recognized for the delivered elements when (1) there is VSOE
                  of the fair values of all the undelivered elements, and (2)
                  all revenue recognition criteria of SOP No. 97-2, as amended,
                  are satisfied. Under the residual method any discount in the
                  arrangement is allocated to the delivered element.

                  Provision for returns in the amount of (euro) 4 is determined
                  principally on the basis of past experience.

                  Revenues from maintenance and support services are recognized
                  over the life of the maintenance agreement or at the time
                  support services are rendered.

                  Deferred revenues include unearned amounts received under
                  maintenance and support contracts, not yet recognized as
                  revenues.

                                      F-48
<PAGE>
                                                                     JUSAN, S.A.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Euros in thousands

NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES (Cont.)

            j.    Warranty costs:

                  The Company provides free warranty for up to one year. A
                  provision in the amount of (euro) 20 as of December 31, 2004
                  ((euro) 18 in 2003 and 2002) is recorded for probable costs in
                  connection with these services based on the Company's
                  experience.

                  The Company estimates the costs that may be incurred under its
                  basic limited warranty and records a liability in the amount
                  of such costs at the time product revenue is recognized.
                  Factors that affect the Company's warranty liability include
                  the number of installed units, historical and anticipated
                  rates of warranty claims, and cost per claim. The Company
                  periodically assesses the adequacy of its recorded warranty
                  liabilities and adjusts the amounts as necessary.

            k.    Fair value of financial instruments:

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

                  There are short term fixed-rate securities as an amount of
                  (euro) 450.000 as of December 31, 2004.

            l.    Concentrations of credit risk:

                  Financial instruments that potentially subject the Company to
                  concentrations of credit risk consist principally of cash and
                  cash equivalents, short-term bank deposits and trade
                  receivables.

                  Cash and cash equivalents and short-term bank deposits are
                  deposited with major banks in Spain. Management believes that
                  the financial institutions that hold the Company's investments
                  are financially sound, and accordingly, minimal credit risk
                  exists with respect to these investments.

                  The trade receivables of the Company are mainly derived from
                  sales to customers in Spain and Europe (see Note 12a). The
                  Company performs ongoing credit evaluations of its customers.
                  The allowance for doubtful accounts is determined with respect
                  to specific debts that are doubtful of collection according to
                  management estimates (the ageing of account receivable is more
                  than 180 days). In certain circumstances, the Company may
                  require letters of credit, other collateral or additional
                  guarantees.

                  The Company has no off-balance-sheet concentration of credit
                  risk such as foreign exchange contracts, option contracts or
                  other foreign hedging arrangements.

                                      F-49

<PAGE>
                                                                     JUSAN, S.A.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Euros in thousands

NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES (Cont.)

            m.    Basic and diluted net earnings per share:

                  Basic net earnings per share is computed based on the weighted
                  average number of ordinary shares outstanding during each
                  year. Diluted earnings per share is computed based on the
                  weighted average number of ordinary shares outstanding during
                  each year, plus potential ordinary shares considered
                  outstanding during the year, in accordance with Statement of
                  Financial Accounting Standard No. 128, "Earnings Per Share"
                  ("SFAS No. 128").

NOTE 3:-    OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

<TABLE>
<CAPTION>
                                                                                 December 31,
                                                          ----------------------------------------------------------
                                                                2002                 2003                2004
                                                          ----------------     ----------------    -----------------
<S>                                                      <C>                   <C>                 <C>
                Government authorities                    (euro)       201     (euro)       191    (euro)        137
                Employee advances                                       34                   33                   25
                Deposits                                                16                   16                   16
                Other                                                   11                    -                    -
                                                          ----------------     ----------------    -----------------

                                                          (euro)       262     (euro)              (euro)        178
                                                          ================     ================    =================
</TABLE>

NOTE 4:-    INVENTORIES

<TABLE>
<CAPTION>
                                                                                 December 31,
                                                          ----------------------------------------------------------
                                                                2002                 2003                2004
                                                          ----------------     ----------------    -----------------
<S>                                                      <C>                   <C>                 <C>
                Raw materials                             (euro)       551     (euro)       489    (euro)        670
                Work in progress                                        38                   23                   31
                Finished products                                      311                  281                  211
                                                          ----------------     ----------------    -----------------

                                                          (euro)       900     (euro)       793    (euro)        912
                                                          ================     ================    =================
</TABLE>

            The provision for obsolescence for the years ended 31, 2002, 2003
            and 2004 were (euro) 0, 0 and 12, respectively.


