SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                    FORM 20-F

[_]  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, 2007

                                       OR

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

             FOR THE TRANSITION PERIOD FROM __________ TO __________

[_]  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

       Date of event requiring this shell company report .................

                         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:

      Title of each class              Name of each exchange on which registered
ORDINARY SHARES, NIS 0.1 PAR VALUE               NASDAQ CAPITAL MARKET

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

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

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

      ORDINARY SHARES, PAR VALUE NIS 0.01 PER SHARE...............5,773,845
                            (as of December 31, 2007)

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

                               Yes [_]     No [X]

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

                               Yes [_]     No [X]

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 [_]

<PAGE>


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

 Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]

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

                           Item 17 [_]     Item 18 [X]

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

                               Yes [_]     No [X]

This Report on Form 20-F is incorporated by reference into our Form F-3
Registration Statement File No. 333-128225 and into our Form S-8 Registration
Statements File No. 333-12014 and 333-123321.


<PAGE>


                                  INTRODUCTION

     Mer Telemanagement Solutions Ltd. is a worldwide provider of solutions for
telecommunications expense management, or TEM, used by enterprises, and billing
solutions, used by information and telecommunication service providers. Our TEM
solutions assist enterprises and organizations to make smarter choices with
their telecommunications spending at each stage of the service lifecycle,
including allocation of cost, proactive budget control, fraud detection,
processing of payments and spending forecasting. Our converged billing solutions
have been successfully implemented worldwide by wireless providers, Voice over
Internet Protocol, Internet Protocol Television, and content service providers.
Our converged billing solutions include applications for charging and invoicing
customers, interconnect billing and partner revenue management using pre-pay and
post-pay schemes.

     Since our public offering in May 1997, our ordinary shares have been listed
on the NASDAQ Stock Market (symbol: MTSL) and are presently listed on the NASDAQ
Capital Market. As used in this annual report, the terms "we," "us" and "our"
mean Mer Telemanagement Solutions Ltd. and its subsidiaries, unless otherwise
indicated.

     We have obtained a U.S. trademark registration for TABS by MER(R) and have
common law rights in the trademarks TABS.IT, FACILITRAK, and PMSI, based on use
of the marks in the United States. We have also acquired rights in the
TOTAL-e(TM) trademark in connection with the products we acquired from
Teleknowledge Group Ltd. in December 2004. Additionally, in connection with the
assets we acquired from TelSoft Solutions, Inc. in July 2006, we have acquired
the rights in the CALLTRAC(R) registered trademark and the common law trademarks
and service marks TELSOFT SOLUTIONS, TELSOFT, MEGACALL, CALLTRAC LITE, MEGAPOLL,
MEGABILL, MEGABILL-BACK and MEGASYNC. All other trademarks and trade names
appearing in this annual report owned by their respective holders.

     Our consolidated financial statements appearing in this annual report are
prepared in U.S. dollars and in accordance with generally accepted accounting
principles in the United States, or U.S. GAAP. All references in this annual
report to "dollars" or "$" are to U.S. dollars and all references in this annual
report to "NIS" are to New Israeli Shekels.

     Statements made in this annual report concerning the contents of any
contract, agreement or other document are summaries of such contracts,
agreements or documents and are not complete descriptions of all of their terms.
If we filed any of these documents as an exhibit to this annual report or to any
registration statement or annual report that we previously filed, you may read
the document itself for a complete description of its terms.

     Except for the historical information contained in this annual report, the
statements contained in this annual report are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995, as amended, with respect to our
business, financial condition and results of operations. Such forward-looking
statements reflect our current view with respect to future events and financial
results. We urge you to consider that statements which use the terms
"anticipate," "believe," "do not believe," "expect," "plan," "intend,"
"estimate," "anticipate" and similar expressions are intended to identify
forward-looking statements. We remind readers that forward-looking statements
are merely predictions and therefore inherently subject to uncertainties and
other factors and involve known and unknown risks that could cause the actual
results, performance, levels of activity, or our achievements, or industry
results, to be materially different from any future results, performance, levels
of activity, or our achievements expressed or implied by such forward-looking
statements. Such forward-looking statements are also included in Item 4 -
"Information on the Company" and Item 5 - "Operating and Financial Review and
Prospects." Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. Except as
required by applicable law, including the securities laws of the United States,
we undertake no obligation to publicly release any update or revision to any
forward-looking statements to reflect new information, future events or
circumstances, or otherwise after the date hereof. We have attempted to identify
significant uncertainties and other factors affecting forward-looking statements
in the Risk Factors section that appears in Item 3D. "Key Information - Risk
Factors."

                                       i
<PAGE>


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                               PAGE
                                                                                               ----

<S>                                                                                            <C>
PART I                                                                                          4

ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                                  4
ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE                                                4
ITEM 3.  KEY INFORMATION                                                                        4
           A. Selected Financial Data                                                           4
           B. Capitalization and Indebtedness                                                   5
           C. Reasons for the Offer and Use of Proceeds                                         5
           D. Risk Factors                                                                      5
ITEM 4.  INFORMATION ON THE COMPANY                                                            16
           A. History and Development of the Company                                           16
           B. Business Overview                                                                17
           C. Organizational Structure                                                         21
           D. Property, Plants and Equipment                                                   21
ITEM 4A. UNRESOLVED STAFF COMMENTS                                                             22
ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                          22
           A. Operating Results                                                                22
           B. Liquidity and Capital Resources                                                  34
           C. Research and Development                                                         35
           D. Trend Information                                                                36
           E. Off-Balance Sheet Arrangements                                                   36
           F. Tabular Disclosure of Contractual Obligations                                    36
ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                            37
           A. Directors and Senior Management                                                  37
           B. Compensation                                                                     39
           C. Board Practices                                                                  39
           D. Employees                                                                        45
           E. Share Ownership                                                                  46
ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                                     50
           A. Major Shareholders                                                               50
           B. Related Party Transactions                                                       51
           C. Interests of Experts and Counsel                                                 52
ITEM 8.  FINANCIAL INFORMATION                                                                 52
           A. Consolidated Statements and Other Financial Information                          52
           B. Significant Changes                                                              53
ITEM 9.  THE OFFER AND LISTING                                                                 53
           A. Offer and Listing Details                                                        53
           B. Plan of Distribution                                                             54
           C. Markets                                                                          54
           D. Selling Shareholders                                                             54
           E. Dilution                                                                         54
           F. Expense of the Issue                                                             55
ITEM 10. ADDITIONAL INFORMATION                                                                55
           A. Share Capital                                                                    55
           B. Memorandum and Articles of Association                                           55
           C. Material Contracts                                                               57
           D. Exchange Controls                                                                58
           E. Taxation                                                                         58
           F. Dividend and Paying Agents                                                       69
           G. Statement by Experts                                                             69
           H. Documents on Display                                                             69
           I. Subsidiary Information                                                           69
</TABLE>

                                       ii
<PAGE>

<TABLE>
<CAPTION>
<S>                                                                                            <C>
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS                           69
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                                70

PART II                                                                                        70

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                                       70
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS          70
ITEM 15. CONTROLS AND PROCEDURES                                                               70
ITEM 15T. CONTROLS AND PROCEDURES                                                              70
ITEM 16.  [RESERVED]                                                                           71
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                                     71
ITEM 16B. CODE OF ETHICS                                                                       71
ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES                                               72
ITEM 16D. EXEMPTIONS FROM THE LISTING REQUIREMENTS AND STANDARDS FOR AUDIT COMMITTEE           72
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS               72

PART III                                                                                       73

ITEM 17.  FINANCIAL STATEMENTS                                                                 73
ITEM 18.  FINANCIAL STATEMENTS                                                                 73
ITEM 19.  EXHIBITS                                                                             73
S I G N A T U R E S                                                                            76
</TABLE>

                                      iii

<PAGE>


                                     PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

     Not applicable.

ITEM 3. KEY INFORMATION

     A. SELECTED FINANCIAL DATA

     The following selected consolidated financial data for and as of the five
years ended December 31, 2007 are derived from our audited consolidated
financial statements, which have been prepared in accordance with U.S. GAAP. Our
audited consolidated financial statements with respect to the three years ended
December 31, 2007 and as of December 31, 2006 and 2007 appear elsewhere in this
Annual Report. Our selected consolidated financial data as of December 31, 2005,
2004 and 2003 and for the years ended December 31, 2004 and 2003 have been
derived from audited consolidated financial statements not included in this
Annual Report. The selected consolidated financial data set forth below should
be read in conjunction with Item 5. "Operating and Financial Review and
Prospects," and our consolidated financial statements and notes thereto included
elsewhere in this annual report.

STATEMENT OF OPERATIONS DATA:

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                            -------------------------------------------------------------------------------
                                               2003              2004             2005             2006             2007
                                            -----------      -----------      -----------      -----------      -----------
                                                             (in thousands, except share and per share data)
<S>                                         <C>              <C>              <C>              <C>              <C>
Revenues                                    $     9,230      $     9,413      $    11,563      $    10,484      $     9,338
Cost of revenues                                  1,849            2,814            3,802            3,355            2,736
                                            -----------      -----------      -----------      -----------      -----------
Gross profit                                      7,381            6,599            7,761            7,129            6,602
Selling and marketing                             3,916            6,300            4,797            3,078            3,481
Research and development, net                     1,825            2,362            4,395            3,633            2,640
General and administrative                        1,830            2,101            2,830            2,651            3,695
Impairment of goodwill and other
   intangible assets                                 --               --               --               --            2,312
                                            -----------      -----------      -----------      -----------      -----------
Operating loss                                     (190)          (4,164)          (4,261)          (2,233)          (5,526)
Financial (expenses) income, net                    130               78               53              (54)            (105)
Capital loss on sale of long-term
   investment                                        --               --               --               --              (63)
                                            -----------      -----------      -----------      -----------      -----------
Loss before taxes on income                         (60)          (4,086)          (4,208)          (2,287)          (5,694)
Taxes on income (benefit), net                      198              266               10              118              (68)
                                            -----------      -----------      -----------      -----------      -----------
Net loss before equity in earnings
   (losses) of affiliate                           (258)          (4,352)          (4,218)          (2,405)          (5,626)
Equity in earnings (losses) of
affiliate                                           345              225                2              159             (197)
                                            -----------      -----------      -----------      -----------      -----------
Net loss                                    $        87      $    (4,127)     $    (4,216)     $    (2,246)     $    (5,823)
                                            ===========      ===========      ===========      ===========      ===========
Basic and diluted net loss per share        $      0.02      $     (0.89)     $     (0.83)     $     (0.39)     $     (1.01)
                                            ===========      ===========      ===========      ===========      ===========
Weighted average number of ordinary
   shares used in computing basic net
   loss per share                             4,617,099        4,634,413        5,092,117        5,762,311        5,773,845
                                            ===========      ===========      ===========      ===========      ===========
Weighted average number of ordinary
   shares used in computing diluted
   net loss per share                         4,628,249        4,634,413        5,092,117        5,762,311        5,773,845
                                            ===========      ===========      ===========      ===========      ===========
</TABLE>


                                       4
<PAGE>


BALANCE SHEET DATA:

                                          As of December 31,
                         ----------------------------------------------------
                         2003        2004        2005         2006       2007
                         ----        ----        ----         ----       ----
                                           (in thousands)
Working capital        $ 9,437     $ 2,773     $ 2,065     $   186     $(2,014)
Total assets            18,182      15,323      13,816      14,054       8,478
Long-term loans             --          --          --         583          --
Shareholders' equity    14,464      10,657       9,174       7,542       1,569

B.   CAPITALIZATION AND INDEBTEDNESS

     Not applicable.

C.   REASONS FOR THE OFFER AND USE OF PROCEEDS

     Not applicable.

D.   RISK FACTORS

     INVESTING IN OUR ORDINARY SHARES INVOLVES A HIGH DEGREE OF RISK AND
UNCERTAINTY. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW BEFORE INVESTING IN OUR ORDINARY SHARES. IF ANY OF THE FOLLOWING RISKS
ACTUALLY OCCURS, OUR BUSINESS, PROSPECTS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS COULD BE HARMED. IN THAT CASE, THE VALUE OF OUR ORDINARY SHARES COULD
DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.

RISKS RELATING TO OUR BUSINESS AND MARKET

WE HAVE HAD A RECENT HISTORY OF OPERATING LOSSES AND MAY NOT ACHIEVE OR SUSTAIN
PROFITABILITY IN THE FUTURE; TO THE EXTENT THAT WE CONTINUE TO INCUR OPERATING
LOSSES, WE MAY NOT HAVE SUFFICIENT WORKING CAPITAL TO FUND OUR OPERATIONS IN THE
FUTURE.

     We have incurred operating losses in each of the last five fiscal years and
we may not be able to achieve or sustain profitable operations in the future or
generate positive cash flows from operations. As a result of our losses, our
cash position has been severely adversely impacted. To the extent that we
continue to incur operating losses, we may not have sufficient working capital
to fund our operations in the future. If we do not generate sufficient cash from
operations, we will be required to obtain additional financing or reduce level
of expenditure. Such financing may not be available in the future, or, if
available, may not be on terms satisfactory to us. If adequate funds are not
available to us, our business, and results of operations and financial condition
will be materially and adversely affected.

OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY.

     Our quarterly results have fluctuated significantly in the past and are
likely to fluctuate significantly in the future. Our future operating results
will depend on many factors, including, but not limited to the following:

     o    demand for our products;

     o    changes in our pricing policies or those of our competitors;

     o    new product announcements by us and our competitors;

     o    the number, timing and significance of product enhancements;


                                       5
<PAGE>


     o    product life cycles;

     o    our ability to develop, introduce and market new and enhanced products
          on a timely basis;

     o    changes in the level of our operating expenses;

     o    budgeting cycles of our customers;

     o    customer order deferrals in anticipation of enhancements or new
          products that we or our competitors offer;

     o    changes in our strategy;

     o    seasonal trends and general domestic and international economic and
          political conditions, among others; and

     o    currency exchange rate fluctuations and economic conditions in the
          geographic areas where we operate.

     Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast, and it is likely that our future operating results will
be adversely affected by these or other factors. Revenues are also difficult to
forecast because the market for telecommunication management and billing
solutions is rapidly evolving and our sales cycle for our solutions, from
initial evaluation to purchase, is lengthy and varies substantially from
customer to customer.