                                      F-50
<PAGE>
                                                                     JUSAN, S.A.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Euros in thousands

NOTE 5:-    PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                  ---------------------------------------------------------
                                                                        2002                2003                 2004
                                                                  ----------------    ----------------     ----------------
<S>                                                              <C>                  <C>                  <C>
               Cost:
                 Computers and peripheral equipment               (euro)       140    (euro)       152     (euro)       132
                 Office furniture and equipment                                285                 294                  291
                 Motor vehicles                                                100                 103                  103
                 Leasehold improvements                                        140                 140                    -
                                                                  ----------------    ----------------     ----------------

                                                                               665                 689                  526
               Accumulated depreciation:
                 Computers and peripheral equipment                             97                 127                  118
                 Office furniture and equipment                                243                 265                  266
                 Motor vehicles                                                 67                  79                   92
                 Leasehold improvements                                        140                 140                    -
                                                                  ----------------    ----------------     ----------------

                                                                               547                 611                  476

               Depreciated cost                                   (euro)       118    (euro)        78     (euro)        50
                                                                  ================    ================     ================
</TABLE>

            Depreciation expenses for the years ended December 31, 2002, 2003
            and 2004 were (euro) 63, (euro) 64 and (euro) 47, respectively.

NOTE 6:-    SHORT-TERM BANK DEBT

            The Company has a short-term bank debt as of December 31, 2004 in
            the amount of (euro)18, bearing interest of 3.75%.

NOTE 7:-    ACCRUED EXPENSES AND OTHER LIABILITIES

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                  ---------------------------------------------------------
                                                                        2002                2003                 2004
                                                                  ----------------    ----------------     ----------------
<S>                                                              <C>                  <C>                  <C>
                Employees and payroll accruals                    (euro)        53    (euro)        55     (euro)        45
                Income tax payable                                             184                 131                  122
                Deferred tax                                                     -                   -                   21
                Government authorities                                         131                 104                  119
                Accrued dividends                                                -                 100                    -
                Current Accounts                                                 -                   -                   34
                Warranty costs                                                  18                  18                   20
                                                                  ----------------    ----------------     ----------------

                                                                   (euro)      386    (euro)       408     (euro)       361
                                                                  ================    ================     ================
</TABLE>


                                      F-51
<PAGE>
                                                                     JUSAN, S.A.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Euros in thousands

NOTE 8:-    COMMITMENTS

            The facilities of the Company are rented under operating leases for
            periods ending in 2009.

            Future minimum lease commitments under non-cancelable operating
            leases as of December 31, 2004, are as follows:

                         2005               (euro)   100
                         2006                         43
                         2007                          8
                         2008                          8
                         2009                          5
                                            ------------

                                            (euro)   164
                                            ============

            Rent expenses for years ended December 31, 2002, 2003, and 2004,
            were approximately (euro) 142, (euro) 152 and (euro) 152,
            respectively.


NOTE 9:-    TAXES ON INCOME

            Reconciliation between the theoretical tax expense, assuming all
            income is taxed at the statutory tax rate applicable to income of
            the Company and the actual tax expense as reported in the statements
            of operations, is as follows:

<TABLE>
<CAPTION>
                                                                                        Year ended December 31,
                                                                            ------------------------------------------------
                                                                                 2002             2003            2004
                                                                            ---------------  --------------   --------------
<S>                                                                        <C>              <C>              <C>
               Income before taxes as reported in the statements
                 of operations                                              (euro)      812  (euro)     657   (euro)     516
               Adjustments for tax purposes                                               -               -   (euro)      82
               Decrease in the taxable base - Profit in sales to term                     -               -              (62)
                                                                            ===============  ==============   ==============
                                                                                        812             657              536

               Statutory tax rates                                                       35%             35%              35%
                                                                            ===============  ==============   ==============

               Theoretical tax expense                                      (euro)      284  (euro)     230   (euro)     188
               Decrease in taxes resulting from:
               Tax deduction for development                                            (99)            (99)             (66)
               Deferred Tax                                                               -               -               21
                                                                            ---------------  --------------   --------------

               Taxes on income as reported in the
                 statements of income                                       (euro)      185  (euro)     131   (euro)     143
                                                                            ===============  ==============   ==============
</TABLE>

            Under the current tax legislation, 35% of development expense can be
            deducted from the income tax with the limits of 35% of the
            theoretical tax benefits. In 2002 this limit was 35% and 2003 this
            limit was 45%.

                                      F-52

<PAGE>
                                                                     JUSAN, S.A.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Euros in thousands

            All the income before income taxes is domestic. Income taxes include
            only current tax expenses.

            There is a currently tax inspection at the date of the issue of
            financial statements. The managers do not consider it will arise
            significative impacts as a result of this inspection.

NOTE 10:-   RELATED PARTIES TRANSACTIONS

            The balances with and the revenues derived from related parties were
            as follows:

            a.    Payments to related parties:
<TABLE>
<CAPTION>

                                                                                       Year ended December 31,
                                                                            -----------------------------------------------
                                                                                 2002            2003            2004
                                                                            --------------   -------------   --------------
<S>                                                                        <C>               <C>            <C>
                     Wages                                                  (euro)     274   (euro)    308   (euro)     255
                                                                            ==============   =============   ==============
</TABLE>

            In 2002, 2003 and 2004, the balance with personnel reflects
            short-term debt.