     We typically ship orders for our TABS product line shortly after receipt of
a purchase order and, consequently, order backlog at the beginning of any
quarter has in the past represented only a small portion of that quarter's
revenues. As a result, license revenues from our TABS product line in any
quarter depend substantially on orders for TABS products that have been booked
and shipped in that quarter. Also, we can not predict whether revenues from our
Application Suite will be recognized in any quarter because the delivery and, in
some cases, the implementation of all the components of the Application Suite
(including among, other things, customer training) are dependent on the
customers individual timing requirements, which can delay the completion of
these orders. In addition, revenues from our billing solutions are generated by
using contract accounting on a percentage of completion method and because the
completion pace varies from quarter to quarter and is dependent on different
variables that are out of our control, billing solutions revenues in any quarter
depend on our customers' operational plans, which can delay our ability to
progress and complete the projects.

     Due to all of the foregoing, we cannot predict revenues for any future
quarter with any significant degree of accuracy. Accordingly, we believe that
period-to-period comparisons of our operating results are not necessarily
meaningful and you should not rely upon them as indications of future
performance. Our revenues declined in 2007 and 2006 and we may not be able to
achieve or sustain revenue growth in the future.

OUR QUARTERLY FINANCIAL PERFORMANCE VARIES SIGNIFICANTLY.

     We have often recognized a substantial portion of our revenues in the last
quarter of the year and in the last month, or even weeks or days, of a quarter.
Our expense levels are substantially based on our expectations for future
revenues and are therefore relatively fixed in the short term. If revenue levels
fall below expectations, our quarterly results are likely to be
disproportionately adversely affected because a proportionately smaller amount
of our expenses varies with our revenues. Our operating results are generally
not characterized by a seasonal pattern, except that our sales in Europe are
generally lower in the summer months.

     Due to the foregoing, our quarterly financial performance has in the past
and may in the future vary significantly. Our revenues and operating results in
any quarter may not be indicative of our future performance and it may be
difficult for investors to evaluate our prospects. In some future quarter, our
operating results may be below the expectations of public market analysts and
investors. In such event, it is likely that the price of our ordinary shares
would be materially and adversely affected.


                                       6
<PAGE>


WE DERIVE THE MAJORITY OF OUR REVENUES FROM TELECOMMUNICATIONS EXPENSE
MANAGEMENT SOLUTIONS, THE MARKET FOR WHICH HAS DECLINED IN RECENT YEARS.

     Until 2005, we derived substantially all of our revenues from our TABS.IT
call accounting and billing products. In late 2004, we implemented a new
strategy that led to the development and introduction of our Application Suite.
The Application Suite is built on the Microsoft.Net platform and establishes a
framework for us to provide customized solutions that include customer care and
billing in addition to our traditional telecommunications expense management, or
TEM, solutions. The main functions of our TABS.IT and prior WinTrak families of
products were incorporated into the Application Suite. In 2005, we expanded and
enhanced the functionality of the Application Suite to include invoice
management, which facilitates bill reconciliation and dispute management. In
July 2006, we completed the acquisition of certain assets and liabilities of
TelSoft Solutions, Inc., or TelSoft, a California-based provider of call
accounting and TEM solutions. Despite all of the foregoing, our revenues from
our TEM solutions declined each year from 1999 until 2003 and again in 2006 and
revenues for these products may not continue to grow in the future. If the
market for our TEM solutions fails to grow in the future, our business,
operating results and financial condition would be materially adversely
affected. Our future financial performance will be dependent to a substantial
degree on the successful introduction, marketing and customer acceptance of our
invoice management products.

WE DEPEND ON BUSINESS TELEPHONE SYSTEM MANUFACTURERS, VENDORS AND DISTRIBUTORS
FOR OUR SALES.

     One of the primary distribution channels for our call accounting management
products are private branch exchange, or PBX, original equipment manufacturers,
or OEMs, and vendors who market our products to end-users in conjunction with
their own products. We are highly dependent upon the active marketing and
distribution efforts of our PBX OEMs. In 2005, 2006 and 2007, sales attributable
to our largest OEM customer, Siemens Gmbh, represented approximately 36.0%,
29.0% and 26.4% of our total revenues, respectively.

     As these and other PBX vendors expand their product offerings to offer a
wider range of newer technologies such as the Internet, Wireless Fidelity, or
WiFi, and voice over Internet protocol, or VoIP, we have enhanced our
Application Suite to accommodate these new services. In late 2004 and early
2005, we entered into partnership agreements with each of NEC Unified Solutions,
Inc. and Avaya Inc. for the integration of our products with their own products
and the marketing of our integrated product. Sales of call accounting solutions
by PBX manufacturers and vendors have declined markedly in the recent past, and
sales through this channel may not recover. Our success will be dependent to a
substantial degree on the marketing and sales efforts of such third parties in
marketing and integrating our products. These third parties may not give
priority to the sale of our products as an enhancement to their products.
Although most of the major business telephone switching systems manufacturers
and vendors currently rely on third-party suppliers to provide call accounting
and other telemanagement products, these manufacturers and vendors, including
our current customers, may develop their own competing products or purchase
competing products from others.

     Because we sell our products through local master distributors in countries
where we do not have a marketing subsidiary, we are highly dependent upon the
active marketing and distribution efforts of our distributors. We also depend in
large part upon our distributors for product maintenance and support. Our
distributors may not continue to provide adequate maintenance and support to
end-users or provide maintenance and support for new products, which might cause
us to seek new or additional distributors or incur additional service and
support costs. The distributors to whom we sell our products are generally not
contractually required to make future purchases of our products and could,
therefore, discontinue carrying our products at any time. None of our
distributors or resellers is subject to any minimum purchase requirements under
their agreements with us. We may not be able to continue our relationships with
our OEM customers or, if such relationships are not maintained, we may not be
able to attract and retain comparable PBX original equipment manufacturers
(OEMs). The loss of any of our major reseller or OEM relationships, either to
competitive products offered by other companies or products developed by such
resellers, would have a material adverse effect on our business, financial
condition and results of operations. Our future performance will depend, in
part, on our ability to attract additional PBX manufacturers and vendors that
will be able to market and support our products effectively, especially in
markets in which we have not previously distributed our products.


                                       7
<PAGE>


ON JULY 31, 2006, WE ACQUIRED CERTAIN ASSETS AND LIABILITIES OF TELSOFT
SOLUTIONS, INC. AND WE MAY NOT BE ABLE TO SUCCESSFULLY EXPLOIT THE ACQUIRED
PRODUCTS.

     On July 31, 2006, we completed the acquisition of certain assets and
liabilities of TelSoft, a California corporation, a provider of call accounting
and TEM solutions. The acquisition of TelSoft's TEM and call accounting software
enables us to expand our TEM solutions and assists us to strengthen our growing
business in the United States. We may not be able to successfully integrate the
operations of TelSoft into our business or successfully exploit the solutions
that we acquired from it.

WE FACE RISKS ASSOCIATED WITH EXPANDING AND MAINTAINING OUR DISTRIBUTION
NETWORK.

     We sell our products through distributors, business telephone switching
systems manufacturers and vendors, post, telephone and telegraph authorities, or
PTTs and our direct sales force. Our ability to achieve revenue growth in the
future will depend in large part on our success in establishing and maintaining
relationships with business telephone switching systems manufacturers and
vendors and PTTs, and establishing and maintaining relationships with
distributors. Historically, we have at times experienced difficulty in
establishing effective distribution relationships. We may not be able to
successfully expand our distribution channels or any such expansion may not
result in an increase in revenues. The failure to expand or maintain our
distribution channels could have a material adverse effect on our business,
operating results and financial condition.

WE ARE SUBJECT TO RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.

     We are based in Israel and generate a large percentage of our sales outside
the United States. Our sales in the United States accounted for 52.0%, 51.1% and
52.7% of our total revenues for the years ended December 31, 2005, 2006 and
2007, respectively. We may not be able to maintain or increase international
market demand for our products. To the extent that we cannot do so in a timely
manner, our business, operating results and financial condition will be
materially and adversely affected.

     International operations are subject to inherent risks, including the
following:

     o    the impact of possible recessionary environments in multiple foreign
          markets;

     o    costs of localizing products for foreign markets;

     o    longer receivables collection periods and greater difficulty in
          accounts receivable collection;

     o    unexpected changes in regulatory requirements;

     o    difficulties and costs of staffing and managing foreign operations;

     o    reduced protection for intellectual property rights in some countries;

     o    potentially adverse tax consequences; and

     o    political and economic instability.


                                       8
<PAGE>


     Our distributors or resellers may not be able to sustain or increase
revenues from international operations or the foregoing factors may have a
material adverse effect on our future revenues and, as a result, on our
business, operating results and financial condition.

     We may be adversely affected by fluctuations in currency exchange rates.
While our revenues are generally denominated in U.S. dollars and Euros, a
significant portion of our expenses are incurred in NIS. We do not currently
engage in any currency hedging transactions intended to reduce the effect of
fluctuations in foreign currency exchange rates on our results of operations. If
we were to determine that it was in our best interests to enter into any hedging
transactions in the future, we may not be able to do so or such transactions, if
entered into, may not materially reduce the effect of fluctuations in foreign
currency exchange rates on our results of operations. In addition, if, for any
reason, exchange or price controls or other restrictions on the conversion of
foreign currencies into NIS were imposed, our business could be adversely
affected. Currency fluctuations in the future may have a material adverse effect
on revenues from international sales and, consequently, on our business,
operating results and financial condition.

WE ARE SUBJECT TO RISKS RELATING TO PROPRIETARY RIGHTS AND RISKS OF
INFRINGEMENT.

     We are dependent upon our proprietary software technology and we rely
primarily on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect our proprietary
rights. We try to protect our software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. It is possible that others will develop technologies that are
similar or superior to our technology. Unauthorized parties may attempt to copy
aspects of our products or to obtain and use information that we regard as
proprietary. It is difficult to police the unauthorized use of our products, and
we expect software piracy to be a persistent problem, although we are unable to
determine the extent to which piracy of our software products exists. In
addition, the laws of some foreign countries do not protect our proprietary
rights as fully as do the laws of the United States. Our means of protecting our
proprietary rights in the United States or abroad may not be adequate or our
competition may independently develop similar technology.

     We are not aware that we are infringing upon any proprietary rights of
third parties. However, it is possible, that third parties will claim
infringement by us of their intellectual property rights. We believe that
software product developers will increasingly be subject to infringement claims
as the number of products and competitors in our industry segment grows and the
functionality of products in different industry segments overlaps. It would be
time consuming for us to defend any such claims, with or without merit, and any
such claims could:

     o    result in costly litigation;

     o    divert management's attention and resources;

     o    cause product shipment delays; or

     o    require us to enter into royalty or licensing agreements. Such royalty
          or licensing agreements, if required, may not be available on terms
          acceptable to us, if at all.

     If there is a successful claim of product infringement against us and we
are not able to license the infringed or similar technology, our business,
operating results and financial condition would be materially and adversely
affected.

     We rely upon certain software that we license from third parties, including
software that we integrate with our internally developed software. These
third-party software licenses may not continue to be available to us on
commercially reasonable terms. If we lose or are unable to maintain any such
software licenses, we could suffer shipment delays or reductions until
equivalent software could be developed, identified, licensed and integrated,
which would materially and adversely affect our business, operating results and
financial condition.


                                       9
<PAGE>


WE MAY BE UNSUCCESSFUL IN OUR DEFENSE OF PENDING LITIGATION.

     In April 2000, the tax authorities in Israel issued a demand for a tax
payment for the 1997-1999 period in the amount of approximately NIS 6.0 million
($1.6 million). We have appealed to the Israeli District Court in respect of
such tax demand and believe that certain defenses can be raised against the
demand of the tax authorities. We have made a provision in our financial
statements for this tax demand for the amount deemed probable.

     If we are unsuccessful in the above and other pending claims and
litigations or if actual results are not consistent with our assumptions and
judgments, we may be exposed to losses that could be material to our company.

OUR RESULTS MAY BE ADVERSELY AFFECTED BY COMPETITION.

     The market for telemanagement products and invoice management solutions is
fragmented and is intensely competitive. Competition in the industry is
generally based on product performance, depth of product line, technical support
and price. We compete both with international and local competitors (including
providers of telecommunications services), many of whom have significantly
greater financial, technical and marketing resources than us. We anticipate
continuing competition in the telemanagement products and invoice management
solution market and the entrance of new competitors into the market. Our
existing and potential customers, including business telephone switching system
manufacturers and vendors, may be able to develop telemanagement products and
services that are as effective as, or more effective or easier to use than,
those offered by us. Such existing and potential competitors may also enjoy
substantial advantages over us in terms of research and development expertise,
manufacturing efficiency, name recognition, sales and marketing expertise and
distribution channels. We may not be able to compete successfully against
current or future competitors and that competition may have a material adverse
effect on our future revenues and, consequently, on our business, operating
results and financial condition.

WE ARE SUBJECT TO RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGE AND RISKS
ASSOCIATED WITH NEW VERSIONS AND NEW PRODUCTS.

     The information and telecommunication service providers market in which we
compete is characterized by rapid technological change, introductions of new
products, changes in customer demands and evolving industry standards. Our
future success will depend upon our ability to keep pace with the technological
developments and to timely address the increasingly sophisticated needs of our
customers by supporting existing and new telecommunication technologies and
services and by developing and introducing enhancements to our current and new
products. We may not be successful in developing and marketing enhancements to
our products that will respond to technological change, evolving industry
standards or customer requirements, we may experience difficulties that could
delay or prevent the successful development, introduction and sale of such
enhancements or such enhancements may not adequately meet the requirements of
the marketplace and achieve any significant degrees of market acceptance. If
release dates of any new products or enhancements are delayed or, if when
released, they fail to achieve market acceptance, our business, operating
results and financial condition would be materially and adversely affected. In
addition, the introduction or announcement of new product offerings or
enhancements by us or our competitors may cause customers to defer or forgo
purchases of current versions of our product, which could have a material
adverse effect on our business, operating results and financial condition.

WE MAY NOT BE ABLE TO RETAIN OR ATTRACT KEY MANAGERIAL, TECHNICAL AND RESEARCH
AND DEVELOPMENT PERSONNEL WE NEED TO SUCCEED.

     Our success has largely depended and will depend in the future on our
skilled professional and technical employees. The competition for these
employees is intense. We may not be able to retain our present employees, or
recruit additional qualified employees as we require them. The loss of any key
member of our management team might significantly delay or prevent the
achievement of our business or development objectives. Our ability to replace
key members of our management team and hire additional skilled personnel in the
future might be negatively impacted by the use of restrictive covenants in our
industry and market. Any failure to attract and retain key managerial, technical
and research and development personnel could have a material adverse affect on
our ability to generate sales, deploy our products or successfully develop new
products and enhancements.


                                       10
<PAGE>


FOUR OF OUR SHAREHOLDERS ARE IN A POSITION TO CONTROL MATTERS REQUIRING A
SHAREHOLDER VOTE.

     Mr. Chaim Mer, our Chairman, and his wife, Dora Mer, our Israeli counsel,
currently control the vote of approximately 31.0% of our outstanding ordinary
shares, Isaac Ben-Bassat, one of our directors, is the owner of 10.6% of our
outstanding ordinary shares, and Lior Salansky, our President, is the owner of
16.1% of our outstanding ordinary shares. As a result, such persons control and
will continue to control the election of our entire Board of Directors other
than our three outside directors and generally have the ability to direct our
business and affairs.

WE ARE SUBJECT TO RISKS ARISING FROM PRODUCT DEFECTS AND POTENTIAL PRODUCT
LIABILITY.

     We provide free warranty and support for up to one year for end-users and
up to 15 months for our OEM distributors. Our sales agreements typically contain
provisions designed to limit our exposure to potential product liability or
related claims. The limitation of liability provisions contained in our
agreements may not be effective. Our products are used by businesses to reduce
communication costs, recover charges payable by third parties, prevent abuse and
misuse of telephone networks and converged billing solutions for information and
telecommunication service providers, and as a result, the sale of products by us
may entail the risk of product liability and related claims. A product liability
claim brought against us could have a material adverse effect upon our business,
operating results and financial condition. Products such as those offered by us
may contain undetected errors or failures when first introduced or when new
versions are released. Despite our testing and testing by current and potential
customers, errors may be found in new products or releases after commencement of
commercial shipments. The occurrence of these errors could result in adverse
publicity, loss of or delay in market acceptance or claims by customers against
us, any of which could have a material adverse effect upon our business,
operating results and financial condition.

WE ARE NOT IN COMPLIANCE WITH CERTAIN FINANCIAL COVENANTS AND MAY NOT BE ABLE TO
OBTAIN OR MAINTAIN COMPLIANCE WITH THOSE FINANCIAL COVENANTS IN THE FUTURE

     On July 27, 2006, we obtained a $1.0 million loan from Bank Hapoalim in
order to facilitate the funding of the TelSoft acquisition. We have made monthly
repayments under the loan agreement and had an outstanding balance of $583,000
as of December 31, 2007. Under the terms of the loan, we are required to
maintain (i) shareholders' equity of not less than $5 million and 40% of our
total assets; (ii) operating profit over two consecutive quarters as of the
second quarter of 2007; and (iii) cash and cash equivalents of not less than $1
million. As a security interest for the repayment of the loan, we agreed to
grant Bank Hapoalim a floating-charge over all of our company's assets, a fixed
charge over our company's share capital, goodwill and rights to an exemption
from taxation or reduced tax, and a fixed charge over all of the securities,
documents and notes in the possession of Bank Hapoalim. We are not currently in
compliance with such covenants and may not be able to achieve or maintain
compliance with those financial covenants in the future.

RISK FACTORS RELATED TO OUR ORDINARY SHARES

IF WE FAIL TO MAINTAIN NASDAQ'S CONTINUED LISTING REQUIREMENT OF MINIMUM
SHAREHOLDERS' EQUITY OF $2.5 MILLION, OUR SHARES MAY BE IMMEDIATELY DELISTED
FROM THE NASDAQ CAPITAL MARKET.

     Our ordinary shares are listed on The NASDAQ Capital Market under the
symbol MTSL. To continue to be listed on NASDAQ, we need to satisfy a number of
conditions, including minimum shareholders' equity of at least $2.5 million. We
fell below the minimum $2.5 million shareholders' equity in third quarter of
2007. The Staff determined to delist our shares as of December 31, 2007 unless
we chose to appeal. We appealed the Staff' decision and on March 17, 2008, we
received notice that the NASDAQ Hearings Panel had determined to continue the
listing of our ordinary shares, subject to certain conditions, including that by
May 16, 2008, we file with the Securities and Exchange Commission and with
NASDAQ a Form 6-K that includes financial statements for the quarter ending
March 31, 2008 and demonstrate more than $2.5 million in actual (not pro forma)
shareholders' equity. If we fail to satisfy such condition, our shares will be
delisted. If we meet such condition, the Panel will find that we are in
compliance with the shareholders' equity requirement and will impose a Panel
Monitor. Under the Panel Monitor, our continued listing is conditioned upon us
filing, within 45 days of the end of each fiscal quarter ending on or before
March 31, 2009, a Form 6-K with the Securities and Exchange Commission and
NASDAQ that includes financial statements for the prior quarter and demonstrates
compliance with the $2.5 million minimum shareholder's equity continued listing
requirement. If we fail to demonstrate shareholders' equity of $2.5 million or
greater, the Panel will review the matter and our shares may be immediately
delisted. If we are delisted from NASDAQ, trading in our ordinary shares would
be conducted on a market where an investor would likely find it significantly
more difficult to dispose of, or to obtain accurate quotations as to the value
of, our ordinary shares.


                                       11
<PAGE>


WE MAY IN THE FUTURE BE CLASSIFIED AS A PASSIVE FOREIGN INVESTMENT COMPANY, OR
PFIC, WHICH WILL SUBJECT OUR U.S. INVESTORS TO ADVERSE TAX RULES.

     Holders of our ordinary shares who are United States residents face income
tax risks. There is a substantial risk that we may become a passive foreign
investment company, commonly referred to as PFIC. Our treatment as a PFIC could
result in a reduction in the after-tax return to the holders of our ordinary
shares and would likely cause a reduction in the value of such shares. For U.S.
Federal income tax purposes, we will be classified as a PFIC for any taxable
year in which either (i) 75% or more of our gross income is passive income, or
(ii) at least 50% of the average value of all of our assets for the taxable year
produce or are held for the production of passive income. For this purpose, cash
is considered to be an asset, which produces passive income. As a result of our
relatively substantial cash position at the time, we believe that we were a PFIC
in certain periods over the last few years under a literal application of the
asset test described above, which looks solely to the market value of our
assets. We do not believe that we were a PFIC in 2007. If we are classified in
the future as a PFIC for U.S. federal income tax purposes, highly complex rules
would apply to U.S. Holders owning ordinary shares. Accordingly, you are urged
to consult your tax advisors regarding the application of such rules.

OUR SHARE PRICE HAS BEEN VOLATILE IN THE PAST AND MAY DECLINE IN THE FUTURE.

     Our ordinary shares have experienced significant market price and volume
fluctuations in the past and may experience significant market price and volume
fluctuations in the future in response to factors such as the following, some of
which are beyond our control:

     o    quarterly variations in our operating results;

     o    operating results that vary from the expectations of securities
          analysts and investors;

     o    changes in expectations as to our future financial performance,
          including financial estimates by investors;

     o    announcements of technological innovations or new products by us or
          our competitors;

     o    announcements by us or our competitors of significant contracts,
          acquisitions, strategic partnerships, joint ventures or capital
          commitments;

     o    announcements by third parties of significant claims or proceedings
          against us;

     o    changes in the status of our intellectual property rights;

     o    additions or departures of key personnel;

     o    future sales of our ordinary shares; and


                                       12
<PAGE>


     o    general stock market prices and volume fluctuations.

     Domestic and international stock markets often experience extreme price and
volume fluctuations. Market fluctuations, as well as general political and
economic conditions, such as a recession or interest rate or currency rate
fluctuations or political events or hostilities in or surrounding Israel, could
adversely affect the market price of our ordinary shares.

     In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.

WE DO NOT EXPECT TO DISTRIBUTE CASH DIVIDENDS.

     We do not anticipate paying cash dividends in the foreseeable future.
According to the Israeli Companies Law, a company may distribute dividends out
of its profits (within the meaning of the Israeli Companies Law), so long as the
company reasonably believes that such dividend distribution will not prevent the
company from paying all its current and future debts. The declaration of
dividends is subject to the discretion of our Board of Directors and will depend
on various factors, including our operating results, financial condition, future
prospects and any other factors deemed relevant by our board of directors. You
should not rely on an investment in our company if you require dividend income
from your investment in our company. The success of your investment will likely
depend entirely upon any future appreciation of the market price of our ordinary
shares, which is uncertain and unpredictable. There is no guarantee that our
ordinary shares will appreciate in value or even maintain the price at which you
purchased your ordinary shares.

WE MAY FAIL TO MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION
404 OF THE SARBANES-OXLEY ACT OF 2002.

     The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our
executives and directors. Our efforts to comply with the requirements of Section
404 of the Sarbanes-Oxley Act of 2002 governing internal controls and procedures
for financial reporting, which started in connection with this Annual Report on
Form 20-F, have resulted in increased general and administrative expense and a
diversion of management time and attention, and we expect these efforts to
require the continued commitment of significant resources. We may identify
material weaknesses or significant deficiencies in our assessments of our
internal controls over financial reporting. Failure to maintain effective
internal controls over financial reporting could result in investigation or
sanctions by regulatory authorities and could have a material adverse effect on
our operating results, investor confidence in our reported financial information
and the market price of our ordinary shares.

RISKS RELATING TO OPERATIONS IN ISRAEL

POLITICAL, ECONOMIC AND MILITARY INSTABILITY IN ISRAEL MAY DISRUPT OUR
OPERATIONS AND NEGATIVELY AFFECT OUR BUSINESS CONDITION, HARM OUR RESULTS OF
OPERATIONS AND ADVERSELY AFFECT OUR SHARE PRICE.

     We are incorporated under the laws of, and our principal executive offices
and manufacturing and research and development facilities are located in, the
State of Israel. As a result, political, economic and military conditions
affecting Israel directly influence us. Any major hostilities involving Israel,
a full or partial mobilization of the reserve forces of the Israeli army, the
interruption or curtailment of trade between Israel and its present trading
partners, or a significant downturn in the economic or financial condition of
Israel could have a material adverse effect on our business, financial condition
and results of operations.


                                       13
<PAGE>


     Since the establishment of the State of Israel in 1948, Israel and its Arab
neighbors have engaged in a number of armed conflicts. A state of hostility,
varying from time to time in intensity and degree, has led to security and
economic problems for Israel. Major hostilities between Israel and its neighbors
may hinder Israel's international trade and lead to economic downturn. This, in
turn, could have a material adverse effect on our operations and business. There
has been an increase in unrest and terrorist activity in Israel, which began in
September 2000 and which has continued with varying levels of severity through
2007. The future effect of this deterioration and violence on the Israeli
economy and our operations is unclear. Recently, there was an escalation in
violence among Israel, Hamas, the Palestinian Authority and other groups, as
well as extensive hostilities along Israel's northern border with Lebanon in the
summer of 2006, and extensive hostilities along Israel's border with the Gaza
Strip since June 2007 when the Hamas effectively took control of the Gaza Strip.
Ongoing violence between Israel and the Palestinians as well as tension between
Israel and the neighboring Syria and Lebanon may have a material adverse effect
on our business, financial conditions and results of operations.

     Furthermore, there are a number of countries, primarily in the Middle East,
as well as Malaysia and Indonesia, that restrict business with Israel or Israeli
companies, and we are precluded from marketing our products to these countries.
Restrictive laws or policies directed towards Israel or Israeli businesses may
have an adverse impact on our operations, our financial results or the expansion
of our business.

OUR RESULTS OF OPERATIONS MAY BE NEGATIVELY AFFECTED BY THE OBLIGATION OF OUR
PERSONNEL TO PERFORM MILITARY SERVICE.

     Some of our directors, officers and employees in Israel are obligated to
perform annual reserve duty in the Israeli Defense Forces and may be called for
active duty under emergency circumstances at any time. If a military conflict or
war arises, these individuals could be required to serve in the military for
extended periods of time. Our operations could be disrupted by the absence for a
significant period of one or more of our executive officers or key employees or
a significant number of other employees due to military service. Any disruption
in our operations could adversely affect our business.

OUR FINANCIAL RESULTS MAY BE ADVERSELY AFFECTED BY INFLATION AND CURRENCY
FLUCTUATIONS.

     We report our financial results in dollars, while a significant amount of
our expenses, primarily salaries, are paid in NIS. Therefore, our NIS related
costs, as expressed in U.S. dollars, are influenced by the exchange rate between
the U.S. dollar and the NIS. During 2007, the NIS appreciated against the U.S.
dollar, which resulted in a significant increase in the U.S. dollar cost of our
NIS expenses. Such trend continued during the first three months of 2008 with
further devaluation of the U.S. dollar compared to the NIS. We are also
influenced by the timing of, and the extent to which, any increase in the rate
of inflation in Israel over the rate of inflation in the United States is not
offset by the devaluation of the NIS in relation to the dollar. Our dollar costs
in Israel will increase if inflation in Israel exceeds the devaluation of the
NIS against the dollar or if the timing of such devaluation lags behind
inflation in Israel. In the past, the NIS has devalued against the dollar and
other foreign currencies, generally reflecting inflation rate differentials. We
cannot predict any future trends in the rate of inflation in Israel or the rate
of devaluation or appreciation of the NIS against the dollar. If the dollar cost
of our operations in Israel increases, our dollar measured results of operations
will be adversely affected. Likewise, our operations could be adversely affected
if we are unable to guard against currency fluctuations in the future.

THE GOVERNMENT PROGRAMS AND TAX BENEFITS WE CURRENTLY PARTICIPATE IN OR RECEIVE
REQUIRE US TO MEET SEVERAL CONDITIONS AND MAY BE TERMINATED OR REDUCED IN THE
FUTURE.