            In 2004 the payments of wages to related parties are based on the
            payments to the managers ((euro) 161), the bonus of the president
            ((euro) 45), arised from the 10% of the year profit result, the
            social security paid to the directors ((euro) 26) and 20% from the
            leases ((euro) 23).

            b.    Transactions with related parties were as follows:

<TABLE>
<CAPTION>
                                                                                          Year ended December 31,
                                                                           ------------------------------------------------------
                                                                                2002              2003               2004
                                                                           ---------------  ----------------   ------------------
<S>                                                                        <C>               <C>               <C>
                     Sales through related parties                         (euro)        -  (euro)        15   (euro)          18
                                                                           ===============  ================   ==================

                     Amounts charged by related parties:
                        Cost of revenues                                   (euro)       80  (euro)       205   (euro)         100
                                                                           ===============  ================   ==================
</TABLE>

            c.    Amounts receivable from and payables to related parties:

<TABLE>
<CAPTION>
                                                                                                December 31,
                                                                            -----------------------------------------------------
                                                                                 2002              2003               2004
                                                                            --------------    --------------    -----------------
<S>                                                                        <C>               <C>               <C>
                     Receivables:
                        Mer Telemanagement Solutions                        (euro)       1    (euro)       9    (euro)         17
                        MTS Asia                                                         -                 -                   11
                        MTS IntegraTRAK                                                  -                 -                    3
                                                                            ==============    ==============    =================
                     Payables:
                        Beheer - Jaraga BV                                  (euro)       -    (euro)     128    (euro)         31
                                                                            ==============    ==============    =================
</TABLE>

                                      F-53
<PAGE>
                                                                     JUSAN, S.A.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Euros in thousands

NOTE 11:-   SHAREHOLDERS' EQUITY

            a.    Share capital:

                  The ordinary shares entitle their holders the right to receive
                  notice, to participate and vote in general meetings of the
                  Company and the right to receive dividends, if declared.


            b.    Legal reserve

                  As established by the Spanish Companies' Act, 10% of profits
                  must be allocated to the legal reserve, until such reserve is
                  equal to 20% of share capital. The legal reserve shall not be
                  distributed and may only be used for compensation of losses or
                  to increase capital.

            c.    Shareholding

                  There are 15,052 ordinary shares of (euro) 0.0042 par value,
                  authorized, issued and outstanding as of December 31, 2004.

                  The shareholders at December 31, 2004 are:


                  Jaraga, B.V.                              50%
                  Jose Lasry Nahon                          25%
                  Mauricio Toledano Marques                 25%


NOTE 12:-   SEGMENTS, CUSTOMERS AND GEOGRAPHIC INFORMATION

            a.    Major customers as a percentage of total revenues:
<TABLE>
<CAPTION>
                                                                                     Year ended December 31,
                                                                        ---------------------------------------------------
                                                                             2002              2003              2004
                                                                        --------------    --------------    ---------------
                                                                                                %
                                                                        ---------------------------------------------------
<S>                                                                      <C>              <C>                <C>
                     Customer A                                                  3%               13%               14%
                     Customer B                                                  3%               10%                8%
</TABLE>

            b.    The following is a summary of revenues within geographic areas
                  based on end customer location:

<TABLE>
<CAPTION>
                                                                                     Year ended December 31,
                                                                        ---------------------------------------------------
                                                                             2002              2003              2004
                                                                        --------------    --------------    ---------------
<S>                                                                      <C>              <C>                <C>
                     Spain                                              (euro)   4,335    (euro)   3,360    (euro)    2,287
                     European Community                                          2,067             2,179              2,796
                     Other                                                         477               521                711
                                                                        --------------    --------------    ---------------

                                                                        (euro)   6,879    (euro)   6,060    (euro)    5,794
                                                                        ==============    ==============    ===============
</TABLE>


                                      F-54
<PAGE>
                                                                     JUSAN, S.A.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Euros in thousands

NOTE 13:-   SELECTED STATEMENTS OF OPERATIONS DATA

            Financial income, net
<TABLE>
<CAPTION>
                                                                                     Year ended December 31,
                                                                        ---------------------------------------------------
                                                                             2002              2003              2004
                                                                        --------------    --------------    ---------------
<S>                                                                      <C>              <C>                <C>
              Financial expenses:

              Interest expenses                                         (euro)     9      (euro)     5      (euro)     3
              Other expenses                                                      13                 8                11
                                                                        --------------    --------------    ---------------

                                                                                  22                13                14
                                                                        --------------    --------------    ---------------
              Financial income:

              Interest income                                                     29                22                16
                                                                        --------------    --------------    ---------------

              Financial income, net                                     (euro)     7      (euro)     9      (euro)     2
                                                                        ==============    ==============    ===============
</TABLE>





                            -------------------------
















                                      F-55
<PAGE>

                               S I G N A T U R E S

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




                                   MER TELEMANAGEMENT SOLUTIONS LTD.


                                   By:      /s/Eytan Bar
                                            ------------
                                            Eytan Bar
                                            Chief Executive Officer



                                   By:      /s/Shlomi Hagai
                                            ---------------
                                            Shlomi Hagai
                                            Chief Financial Officer



Dated: October 7, 2005


                                       4