     We have benefited from certain Israeli Government grants, programs and tax
benefits. In late 2005 and early 2006 and 2007, we applied to the Office of the
Chief Scientist of the Israeli Ministry of Industry, Trade and Labor for grants
for our research and development projects and we subsequently received approval
such applications. Future grant applications may not be approved by the Office
of the Chief Scientist and we may not be able to obtain any such grants in the
future. To remain eligible for these grants, programs and tax benefits, we must
comply with certain conditions, including making specified investments in fixed
assets from our own equity and paying royalties with respect to grants received.
In addition, some of these programs restrict our ability to manufacture
particular products and to transfer particular technology outside of Israel. If
we do not meet these conditions in the future, the benefits we received could be
canceled and we may have to refund payments previously received under these
programs or pay increased taxes. The Government of Israel has reduced the
benefits available under these programs in recent years and these programs and
tax benefits may be discontinued or curtailed in the future.


                                       14
<PAGE>


SERVICE AND ENFORCEMENT OF LEGAL PROCESS ON US AND OUR DIRECTORS AND OFFICERS
MAY BE DIFFICULT TO OBTAIN.

     Service of process upon our directors and officers and the Israeli experts
named herein, most of whom reside outside the United States, may be difficult to
obtain within the United States. Furthermore, since substantially all of our
assets, most of our directors and officers and the Israeli experts named herein
are located outside the United States, any judgment obtained in the United
States against us or these individuals or entities may not be collectible within
the United States.

     There is doubt as to the enforceability of civil liabilities under the
Securities Act and the Securities Exchange Act in original actions instituted in
Israel. However, subject to certain time limitations and other conditions,
Israeli courts may enforce final judgments of United States courts for
liquidated amounts in civil matters, including judgments based upon the civil
liability provisions of those Acts.

PROVISIONS OF ISRAELI LAW MAY DELAY, PREVENT OR MAKE DIFFICULT OUR ACQUISITION
BY A THIRD-PARTY, WHICH COULD PREVENT A CHANGE OF CONTROL AND THEREFORE DEPRESS
THE PRICE OF OUR SHARES.

     Provisions of Israeli corporate and tax law may have the effect of
delaying, preventing or making more difficult a merger with, or other
acquisition of, us. This could cause our ordinary shares to trade at prices
below the price for which third parties might be willing to pay to gain control
of us. Third parties who are otherwise willing to pay a premium over prevailing
market prices to gain control of us may be unable or unwilling to do so because
of these provisions of Israeli law.

THE RIGHTS AND RESPONSIBILITIES OF OUR SHAREHOLDERS ARE GOVERNED BY ISRAELI LAW
AND DIFFER IN SOME RESPECTS FROM THE RIGHTS AND RESPONSIBILITIES OF SHAREHOLDERS
UNDER U.S. LAW.

     We are incorporated under Israeli law. The rights and responsibilities of
holders of our ordinary shares are governed by our memorandum of association,
articles of association and Israeli law. These rights and responsibilities
differ in some respects from the rights and responsibilities of shareholders in
typical U.S. corporations. In particular, each shareholder of an Israeli company
has a duty to act in good faith in exercising his or her rights and fulfilling
his or her obligations toward the company and other shareholders and to refrain
from abusing his power in the company, including, among other things, in voting
at the general meeting of shareholders on certain matters. Israeli law provides
that these duties are applicable in shareholder votes on, among other things,
amendments to a company's articles of association, increases in a company's
authorized share capital, mergers and interested party transactions requiring
shareholder approval. In addition, a controlling shareholder of an Israeli
company or a shareholder who knows that it possesses the power to determine the
outcome of a shareholder vote or who has the power to appoint or prevent the
appointment of a director or officer in the company has a duty of fairness
toward the company. However, Israeli law does not define the substance of this
duty of fairness. Because Israeli corporate law has undergone extensive revision
in recent years, there is little case law available to assist in understanding
the implications of these provisions that govern shareholder behavior.

AS A FOREIGN PRIVATE ISSUER WHOSE SHARES ARE LISTED ON THE NASDAQ CAPITAL
MARKET, WE MAY FOLLOW CERTAIN HOME COUNTRY CORPORATE GOVERNANCE PRACTICES
INSTEAD OF CERTAIN NASDAQ REQUIREMENTS.

     As a foreign private issuer whose shares are listed on the NASDAQ Capital
Market, we are permitted to follow certain home country corporate governance
practices instead of certain requirements of the NASDAQ Marketplace Rules,
including the composition of our Board of Directors, director nomination
procedure, compensation of officers, distribution of annual reports to
shareholders and quorum at shareholders meetings. In addition, we may follow
Israeli law instead of the NASDAQ Marketplace Rules that require that we obtain
shareholder approval for certain dilutive events, such as for the establishment
or amendment of certain equity based compensation plans, an issuance that will
result in a change of control of our company, certain transactions other than a
public offering involving issuances of a 20% or more interest in our company and
certain acquisitions of the stock or assets of another company. Currently, we
follow Israeli law and practice instead of the NASDAQ requirements with respect
to the directors' nomination process.


                                       15
<PAGE>


ITEM 4. INFORMATION ON THE COMPANY

A.   HISTORY AND DEVELOPMENT OF THE COMPANY

     Our company was incorporated under the laws of the State of Israel in
December 1995. We are a public limited liability company under the Israeli
Companies Law 5739-1999 and operate under such law and associated legislation.
Our registered offices and principal place of business are located at 22 Zarhin
Street, Ra'anana 43662, Israel, and our telephone number is +972-9-762-1777. Our
address on the Internet Is www.mtsint.com. The information on our website is not
incorporated by reference into this annual report.

     We are a worldwide provider of solutions for telecommunications expense
management, or TEM, and billing solutions. Our TEM solutions assist enterprises
and organizations to make smarter choices with their telecommunications spending
at each stage of the service lifecycle, including allocation of cost, proactive
budget control, fraud detection, processing of payments and spending
forecasting. Our converged billing solutions have been successfully implemented
worldwide by wireless providers, Voice over Internet Protocol, Internet Protocol
Television, and content service providers. Our converged billing solutions
include applications for charging and invoicing customers, interconnect billing
and partner revenue management using pre-pay and post-pay schemes.

     In December 2004, we completed the acquisition of certain assets and
liabilities of Teleknowledge Group Ltd., or Teleknowledge, a provider of carrier
class billing and related solutions. In connection with the acquisition, we paid
an initial consideration of $2.4 million in cash and agreed to pay additional
contingent consideration of up to $3.6 million over a period of three years
based on post acquisition revenue performance. We acquired the Teleknowledge
billing solution in order to be able to offer an end-to-end customer care and
billing solution, including pre/post paid billing, web self-care, assets
management, partner management, help desk and order management modules. During
the first six months of 2007, we determined that the goodwill and intangible
assets relating to the acquisition of the Teleknowledge billing activity in the
amount of approximately $2.3 million had been impaired and the carrying value
was written off.

     During 2005, we conducted extensive research and development so that our
products and solutions could operate in the high-end enterprise market. As a
result, an advanced TEM module was developed, based on our Application Suite
infrastructure. The modular and scalable architecture topology of our
Application SUITE lends itself easily to an open platform where modules can be
added and integrated seamlessly into the platform, thus allowing customers to
buy such modules as they require. In addition, in 2005 we strengthened our
product offerings to the service provider and carrier market as a result of our
release of a new billing solution module that we acquired from Teleknowledge and
through significant investment in research and development in order to provide a
complete end-to-end billing solution for the wholesale trade. As a result, we
introduced an interconnect billing solution and our retail billing solution was
expanded to accommodate legacy telephony that carriers can use to bill their
subscribers. Also, new value-added services (such as video-on-demand (VOD),
multimedia message service, short message service (SMS)) and content (such as
news and games) were added to our billing solutions package. We believe that an
advantage of our solutions is that they operate off a single data base. We also
introduced a partner revenue management module to our billing solutions product,
which complements our product line by enabling carriers to reconcile bills among
one another.

     During 2006, we enhanced our interconnect billing solution to include a
sophisticated and user-friendly rate loader, that automatically loads the rates
from the various Excel sheets that service providers receive and provides a
composite picture of the rates. In 2006, we also developed solutions for mobile
phones based on a patent for which we have filed an international patent
application (PCT application),which is currently pending, to track and account
for calls made from a mobile phone. One of the solutions provides for
reconciliation of calls made from a mobile phone independent of the service
provider and is intended for enterprises to check and monitor calls made from
mobile phones of their employees. Another solution, Wireless Leak Detector, is
intended for service providers to ascertain that all calls made from a mobile
phone have been accounted for and charged.


                                       16
<PAGE>


     Another development in 2006 was the introduction of our Invoice Management
solution that allows tracking of vendors, invoices, assets and contracts both
for pricing and maintenance, with the ultimate objective of reconciling the
invoices for payment or dispute. The solution can be purchased by an enterprise
for their own accounting, or outsourced as an Application Service Provider
(ASP).

     On July 31, 2006, we completed the acquisition of certain assets and
liabilities of TelSoft, California based provider of call accounting products.
We believe that the acquisition of TelSoft's call accounting software have
enabled us to expand our business in the United States. In connection with the
acquisition, we paid an initial consideration of $1.1 million and agreed to pay
additional contingent consideration based on post acquisition revenue
performance during the 12 month period following the acquisition. As of December
31, 2007, based on the post acquisition revenue performance during the 12 month
period following the acquisition, we have recorded an aggregate $606,000 of
additional contingent consideration, of which $200,000 was paid in 2007 and the
balance was paid during the first quarter of 2008.

     In November 2007, we completed the sale of our 50% ownership interest in
Jusan S.A., our Spanish affiliate, in consideration of 700,000 Euros
(approximately $1.0 million) plus the payment to us of 25% of the net income, if
any, of Jusan S.A. during the period commencing upon completion of the sale and
ending June 30, 2008. We recorded an equity loss of $197,000 as a result of the
transaction.

     In December 2007, we received notice that Online Media Solutions Ltd., a
privately-owned leading online advertising company, in which we held
approximately a 1% ownership interest, was sold to a third party. We received
total proceeds of approximately $36,000 from the sale. We recorded a capital
loss of $63,000 as a result of the transaction.

     In February 2008, we completed the sale of our ownership interest in cVidya
Networks Inc. and received total proceeds of approximately $603,000 for the
sale. We will record a capital gain of approximately $382,000 as a result of the
transaction in 2008.

B.   BUSINESS OVERVIEW

INDUSTRY BACKGROUND

     Technological advances and worldwide deregulation and privatization in the
telecommunications industry have resulted in the growth of alternative
telecommunication services providers, such as cellular companies, competitive
access providers, cable companies and data transmission companies. This growth,
in conjunction with dramatic improvements in computing and communications
technology, including the convergence of telephony systems and computers, or
computer telephony integration, has fostered the rapid expansion of
communication services and an increase in the volume of voice and data traffic
by business organizations. The diversification of services and providers using
varied pricing algorithms and the proliferation of domestic and international
networks using varied equipment and technologies for different services and
modes of transmission has placed new demands on telecommunication and
information technology managers and has created the need for sophisticated and
flexible telecommunication management solutions. This has created a demand for
telemanagement solutions that are capable of supporting multiple sites,
switching platforms, languages and currencies, as well as the generation of
telecommunications usage information vital to an enterprise's operations.

     Telemanagement solutions have evolved from the stand-alone PC-based
telephone call accounting and billing systems of the mid-1980's to local area
network or LAN-based systems offering call accounting, fraud detection and fault
management solutions for users with complex voice and data networks. Over the
years, telemanagement solutions have expanded to support information technology,
or IT, and telecom activities, such as the management of IT assets, an
enterprise's internal billing processes, system modifications and enterprise
help desks.


                                       17
<PAGE>


     Call accounting products, a fundamental management tool, record, retrieve
and process data received from a PBX or other telephone switching system,
providing a telecommunications manager with information on telephone usage. This
information enables the management of internal billing, fraud detection and
optimizes the telecommunications resources.

     With today's greater mobility, the need to keep track of moves and changes
in an organization requires the use of tools to control, manage and document
these changes more effectively. The useful life of a standard cabling structure
should be 15 years. This means that existing cables should be able to support an
average of three upgrades of communication equipment during its lifetime, plus
an average of five changes to all outlets. It is virtually impossible to achieve
this performance level without maintaining accurate records reflecting all
details of cabling installations.

     The continuing increase in use of cellular phones for business, during and
outside working hours, has created the need to develop products that will enable
an enterprise to generate a true and full record of all the calls made by its
employees, including cellular calls and calls made by calling cards and other
charge plans.

     Telephony over the Internet, which provides voice communications using the
Internet, is now becoming more prevalent. In conjunction with these services is
"pre-paid", which allows a customer to buy a certain amount of time (expressed
as a function of money) either from the web or through the purchase of a
"scratch" card (which contains an account or personal identification number
(PIN) and units of time) and debits the account with each usage.

     Internet Protocol Television, or IPTV, digital television service delivered
using the Internet Protocol over a network infrastructure, is also becoming more
prevalent. For IPTV services, billing solutions are required to be able to offer
and charge personalized rates, such as rate per content attributes, bundled
package discounts and advice-of-charge according to subscriber's attributes
before a service is consumed. In addition, since IPTV service providers rely
heavily on revenues from direct advertising and charge the advertiser by
exposures and per click, a billing solution for IPTV must be able to identify
such events and charge the advertiser accordingly.

PRODUCTS AND SERVICES

CALL ACCOUNTING AND TELECOMMUNICATIONS EXPENSE MANAGEMENT SOLUTIONS FOR
ENTERPRISES

     TABS.IT

     TABS.IT is a solution for small offices, medium sized businesses and
Fortune 500 enterprises that want to take full control over their communications
network. Specific applications enable hotels, shared tenant environments,
hospitals, universities and service bureaus to resell communications services to
users employing simple, yet efficient mark-up formulas.

     TABS.IT tracks the details of all voice communications usage (such as
dialed numbers, call duration, destination, cost of each call and trunk line
usage) and produces accurately priced individual customer bills. In addition,
TABS.IT tracks the details of all data communications (such as IP address, name,
number of bytes, bandwidth usage and nodes) and can produce a relative cost
figure.

     The TABS.IT report generator provides a wide variety of usage reports that
are easy to read and understand, yet provide all the information necessary to
identify how communications network resources are being utilized. These reports
can be generated either as a summary of the call data or complete with all the
details necessary to make informed management decisions. Their structural
flexibility allows the user to quickly zero in on the specific data of greatest
interest. Historical reports may be maintained for an unlimited period of time
and can become useful tools for assessing budget needs for the coming months or
years.

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<PAGE>


     APPLICATION SUITE

     The Application Suite is a set of applications that assist in the
management of telecom activities and the IT manager's activities. The system
enables organizations to effectively manage their entire internal billing
process. Utilizing its web-based user centric capabilities, the platform
provides its users, including administrators, employees and customers, with a
single easy-to-use interface self provisioning customer care, while guaranteeing
corporate security via the different authentication levels.

     Application Suite includes an invoice management module, which checks the
rates billed by the service provider against the contracted rates and also
reconciles an organization's telecommunications bills, reflecting the usage
reported by the service provider with the actual usage recorded by the
Application Suite. Additionally, the invoice management module checks that the
service provider has charged only for communication equipment actually used by
the organization, as opposed to equipment that is no longer serviceable or not
under current service contracts. An organization's internal procedures for
payment of bills can be entered into the Application Suite and it will track the
bills and insure that there are no delays in payments, and in the case of
discrepancies between the usage and bills, it will provide an analysis of the
discrepancies.

     Application Suite includes a workflow and provisioning module that enables
the management of an organization's process. The provisioning capability enables
the performance of changes in the IT and telecom network as part of the process
and saves time and reduces security risks as a result.

BILLING SOLUTIONS

     Our billing solution for service providers is based on Total-e product with
the following modules:

     o    Retail Billing - customer care and billing (business and residential).
          The billing and rating is for both postpaid and prepaid scenarios.

     o    Partner Management - management of all value added services, or VAS,
          provided (such as content SMS/MMS, pay-by-mobile services and
          location-based advertising services). The module supports advance
          business models, such as revenue sharing between the operator/service
          provider and VAS provider based on the end customer's consumption.

     o    Interconnect/Wholesale Management - manages the activity between the
          operator/service provider and other local or international carriers
          for the traffic that is transferred between them. The basic goal of an
          interconnect solution is to produce an invoice for the calls you have
          delivered for another operator and to validate the invoices received
          from other operators for the calls they have delivered for you.

     Our billing solution for IPTV may be installed side-by-side with legacy
systems and may provide an economic solution to new providers of virtual IPTV
services. Based on our experience to date, our billing solutions for IPTV meets
the emerging market requirements for IPTV billing solutions.

CUSTOMER SERVICE AND INSTALLATION

     We provide customer support to end-users and channels (distributors and
business partners) in the United States, Israel, Hong Kong and Brazil on both a
service contract and a per-incident basis. Our technical support engineers
answer support calls directly and generally seek to provide same-day responses.
We provide updated telephone rate tables to customers on a periodic basis under
annual service contracts. The rate tables are obtained from third-party vendors
who provide this data for all major long-distance service providers. Our
distributors provide a full range of service and technical support functions for
our products, including rate tables, to their respective end-user customers.


                                       19
<PAGE>


SALES AND MARKETING

     We believe that partnering with network vendors and system integrators is
the most advantageous means to generate new sales of our solutions. In addition,
our broad base of previously installed solutions, primarily in the United
States, provides us with opportunities to offer and sell any new products,
solutions and services.

     We sell our solutions worldwide through original equipment manufacturer, or
OEM, distribution channels and our own direct sales force in the United States,
Israel, Hong Kong and Brazil, and through a network of local distributors in
these and various other countries. We employed 12 persons in sales and marketing
and 18 persons in support as of December 31, 2007, as compared to 20 persons in
sales and marketing and 29 persons in support as of December 31, 2006.

     We conduct a wide range of marketing activities aimed at generating
awareness and leads. We maintain our website (www.mtsint.com), allowing for
correspondence and queries from new potential customers as well as promoting
support for our existing customer base.

MANAGED SERVICES

     Our managed services solution is an outsourcing solution geared to
multi-national companies that centrally manage their telecommunications usage
and is offered as an added value service. This solution has been offered in the
United States where our New Jersey office acts as a service bureau.

     SWITCHING SYSTEMS MANUFACTURERS AND VENDORS. We believe that the most
efficient means of selling our telemanagement products is to enter into
relationships with major business telephone system manufacturers and vendors who
market our products on either an OEM basis or supplemental sales basis at the
time they sell their switching systems. We also utilize our distributors to
market our products to local business telephone switching systems manufacturers
and distributors. We intend to establish additional strategic relationships with
business telephone switching systems manufacturers and vendors. Among the
companies that sell our telemanagement products are Alcatel, Avaya, Damovo,
ECI/Tadiran, Ericsson, Harris, LG, Lucent, Mitel, NEC, Nortel, Panasonic and
Siemens. We have also entered into an agreement with a major global manufacturer
with respect to our billing products. Sales attributable our largest OEM
customer, Siemens, represented approximately 36.0%, 29.0, 26.4% of our total
revenues for the years ended December 31, 2005, 2006 and 2007, respectively.

     DISTRIBUTORS. In general, in those countries where we do not have a
marketing subsidiary, we distribute our products through a local distributor.
Marketing, sales, training, product and client support are provided by our local
distributors. A local distributor is typically a telecommunication products
marketing organization with the capability to add value with installation,
training and support. Distributors are generally responsible for the
localization of our products into their native language. The distributor also
translates our standardized product marketing literature and technical
documentation. Prior to becoming an authorized distributor, the distributor's
employees must undergo sales and technical training. We are available for
second-tier support for the distributor and for end-users. In coordination with
the distributors, we also provide technical support for large and multinational
accounts. We have distributors worldwide and intend to expand our network of
distributors and resellers in selected markets.

     STRATEGIC RELATIONSHIPS. As part of our marketing strategy, we attempt to
develop and establish new strategic relationships with manufacturers of voice
and data communication systems and IP-based equipment as means of entering new
markets and channels.


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<PAGE>


COMPETITION

     The market for telemanagement products and billing solutions is fragmented
and intensely competitive. Competition in the industry is generally based on
product performance, depth of product line, technical support and price. We
compete both with international and local competitors (including providers of
telecommunications and billing services), many of whom have significantly
greater financial, technical and marketing resources than we do. Our existing
and potential customers, including business telephone switching system
manufacturers and vendors, may be able to develop telemanagement and billing
products and services that are as effective as, or more effective or easier to
use than, those offered by us. Such existing and potential competitors may also
enjoy substantial advantages over us in terms of research and development
expertise, manufacturing efficiency, name recognition, sales and marketing
expertise and distribution channels. Although we believe that the quality of our
products is equal to or better than the product quality of our competitors with
regard to performance and reliability, we have no quantitative data other than
the evaluations of our present customers from which to assess our current
ability to compete. There can be no assurance that we will be able to compete
successfully against current or future competitors or that competition will not
have a material adverse effect on our future revenues and, consequently, on our
business, operating results and financial condition.

INTELLECTUAL PROPERTY RIGHTS

     We rely upon a combination of security devices, copyrights, trademarks,
patents, trade secret laws, confidentiality procedures and contractual
restrictions to protect our rights in our products. In 2005, we filed an
international patent application (PCT application), which is currently pending,
relating to a mobile verification technique that verifies mobile phone usage
against the bill received from the service provider. Our policy has been to
pursue copyright protection for our software and related documentation and
trademark registration of our product names. Some of our products have the added
protection afforded by a hardware component which has embedded software that it
is difficult to misappropriate. In addition, our key employees and independent
contractors are required to sign non-disclosure and confidentiality agreements.
All of the intellectual property rights with respect to our current products are
held by Mer Telemanagement Solutions Ltd.

     Our trademark rights include rights associated with the use of our
trademarks and rights obtained by registration of our trademarks in Israel and
the United States. We have also acquired rights in certain registered trademarks
and common law trademarks and service marks in connection with the products we
acquired from Teleknowledge in December 2004 and the assets we acquired from
TelSoft in July 2006. The use and registration rights of our trademarks does not
ensure that we have superior rights over other third parties that may have
registered or used identical related marks on related goods or services.
Trademark rights are territorial in nature; therefore we do not have rights in
all jurisdictions.

     We believe that, because of the rapid pace of technological change in the
communication industry, the legal protections for our products are less
significant factors in our success than the knowledge, ability and experience of
our employees, the frequency of product enhancements and the timeliness and
quality of support services provided by us.

C.   ORGANIZATIONAL STRUCTURE

     Our wholly-owned subsidiaries in the United States, Hong Kong, the
Netherlands and Brazil, MTS IntegraTRAK Inc., MTS TelSoft Inc., MTS Asia Ltd.,
JARAGA B.V. and TABS Brazil Ltda., respectively, act as marketing and customer
service organizations in those countries.

D.   PROPERTY, PLANTS AND EQUIPMENT

     Our executive offices and research and development facilities are located
at 22 Zarhin Street, Ra'anana, Israel, where we occupy approximately 16,300
square feet. The lease, which expires on June 15, 2010, has an annual rental
charge of approximately $450,000. We have subleased approximately 4,400 square
feet of this space until June 15, 2010 for an annual rental charge of
approximately $120,000.

     Our U.S. subsidiary MTS IntegraTRAK Inc. occupies approximately 2,150
square feet of space in New Jersey, under a month-to-month lease for a monthly
rental fee of $3,150. We have an office in Kirkland, Washington., where we
occupy approximately 2,314 square feet. The lease, which expires on October 15,
2008, has a remaining obligation of approximately $45,000. We also have an
office in Glendale, California, where we occupy approximately 2,340 square feet.
of space. The lease is on a month-to-month basis for a monthly rental fee of
approximately $5,300.


                                       21
<PAGE>


     In addition, we lease offices in Hong Kong and Sao Paulo. The lease
agreements for the Hong Kong and Sao Paulo offices will expire in October 2007
and August 2008, respectively and have a combined remaining obligation of
approximately $32,000.

ITEM 4A. UNRESOLVED STAFF COMMENTS

     Not applicable.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A.   OPERATING RESULTS

     THE FOLLOWING DISCUSSION OF OUR RESULTS OF OPERATIONS SHOULD BE READ
TOGETHER WITH OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED
NOTES, WHICH APPEAR ELSEWHERE IN THIS ANNUAL REPORT. THE FOLLOWING DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS THAT REFLECT OUR CURRENT PLANS, ESTIMATES
AND BELIEFS AND INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW AND
ELSEWHERE IN THIS ANNUAL REPORT.

BACKGROUND

     We were incorporated under the laws of the State of Israel in December
1995, as a subsidiary of C.Mer Industries Ltd., an Israeli public company. Since
our initial public offering in May 1997, our ordinary shares have been listed on
the NASDAQ Stock Market. In June 1999, C.Mer Industries Ltd. distributed to its
shareholders all of its remaining shares in our company as a dividend.

     We have wholly-owned subsidiaries in the United States, Hong Kong, the
Netherlands and Brazil, MTS IntegraTRAK Inc., MTS TelSoft Inc., MTS Asia Ltd.,
JARAGA B.V. and TABS Brazil Ltda., respectively, which act as marketing and
customer service organizations in those countries.

OVERVIEW

     We are a worldwide provider of solutions for telecommunications expense
management, or TEM, and billing solutions. Our TEM solutions assist enterprises
and organizations to make smarter choices with their telecommunications spending
at each stage of the service lifecycle, including allocation of cost, proactive
budget control, fraud detection, processing of payments and spending
forecasting. Our converged billing solutions have been successfully implemented
worldwide by wireless providers, Voice over Internet Protocol, Internet Protocol
Television, and content service providers. Our converged billing solutions
include applications for charging and invoicing customers, interconnect billing
and partner revenue management using pre-pay and post-pay schemes.

     In November 2007, we completed the sale of our 50% ownership interest in
Jusan S.A., our Spanish affiliate, in consideration of 700,000 Euros
(approximately $1.0 million) plus the payment to us of 25% of the net income, if
any, of Jusan S.A. during the period commencing upon completion of the sale and
ending June 30, 2008 . We recorded an equity loss of $197,000 as a result of the
transaction.

     In December 2007, we received notice that Online Media Solutions Ltd., a
privately-owned leading online advertising company, in which we held
approximately a 1% ownership interest, was sold to a third party. We received
total proceeds of approximately $36,000 from the sale. We recorded a capital
loss of $63,000 as a result of the transaction.

     In February 2008, we completed the sale of our ownership interest in cVidya
Networks Inc. and received total proceeds of approximately $603,000 for the
sale. We will record a capital gain of approximately $382,000 as a result of the
transaction in 2008.


                                       22
<PAGE>


GENERAL

     Our consolidated financial statements appearing in this annual report are
prepared in U.S. dollars and in accordance with generally accepted accounting
principles in the United States, or U.S. GAAP. Transactions and balances
originally denominated in dollars are presented at their original amounts.
Transactions and balances in other currencies are remeasured into dollars in
accordance with the principles set forth in Financial Accounting Standards
Board, or FASB, Statement No. 52. The majority of our sales are made outside
Israel in dollars. In addition, substantial portions of our costs are incurred
in dollars. Since the dollar is the primary currency of the economic environment
in which we and certain of our subsidiaries operate, the dollar is our
functional and reporting currency and, accordingly, monetary accounts maintained
in currencies other than the dollar are remeasured using the foreign exchange
rate at the balance sheet date. Operational accounts and non-monetary balance
sheet accounts are measured and recorded at the exchange rate in effect at the
date of the transaction. The financial statements of certain subsidiaries and an
affiliate that we sold in November 2007 whose functional currency is not the
dollar, have been translated into dollars. All balance sheet accounts have been
translated using the exchange rates in effect at the balance sheet date.
Statement 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).

DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATIONS

     The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and the use of different
assumptions would likely result in materially different results of operations.

     Critical accounting policies are those that are both most important to the
portrayal of a company's financial position and results of operations, and
require management's most difficult, subjective or complex judgments. Although
not all of our significant accounting policies require management to make
difficult, subjective or complex judgments or estimates, the following policies
and estimates are those that we deem most critical:

     REVENUE RECOGNITION. We account for our revenue in accordance with the
provisions of Statement of Position, or SOP, No. 97-2, "SOFTWARE REVENUE
RECOGNITION," issued by the American Institute of Certified Public Accountants
and as amended by SOP No. 98-9 and related interpretations. When an arrangement
does not require significant production, modification or customization of
software or does not contain services considered to be essential to the
functionality of the software, revenue is recognized when the following four
criteria are met:

     o    Persuasive evidence of an arrangement exists. We require evidence of
          an agreement with a customer specifying the terms and conditions of
          the products or services to be delivered typically in the form of a
          purchase order or the customer's signature on our proposal;

     o    Delivery has occurred. For software licenses, delivery takes place
          when the software is installed on site or remotely or is shipped via
          mail on a compact disc or server. For services, delivery takes place
          as the services are provided;

     o    The fee is fixed or determinable. Fees are fixed or determinable if
          they are not subject to a refund or cancellation and do not have
          payment terms that exceed our customary payment terms; and

     o    Collection is probable. We perform a credit review of all customers
          with significant transactions to determine whether a customer is
          credit worthy and collection is probable.


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<PAGE>


     In general, revenue for transactions that do not involve software
customization or services considered essential to the functionality of the
software is recognized as follows: (i) software license fees for sales through
OEMs are recognized upon receipt of license activity reports; (ii) all other
software license fees are recognized upon delivery of the software; (iii)
software maintenance and technical support are recognized ratably over the
contract term; and (iv) consulting, training and other similar services are
recognized as the services are performed.

     We exercise judgment and use estimates in connection with the determination
of the amount of product software license and services revenues to be recognized
in each accounting period. If the fee due from the customer is not fixed or
determinable, revenue is recognized as payments become due from the customer. If
collection is not considered probable, revenue is recognized when the fee is
collected. We record a provision to operating expenses for bad debts resulting
from customers' inability to pay for the products or services they have
received. These estimates are based on historical bad debt expense, analyses of
credit memo data, and other known factors, such as bankruptcy. If the historical
data we use to calculate these estimates do not accurately reflect future
returns or bad debts, adjustments to these reserves may be required that would
increase or decrease revenue or net income.

     Many of our software arrangements involve multiple elements. Such elements
typically include any or all of the following: software licenses, software
maintenance, technical support and training services. For multiple-element
arrangements that do not involve significant modification or customization of
the software and do not involve services that are considered essential to the
functionality of the software, we allocate value to each undelivered element
based on vendor specific objective evidence, or VSOE, of the fair value 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 us 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 (i) there is VSOE of the fair values
of all the undelivered elements, and (ii) all revenue recognition criteria of
SOP No. 97-2, as amended, as described above, are satisfied. Under the residual
method any discount in the arrangement is allocated to the delivered element. If
sufficient VSOE does not exist for all undelivered elements, revenue is deferred
for the entire arrangement until all revenue recognition criteria are met for
such undelivered elements.

     Revenues from billing products which involve significant customization of
our software to customer specific specifications are recognized in accordance
with SOP No. 81-1, "ACCOUNTING FOR PERFORMANCE OF CONSTRUCTION-TYPE AND CERTAIN
PRODUCTION-TYPE CONTRACTS," using contract accounting on a percentage of
completion method, over the period from signing of the license through to
customer acceptance in accordance with the "input method." The amount of revenue
recognized is based on the total license fees under the license agreement and
the percentage to completion achieved. The percentage to completion is measured
by monitoring progress using records of actual costs incurred to date in the
project compared with the total estimated project requirements. Estimates of
total project requirements are based on prior experience of customization,
delivery and acceptance of the same or similar technology and are reviewed and
updated regularly by management.

     Where arrangements recognized according to SOP No. 81-1 involve maintenance
and support services, revenues are recognized according to Emerging Issues Task
Force, or EITF, Issue No. 00-21, "REVENUES ARRANGEMENTS WITH MULTIPLY
DELIVERIES," or EITF 00-21. According to EITF 00-21, a multiple-element
arrangement (an arrangement that involves the delivery or performance of
multiple products, services and/or rights to use assets) is separated into more
than one unit of accounting, if the functionality of the delivered element is
not dependent on the undelivered element, there is VSOE of fair value of the
undelivered element and delivery of the delivered element represents the
culmination of the earnings process for this element. We have established VSOE
for maintenance and support services based on the renewal rate that will be
charged when these elements are sold separately and therefore the arrangement
consideration is allocated to maintenance and support services based on their
relative VSOE.

     After delivery, if uncertainty exists about customer acceptance of the
software, license revenue is not recognized until acceptance. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are first determined, in the amount of the estimated loss on the entire
contract. As of December 31, 2007, no such estimated losses were identified.


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<PAGE>


     Estimated gross profit or loss from long-term contracts may change due to
changes in estimates resulting from differences between actual performance and
original forecasts. Such changes in estimated gross profit are recorded in
results of operations when they are reasonably determinable by management, on a
cumulative catch-up basis.

     We believe that the use of the percentage of completion method is
appropriate as we have the ability to make reasonably dependable estimates of
the extent of progress towards completion, contract revenues and contract costs.
In addition, contracts executed include provisions that clearly specify the
enforceable rights regarding services to be provided and received by the parties
to the contracts, the consideration to be exchanged and the manner and terms of
settlement. In all cases we expect to perform our contractual obligations and
our licensees are expected to satisfy their obligations under the contract.

     ALLOWANCES FOR DOUBTFUL ACCOUNTS. We perform ongoing credit evaluations of
our customers' financial condition and we require collateral as deemed
necessary. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make payments. In judging the
adequacy of the allowance for doubtful accounts, we consider multiple factors
including the aging of our receivables, historical bad debt experience and the
general economic environment. Management applies considerable judgment in
assessing the realization of receivables, including assessing the probability of
collection and the current credit worthiness of each customer. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.

     INCOME TAXES. Estimates and judgments are required in the calculation of
certain tax liabilities and in the determination of the recoverability of
certain of the deferred tax assets, which arise from net operating losses tax
carryforwards and temporary differences between the tax and financial statement
recognition of revenue and expense. Statement of Financial Accounting Standard,
or SFAS, No. 109, "ACCOUNTING FOR INCOME TAXES," also requires that the deferred
tax assets be reduced by a valuation allowance, if based on the weight of
available evidence, it is more likely than not that some portion or all of the
recorded deferred tax assets will not be realized in future periods.

     In July 2006, the FASB issued Financial Interpretation No. 48, "ACCOUNTING
FOR UNCERTAINTY IN INCOME TAXES - AN INTERPRETATION OF FASB STATEMENT NO. 109,"
or FIN 48. FIN 48 provides detailed guidance for the financial statement
recognition, measurement and disclosure of uncertain tax positions recognized in
an enterprise's financial statements in accordance with SFAS No. 109. Income tax
positions must meet a more-likely-than-not recognition threshold at the
effective date to be recognized upon the adoption of FIN 48 and in subsequent
periods. We adopted FIN 48 effective January 1, 2007 and the provisions of FIN
48 have been applied to all income tax positions commencing from that date. As
of January 1, 2007 there was no difference between the provisions of SFAS 109
and FIN 48 therefore no adjustment was recorded to the retained earnings.

     Prior to 2007 the Company determined its tax contingencies in accordance
with SFAS 5, Accounting for Contingencies, or SFAS 5. The Company recorded
estimated tax liabilities to the extent the contingencies were probable and
could be reasonably estimated.

     In evaluating our ability to recover our deferred tax assets, in full or in
part, we consider all available positive and negative evidence including our
past operating results, the existence of cumulative losses in the most recent
fiscal years and our forecast of future taxable income on a jurisdiction by
jurisdiction basis. In determining future taxable income, we are responsible for
assumptions utilized, including the amount of Israeli and international pre-tax
operating income, the reversal of temporary differences and the implementation
of feasible and prudent tax planning strategies. These assumptions require
significant judgment about the forecasts of future taxable income and are
consistent with the plans and estimates we use to manage the underlying
businesses.


                                       25
<PAGE>


     Based on estimates of future taxable profits and losses in certain foreign
tax jurisdictions, we determined that a valuation allowance of $4.3 million was
required for tax loss carryforwards and other temporary differences as of
December 31, 2007. If these estimates prove inaccurate, a change in the
valuation allowance could be required in the future.

     CONTINGENCIES. We are involved in legal proceedings and other claims from
time to time. We are required to assess the likelihood of any adverse judgments
or outcomes to these matters, as well as potential ranges of probable losses. A
determination of the amount of reserves required, if any, for any contingencies
are made after careful analysis of each individual claim. The required reserves
may change due to future developments in each matter or changes in approach,
such as a change in the settlement strategy in dealing with any contingencies,
which may result in higher net loss. If actual results are not consistent with
our assumptions and judgments, we may be exposed to gains or losses that could
be material. See "Item 8A. Financial Information - Consolidated Statements and
Other Financial Information - Legal Proceedings."

     GOODWILL AND OTHER INTANGIBLE ASSETS AND LONG-LIVED ASSETS. As of December
31, 2006, we had recorded goodwill of approximately $1.9 million attributable to
the acquisition of the billing activity of Teleknowledge in December 2004. As of
December 31, 2006 and 2007, we had recorded goodwill of approximately $166,000
and $772,000, respectively, attributable to the acquisition of the TEM activity
of Telsoft on July 31,2006. On January 1, 2002, we adopted SFAS No. 142,
"GOODWILL AND OTHER INTANGIBLE ASSETS," or SFAS No. 142. SFAS No. 142 requires
goodwill to be tested for impairment on adoption of the statement, at least
annually thereafter, and between annual tests if certain circumstances or
indicators of impairment occur, 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 our reportable units with their
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, weighted average cost of
capital and estimates of market multiples for the reportable units. We have
elected to perform our analysis of goodwill at the end of the third quarter of
the year. During the first six months of 2007, due to indicators of impairment
that occurred, we reviewed our goodwill and determined that there was an
indication that the goodwill relating to the acquisition of the Teleknowledge
billing activity had been impaired due to the significant decrease in revenues
from the activity and delay in receipt of new purchase orders. We assessed the
recoverable amount of such goodwill, based on our projections and using expected
future discounted cash flows. Based on such review, as of June 30, 2007, we
determined that the goodwill in the amount of $1.9 million relating to the
acquisition of the Teleknowledge billing activity had been impaired and the
carrying value was written off.

     Our long-lived assets and certain identifiable intangibles are reviewed for
impairment in accordance with SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS," whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of the carrying amount of assets to be held and used is measured
by a comparison of the carrying amount of the assets to the future undiscounted
cash flows expected to be generated by the assets. If 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. During
the first six months of 2007, we reviewed our goodwill and determined that there
was an indication that the goodwill relating to the acquisition of the
Teleknowledge billing activity had been impaired due to the significant decrease
in revenues from the activity and delay in receipt of new purchase orders. Based
on such review, as of June 30, 2007, we determined that intangible assets
relating to the Teleknowledge acquisition has been impaired, and as a result, we
recorded an impairment loss in the amount of $434,000.


                                       26
<PAGE>


RESULTS OF OPERATIONS

     The following table presents certain financial data expressed as a
percentage of total revenues for the periods indicated:

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                              ----------------------------
                                                              2005        2006        2007
                                                              ----        ----        ----
<S>                                                          <C>         <C>         <C>
Revenues:
Product sales                                                 66.0%       71.7%       61.7%
Services                                                      34.0        28.3        38.3
                                                             -----       -----       -----
Total revenues                                               100.0%      100.0%      100.0%
Cost of revenues:
Product sales                                                 25.7        25.1        20.0
Services                                                       7.2         6.9         9.3
                                                             -----       -----       -----
Total cost of revenues                                        32.9        32.0        29.3
Gross profit                                                  67.1        68.0        70.7
Selling and marketing                                         41.5        29.4        37.3
Research and development, net                                 38.0        34.7        28.3
General and administrative                                    24.5        25.3        39.6
Impairment of goodwill and other intangible assets              --          --        24.8
                                                             -----       -----       -----
Operating loss                                               (36.9)      (21.4)      (59.3)
Financial expenses (income), net                               0.5        (0.5)       (1.1)
Capital loss on sale of long-term investment                    --          --        (0.7)
                                                             -----       -----       -----
Loss before taxes on income                                  (36.4)      (21.9)      (61.1)
Taxes on income (benefit), net                                 0.1         1.1        (0.7)
                                                             -----       -----       -----
Net loss before equity in earnings (losses) of affiliate     (36.5)      (23.0)      (60.4)
Equity in earnings (losses) of affiliate                       0.0         1.5        (2.1)
                                                             -----       -----       -----
Net loss                                                     (36.5)      (21.5)      (62.5)
                                                             =====       =====       =====
</TABLE>

YEARS ENDED DECEMBER 31, 2007 AND 2006

     REVENUES FROM PRODUCTS AND SERVICES. Revenues from products and services
consist primarily of software license fees sales, hardware sales and revenues
from services, including service bureau, maintenance, training, professional
services and support. Revenues from products and services decreased by 10.9% to
$9.3 million for the year ended December 31, 2007 from $10.5 million for the
year ended December 31, 2006. Revenues from products and services from our
wholly-owned U.S. subsidiary, MTS IntegraTRAK, decreased by 8.1% to $4.9
million, or 52.7% of our total revenues, for the year ended December 31, 2007
from $5.4 million, or 51.1% of our total revenues, for the year ended December
31, 2006. The decrease in revenues from products and services in 2007 is
primarily attributable to a longer sales cycle for our solutions during the year
ended December 31, 2007 compared with the year ended December 31, 2006. We
anticipate that our revenues from products and services will remain constant in
2008.

     COST OF REVENUES FROM PRODUCTS AND SERVICES. Cost of revenues from products
and services consists primarily of (i) production costs (including hardware,
media, packaging, freight and documentation); (ii) certain royalties and
licenses payable to third parties (including the Office of the Chief Scientist
of the Ministry of Industry, Trade and Labor of the State of Israel), (iii)
professional services costs; and (iv) warranty and support costs for up to one
year for end-users and up to 15 months for our OEM distributors. Cost of
revenues from products and services decreased by 18.5% to $2.7 million for the
year ended December 31, 2007 from $3.4 million for the year ended December 31,
2006. The decrease in cost of revenues from products and services is primarily a
result of a reduction in the number of employees in training and technical
support.


                                       27
<PAGE>


     SELLING AND MARKETING. Selling and marketing expenses consist primarily of
costs relating to sales representatives and their travel expenses, trade shows
and marketing exhibitions, advertising and presales support. Selling and
marketing expenses increased by 13.1% to $3.5 million for the year ended
December 31, 2007 from $3.1 million for the year ended December 31, 2006. The
increase in selling and marketing expenses is primarily attributable to the
integration of the activity of TelSoft and additional state sales taxes that we
recorded as a result of a state sales tax assessment of our U.S. subsidiary,
which increase was off-set in part by a reduction in the number of sales and
marketing employees worldwide and related expenditures during 2007.

     RESEARCH AND DEVELOPMENT, NET. Research and development, net expenses
consist primarily of salaries of employees engaged in on-going research and
development activities, outsourcing subcontractor development and other related
costs, net of grants that were approved by the Office of the Chief Scientist of
the Ministry of Industry, Trade and Labor of the State of Israel. Research and
development, net expenses decreased by 27.3% to $2.6 million for the year ended
December 31, 2007 (net of the grant from the Office of the Chief Scientist in
the amount of $469,000) from $3.6 million for the year ended December 31, 2006
(net of the grant from the Office of the Chief Scientist in the amount of
$578,000). The decrease in research and development, net expenses is primarily
attributable to the reduction in the number of employees engaged in research and
development and their related expenditure and reduction in costs related to
research and development subcontractors.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of compensation costs for administration, finance and general
management personnel, professional fees and office maintenance and
administrative costs. General and administrative expenses increased by 39.4% to
$3.7 million for the year ended December 31, 2007 from $2.7 million for the year
ended December 31, 2006. The increase in general and administrative expenses is
primarily attributable to the integration of the activity of TelSoft, a
write-off of obsolete and slow moving inventory, a write-off of tax advances
paid to the Israeli Tax Authority that we do not expect to able to utilize, a
contingent liability provision we recorded due to a claim of a former Brazilian
employee and an increase in the allowance for doubtful accounts.

     IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS. Impairment of goodwill
and other intangible assets was approximately $2.3 million for the year ended
December 31, 2007 as a result of our determination that the goodwill and
intangible assets relating to the acquisition of the Teleknowledge billing
activity had been impaired and to write off their carrying value. We did not
record any impairment of goodwill and other intangible assets for the year ended
December 31, 2006.

     FINANCIAL EXPENSES (INCOME), NET. Financial expenses (income), net consists
primarily of gains on marketable securities, interest income on bank deposits,
bank commissions, bank interest and foreign currency translation adjustments.
Financial expenses for the year ended December 31, 2007 were $105,000, compared
to financial expenses of $54,000 for the year ended December 31, 2006. The
increase in our financial expenses for the year ended December 31, 2007 is
primarily attributable to the decrease in our holdings of cash and cash
equivalents and an increase in interest paid on a bank loan.

     CAPITAL LOSS ON SALE OF LONG-TERM INVESTMENT. We recorded a capital loss on
sale of long-term investment of $63,000 for the year ended December 31, 2007 as
a result of the sale of our 1% ownership interest in Online Media Solutions Ltd.
for total proceeds of approximately $36,000. The transaction was consummated in
December 2007. We did not record a capital loss on sale of long-term investment
for the year ended December 31, 2006.

     TAXES ON INCOME (BENEFIT), NET. We recorded a tax benefit of $68,000 for
the year ended December 31, 2007, compared to a tax on income of $118,000 for
the year ended December 31, 2006. The tax benefit for the year ended December
31, 2007 is attributable to the recognition of a deferred tax asset related to
carry forward tax losses of our subsidiary in Hong Kong and a decrease in a
deferred tax liability in the United States. The tax on income for the year
ended December 31, 2006 is primarily attributable to a tax reserve that we
established in 2006 for possible tax liabilities relating to prior years.


                                       28
<PAGE>


     EQUITY IN EARNINGS (LOSSES) OF AFFILIATE. Prior to the sale of our 50%
ownership interest in Jusan S.A., our Spanish affiliate, in November 2007, we
recognized income and loss from the operations of Jusan S.A. For the year ended
December 31, 2006, we recognized income of $159,000 from the operations of Jusan
S.A. As a result of the sale of Jusan S.A. in November 2007, we recorded a loss
of $197,000 from the operations of Jusan S.A for the year ended December
31,2007.

YEARS ENDED DECEMBER 31, 2006 AND 2005

     REVENUES FROM PRODUCTS AND SERVICES. Revenues decreased by 9.3% to $10.5
million for the year ended December 31, 2006 from $11.6 million for the year
ended December 31, 2005. Revenues from our wholly-owned U.S. subsidiary, MTS
IntegraTRAK, decreased by 11.4% to $5.4 million, or 51.1% of our total revenues,
for the year ended December 31, 2006 from $6.0 million, or 52.3% of our total
revenues, for the year ended December 31, 2005. The decrease in revenues in 2006
is primarily attributable to a longer sales cycle for our solutions during the
year ended December 31, 2006 compared with the year ended December 31, 2005.

     COST OF REVENUES FROM PRODUCTS AND SERVICES. Cost of revenues decreased by
11.8% to $3.3 million for the year ended December 31, 2006 from $3.8 million for
the year ended December 31, 2005. The decrease in cost of revenues is consistent
with the decrease in revenues and principally a result of a reduction in the
number of employees in professional services and technical support departments.

     SELLING AND MARKETING. Selling and marketing expenses decreased by 35.8% to
$3.1 million for the year ended December 31, 2006 from $4.8 million for the year
ended December 31, 2005. The decrease in selling and marketing expenses is
primarily attributable to our reliance on establishing and maintaining
partnerships with leading OEMs and vendors for various initiatives and a
reduction in the number of our selling and marketing personnel.

     RESEARCH AND DEVELOPMENT, NET. Research and development, net expenses
decreased by 17.3% to $3.6 million for the year ended December 31, 2006 (net of
the grant from the Office of the Chief Scientist in the amount of $578,000) from
$4.4 million for the year ended December 31, 2005 (net of the grant from the
Office of the Chief Scientist in the amount of $130,000). The decrease in
research and development, net expenses is primarily attributable to the
reduction in the number of employees engaged in research and development and the
increase in the participation of the Office of the Chief Scientist in 2006.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
by 6.3% to $2.7 million for the year ended December 31, 2006 from $2.8 million
for the year ended December 31, 2005. The decrease in general and administrative
expenses is primarily attributable to the decrease in expenses associated with
the integration of the activity of Teleknowledge Group Ltd., or Teleknowledge,
that were incurred in the year ended December 31, 2005.

     IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS. We did not record any
impairment of goodwill and other intangible assets for the years ended December
31, 2006 and December 31, 2005.

     FINANCIAL EXPENSES (INCOME), NET. Financial expenses for the year ended
December 31,2006 were $54,000 compared to financial income of $53,000 for the
year ended December 31,2005. The decrease in our financial income for the year
ended December 31, 2006 is primarily attributable to the decrease in our
holdings of cash and cash equivalents, interest paid on a bank loan and decrease
in gains on marketable securities.

     CAPITAL LOSS ON SALE OF LONG-TERM INVESTMENT. We did not record a capital
loss on sale of long-term investment for the years ended December 31, 2006 and
December 31, 2005.

     TAXES ON INCOME (BENEFIT), NET. We recorded tax on income of $118,000 for
the year ended December 31, 2006, compared to tax on income of $10,000 for the
year ended December 31, 2005. The increase in tax on income is primarily
attributable to a tax reserve that we established in 2006 for possible tax
liabilities relating to prior years.


                                       29
<PAGE>


     EQUITY IN EARNINGS (LOSSES) OF AFFILIATE. Prior to the sale of our 50%
ownership interest in Jusan S.A., our Spanish affiliate, in November 2007, we
recognized income and loss from the operations of Jusan S.A. For the years ended
December 31, 2006 and 2005, we recognized income of $159,000 and $2,000,
respectively, from the operations of Jusan S.A.

QUARTERLY RESULTS OF OPERATIONS

     The following tables set forth certain unaudited quarterly financial
information for each of the eight fiscal quarters ended December 31, 2007, in
dollars and as a percentage of revenues. In management's opinion, this data has
been prepared on a basis consistent with our audited consolidated financial
statements included elsewhere in this annual report and include all necessary
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of the unaudited information for the quarters
presented. The operating results for any quarter are not necessarily indicative
of results that we might achieve for any future periods.

<TABLE>
<CAPTION>
                                                     For the Three Month Periods Ended
                                      --------------------------------------------------------------
                                          Mar.            Jun.             Sept.            Dec.
                                          31,              30,              30,              31,
                                         2006             2006             2006             2006
                                      -----------      -----------      -----------      -----------
<S>                                   <C>              <C>              <C>              <C>
Revenues                              $     2,814      $     2,704      $     2,652      $     2,314
Cost of revenues                              934              894              813              714
                                      -----------      -----------      -----------      -----------
Gross profit                                1,880            1,810            1,839            1,600
                                      -----------      -----------      -----------      -----------
Selling and marketing                         830              753              814              681
Research and development, net               1,060              898              915              760
General and administrative                    578              630              746              697
Impairment of goodwill and other
   intangibles assets                          --               --               --               --
Operating expenses                          2,468            2,281            2,475            2,138
                                      -----------      -----------      -----------      -----------
Operating loss                               (588)            (471)            (636)            (538)
Financial (expenses) income, net               37              (26)             (60)              (5)
Capital loss on sale of
   long-term investment                        --               --               --               --
                                      -----------      -----------      -----------      -----------
Loss before taxes on income                  (551)            (497)            (696)            (543)
Tax on income (benefit), net                    3               --               --              115
                                      -----------      -----------      -----------      -----------
Net loss before equity in
   earnings (losses) of affiliate            (554)            (497)            (696)            (658)
Equity in earnings (losses) of
affiliate                                      69               49               52              (11)
                                      -----------      -----------      -----------      -----------
Net loss                              $      (485)     $      (448)     $      (644)     $      (669)
                                      ===========      ===========      ===========      ===========
Basic and diluted net loss per
   share                              $     (0.08)     $     (0.08)     $     (0.11)     $     (0.12)
Weighted average number of
   ordinary shares used in
   computing basic net loss per
   share                                5,744,864        5,763,845        5,765,289        5,773,845
Weighted average number of
ordinary shares used in
computing diluted net loss per
share                                   5,744,864        5,763,845        5,765,289        5,773,845
Revenues                                    100.0%           100.0%           100.0%           100.0%
Cost of revenues                             33.2             33.1             30.7             30.9
                                      -----------      -----------      -----------      -----------
Gross profit                                 66.8             66.9             69.3             69.1
                                      -----------      -----------      -----------      -----------
Selling and marketing                        29.5             27.8             30.7             29.4
Research and development, net                37.7             33.2             34.5             32.8
General and administrative                   20.5             23.3             28.1             30.1
Impairment of goodwill and other
   intangible assets                            -                -                -                -
Operating expenses                           87.7             84.3             93.3             92.3
                                      -----------      -----------      -----------      -----------
Operating loss                              (20.9)           (17.4)           (24.0)           (23.2)
Financial (expenses) income, net              1.3             (1.0)            (2.3)            (0.2)
Capital loss on sale of
   long-term investment                         -                -                -                -
                                      -----------      -----------      -----------      -----------
Loss before taxes on income                 (19.6)           (18.4)           (26.3)           (23.4)
Taxes on income (benefit), net                0.1                -                -              5.0
                                      -----------      -----------      -----------      -----------
Net loss before equity in
   earnings (losses) of affiliate.          (19.7)           (18.4)           (26.3)           (28.4)
Equity in earnings (losses) of
   affiliate                                  2.5              1.8              2.0             (0.5)
                                      -----------      -----------      -----------      -----------
Net loss                                    (17.2)%          (16.6)%          (24.3)%          (28.9)
                                      ===========      ===========      ===========      ===========
</TABLE>

<TABLE>
<CAPTION>

                                                     For the Three Month Periods Ended
                                      --------------------------------------------------------------
                                        Mar. 31,         Jun. 30,        Sept. 30,         Dec. 31,
                                         2007              2007            2007              2007
                                      -----------      -----------      -----------      -----------
<S>                                   <C>              <C>              <C>              <C>
Revenues                              $     2,446      $     2,505      $     2,187      $     2,200
Cost of revenues                              628              753              790              565
                                      -----------      -----------      -----------      -----------
Gross profit                                1,818            1,752            1,397            1,635
                                      -----------      -----------      -----------      -----------
Selling and marketing                         836              803            1,011              831
Research and development, net                 886              562              645              547
General and administrative                    698              821            1,193              983
Impairment of goodwill and other
   intangibles assets                          --            2,312               --               --
Operating expenses                          2,420            4,498            2,849            2,361
                                      -----------      -----------      -----------      -----------
Operating loss                               (602)          (2,746)          (1,452)            (726)
Financial (expenses) income, net              (15)               2              (18)             (74)
Capital loss on sale of
   long-term investment                        --               --               --*             (63)
                                      -----------      -----------      -----------      -----------
Loss before taxes on income                  (617)          (2,744)          (1,470)            (863)
Tax on income (benefit), net                   --               --               --              (68)
                                      -----------      -----------      -----------      -----------
Net loss before equity in
   earnings (losses) of affiliate            (617)          (2,744)          (1,470)            (795)
Equity in earnings (losses) of
affiliate                                      32              (58)            (206)*             35
                                      -----------      -----------      -----------      -----------
Net loss                              $      (585)     $    (2,802)     $    (1,676)     $      (760)
                                      ===========      ===========      ===========      ===========
Basic and diluted net loss per
   share                              $     (0.10)     $     (0.49)     $     (0.29)     $     (0.13)
Weighted average number of
   ordinary shares used in
   computing basic net loss per
   share                                5,773,845        5,773,845        5,773,845        5,773,845
Weighted average number of
ordinary shares used in
computing diluted net loss per
share                                   5,773,845        5,773,845        5,773,845        5,773,845
Revenues                                    100.0%           100.0%           100.0%           100.0%
Cost of revenues                             25.7             30.1             36.1             25.7
                                      -----------      -----------      -----------      -----------
Gross profit                                 74.3             69.9             63.9             74.3
                                      -----------      -----------      -----------      -----------
Selling and marketing                        34.2             32.1             46.2             37.8
Research and development, net                36.2             22.4             43.2             24.9
General and administrative                   28.5             32.8             54.5             44.7
Impairment of goodwill and other
   intangible assets                            -             92.3                -                -
Operating expenses                           98.9            179.6            130.3            107.3
                                      -----------      -----------      -----------      -----------
Operating loss                              (24.6)          (109.6)           (66.4)           (33.0)
Financial (expenses) income, net             (0.6)             0.1             (0.8)            (3.4)
Capital loss on sale of
   long-term investment                         -                -                -*            (2.9)
                                      -----------      -----------      -----------      -----------
Loss before taxes on income                 (25.2)          (109.5)           (67.2)           (23.4)
Taxes on income (benefit), net                  -                -                -             (3.1)
                                      -----------      -----------      -----------      -----------
Net loss before equity in
   earnings (losses) of affiliate.          (25.2)          (109.5)           (67.2)           (36.1)
Equity in earnings (losses) of
   affiliate                                  1.3             (2.3)            (9.4)*            1.6
                                      -----------      -----------      -----------      -----------
Net loss                                    (23.9)          (111.8)           (76.6)           (34.5)
                                      ===========      ===========      ===========      ===========
</TABLE>

----------

* Reclassified


                                       30
<PAGE>


SEASONALITY

     Our operating results are generally not characterized by a seasonal pattern
except that our volume of sales in Europe is generally lower in the summer
months.

Impact of Currency Fluctuation and of Inflation

     We report our financial results in dollars and receive payments in dollars
for most of our sales, while a significant amount of our expenses, primarily
salaries, are paid in NIS. Therefore, the dollar cost of our operations in
Israel is influenced by the extent to which any increase in the rate of
inflation in Israel is not offset, or is offset on a lagging basis, by a
devaluation of the NIS in relation to the dollar. When the rate of inflation in
Israel exceeds the rate of devaluation of the NIS against the dollar, the dollar
cost of our operations in Israel increase. If the dollar cost of our operations
in Israel increases, our dollar-measured results of operations will be adversely
affected. We cannot assure you that we will not be materially and adversely
affected in the future if inflation in Israel exceeds the devaluation of the NIS
against the dollar or if the timing of the devaluation lags behind inflation in
Israel.

     The following table presents information about the rate of inflation in
Israel, the rate of devaluation or appreciation of the NIS against the dollar,
and the rate of inflation in Israel adjusted for the devaluation:

                                                              Israeli inflation
                                          NIS devaluation       adjusted for
 Year ended        Israeli inflation      (appreciation)         devaluation
December 31,            rate %                rate %           (appreciation) %
------------            ------                ------           ----------------

    2003                (1.9)                 (7.6)                 5.7
    2004                 1.2                  (1.6)                 2.8
    2005                 2.4                   6.8                 (4.4)
    2006                (0.1)                 (8.2)                 8.1
    2007                 3.4                  (9.0)                12.4

     A devaluation of the NIS in relation to the dollar has the effect of
reducing the dollar amount of any of our expenses or liabilities which are
payable in NIS, unless those expenses or payables are linked to the dollar. This
devaluation also has the effect of decreasing the dollar value of any asset
which consists of NIS or receivables payable in NIS, unless the receivables are
linked to the dollar. Conversely, any increase in the value of the NIS in
relation to the dollar has the effect of increasing the dollar value of any
unlinked NIS assets and the dollar amounts of any unlinked NIS liabilities and
expenses. During 2007, the NIS appreciated against the U.S. dollar, which
resulted in a significant increase in the U.S. dollar cost of our NIS expenses.
Such trend continued during the first three months of 2008 with further
devaluation of the U.S. dollar compared to the NIS.


                                       31
<PAGE>


     Because exchange rates between the NIS and the dollar fluctuate
continuously, exchange rate fluctuations, particularly larger periodic
devaluations, may have an impact on our profitability and period-to-period
comparisons of our results. We cannot assure you that in the future our results
of operations may not be materially adversely affected by currency fluctuations.

CONDITIONS IN ISRAEL

     We are incorporated under the laws of, and our principal executive offices
and manufacturing and research and development facilities are located in, the
State of Israel. See Item 3D "Key Information - Risk Factors - Risks Relating to
Our Location in Israel" for a description of governmental, economic, fiscal,
monetary or political polices or factors that have materially affected or could
materially affect our operations.

TRADE RELATIONS

     Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development and the International
Finance Corporation. Israel is a member of the World Trade Organization and is a
signatory to the General Agreement on Tariffs and Trade, which provides for
reciprocal lowering of trade barriers among its members. In addition, Israel has
been granted preferences under the Generalized System of Preferences from the
United States, Australia, Canada and Japan. These preferences allow Israel to
export products covered by such programs either duty-free or at reduced tariffs.

     Israel and the European Union Community concluded a Free Trade Agreement in
July 1975, which confers certain advantages with respect to Israeli exports to
most European countries and obligates Israel to lower its tariffs with respect
to imports from these countries over a number of years. In 1985, Israel and the
United States entered into an agreement to establish a Free Trade Area. The Free
Trade Area has eliminated all tariff and specified non-tariff barriers on most
trade between the two countries. On January 1, 1993, an agreement between Israel
and the European Free Trade Association, known as EFTA, established a free-trade
zone between Israel and the EFTA nations. In November 1995, Israel entered into
a new agreement with the European Union, which includes redefinement of rules of
origin and other improvements, including providing for Israel to become a member
of the research and technology programs of the European Union. In recent years,
Israel has established commercial and trade relations with a number of other
nations, including China, India, Russia, Turkey and other nations in Eastern
Europe and Asia.

EFFECTIVE CORPORATE TAX RATE

     Israeli companies are generally subject to income tax on their taxable
income. The applicable rate for 2007 was 29%, which was reduced to 27% in 2008
and will be further reduced to 26% in 2009 and 25% in 2010 and thereafter.

     However, certain of our manufacturing facilities have been granted
"Approved Enterprise" status under the Law for the Encouragement of Capital
Investments, 1959, as amended, commonly referred to as the Investment Law, and,
consequently, are eligible, subject to compliance with specified requirements,
for tax benefits beginning when such facilities first generate taxable income.
Subject to certain restrictions, we are entitled to a tax exemption in respect
of income derived from our approved facilities for a period of two years,
commencing in the first year in which such income is earned, and will be
entitled to a reduced tax rate of 10%-25% for an additional five to eight years
if we qualify as a foreign investors' company. If we do not qualify as a foreign
investors' company, we will instead be entitled to a reduced rate of 25% for an
additional five, rather than eight, years.


                                       32
<PAGE>


     Our taxes outside Israel are dependent on our operations in each
jurisdiction as well as relevant laws and treaties. Under Israeli tax law, the
results of our foreign consolidated subsidiaries, which have generally been
unprofitable, cannot be consolidated for tax purposes with the results of
operations of the parent company.

RECENTLY ISSUED ACCOUNTING STANDARDS

     In September 2006, the FASB issued SFAS No. 157, "FAIR VALUE MEASUREMENTS,"
or SFAS No. 157. SFAS No. 157 provides a single definition of fair value, a
framework for measuring fair value, and expanded disclosures concerning fair
value. Previously, different definitions of fair value were contained in various
accounting pronouncements creating inconsistencies in measurement and
disclosures. SFAS No. 157 applies under those previously issued pronouncements
that prescribe fair value as the relevant measure of value, except SFAS No.
123(R) and related interpretations. SFAS No. 157 does not apply to accounting
standards that require or permit measurement similar to fair value but are not
intended to measure fair value. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007. We are currently evaluating the impact of
adopting SFAS No. 157.

     In February 2007, the FASB issued SFAS No. 159, "THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES," or SFAS No. 159. SFAS No. 159
provides companies with an option to report selected financial assets and
liabilities at fair value. Generally accepted accounting principles have
required different measurement attributes for different assets and liabilities
that can create artificial volatility in earnings. The Standard's objective is
to reduce both complexity in accounting for financial instruments and the
volatility in earnings caused by measuring related assets and liabilities
differently. SFAS No. 159 is effective as of the beginning of an entity's first
fiscal year beginning after November 15, 2007. We are currently evaluating the
impact of the adoption of SFAS No. 159.

     In June 2007, the FASB ratified Emerging Issues Task Force, or EITF, Issue
No. 07-3, "ACCOUNTING FOR NON REFUNDABLE ADVANCE PAYMENTS FOR GOODS OR SERVICES
RECEIVED FOR USE IN FUTURE RESEARCH AND DEVELOPMENT ACTIVITIES," or EITF 07-3.
EITF 07-3 requires that nonrefundable advance payments for goods or services
that will be used or rendered for future research and development activities be
deferred and capitalized and recognized as an expense as the goods are delivered
or the related services are performed. EITF 07-3 is effective, on a prospective
basis, for fiscal years beginning after December 15, 2007 and will be adopted in
the first quarter of fiscal year 2008. We are currently evaluating the impact of
the pending adoption of EITF 07-3 on our consolidated financial statements.

     In December 2007, the FASB issued SFAS No. 141(R), "BUSINESS COMBINATIONS,"
or SFAS 141(R). SFAS 141(R) establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. The statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statement to
evaluate the nature and financial effects of the business combination. SFAS
141(R) is effective for financial statements issued for fiscal years beginning
after December 15, 2008. Accordingly, any business combinations we engage in
will be recorded and disclosed following existing GAAP until January 1, 2009. We
are currently evaluating the impact of the adoption of SFAS 141(R) on our future
consolidated financial statements.

     In December 2007, the FASB issued SFAS No. 160, "NONCONTROLLING INTEREST IN
CONSOLIDATED FINANCIAL STATEMENTS," or SFAS 160. SFAS 160 re-characterizes
minority interests in consolidated subsidiaries as non-controlling interests and
requires the classification of minority interests as a component of equity.
Under SFAS 160, a change in control will be measured at fair value, with any
gain or loss recognized in earnings. The effective date for SFAS 160 is for
annual periods beginning on or after December 15, 2008. Early adoption and
retroactive application of SFAS 160 to fiscal years preceding the effective date
are not permitted. We are currently evaluating the impact of the adoption of
SFAS 160 on our future consolidated financial statements.


                                       33
<PAGE>


B.   LIQUIDITY AND CAPITAL RESOURCES

     On December 31, 2007, we had $1.4 million in cash and cash equivalents,
$169,000 in marketable securities and a working capital deficit of $2.0 million,
compared to $1.5 million in cash and cash equivalents, $100,000 in short-term
bank deposits, $159,000 in marketable securities and working capital of $186,000
on December 31, 2006. The decrease in working capital at December 31, 2007 was
primarily attributable to the decrease in trade receivables and to the increase
in accrued expenses and other liabilities.

     On August 10, 2005, we raised $2.8 million (before issuance costs) in a
private placement of 937,500 ordinary shares to institutional and private
investors. The private placement also involved the acquisition by the investors
of warrants to purchase an aggregate of 375,000 ordinary shares at an exercise
price of $4.00 per share (subject to anti-dilution adjustments), exercisable
from February 10, 2006 until August 10, 2009.

     To improve our cash position and working capital, in November 2007, we sold
our 50% ownership interest in Jusan S.A. in consideration of 700,000 Euros
(approximately $1.0 million) plus the payment of 25% of the net income of Jusan
S.A. during the period commencing upon completion of the sale and ending June
30, 2008. We recorded an equity loss of $197,000 as a result of the transaction.

     On February 4, 2008, we completed the sale of our ownership interest in
cVidya Networks Inc. and received total proceeds of approximately $603,000 for
the sale. We will record a capital gain of approximately $382,000 as a result of
the transaction in the first quarter of 2008.

     On February 11, 2008, we raised $750,000 in a private issuance of 750,000
ordinary shares to an investor.

     One of the principal factors affecting our working capital is the payment
cycle on our sales. Any material change in the current aging of our accounts
receivable could have an adverse effect on our working capital.

     We currently do not have significant capital spending or purchase
commitments, but we expect to continue to engage in capital spending consistent
with the level of our operations. We anticipate that our cash on hand and cash
flow from operations will be sufficient to meet our working capital and capital
expenditure requirements for at least 12 months. However, if we do not generate
sufficient cash from operations, we may be required to obtain additional
financing or to reduce level of expenditure. There can be no assurance that such
financing will be available in the future, or, if available, will be on terms
satisfactory to us.

     We are not in compliance with certain financial covenants and may not be
able to obtain or maintain compliance with those financial covenants in the
future

CASH FLOWS

     The following table summarizes our cash flows for the periods presented:

                                                      Year ended December 31,
                                                      -----------------------
                                                         2006        2007
                                                         ----        ----
                                                         ($ in thousands)

Net cash used in operating activities                   (1,609)       (615)
Net cash provided by (used in) investing activities     (1,206)        976
Net cash provided by (used in) financing activities      1,098        (398)
Net decrease in cash and cash equivalents               (1,717)        (37)
Cash and cash equivalents at beginning of period         3,191       1,474
Cash and cash equivalents at end of period               1,474       1,437


                                       34
<PAGE>


     Net cash used in operating activities was approximately $615,000 for the
year ended December 31, 2007. The use of our funds in 2007 was primarily
attributable to our continuing investment in product development. Net cash used
in operating activities was approximately $1.6 million for the year ended
December 31, 2006. The use of our funds in 2006 was primarily attributable to
our continuing investment in product development. The decrease in the use of our
funds in the 2007 period is primarily attributable to our cash management
efforts and our on-going monitoring and reduction of expenses in order to
achieve sustainable growth.

     Net cash provided by investing activities was approximately $976,000 for
the year ended December 31, 2007, primarily attributable to the proceeds from
the sale of Jusan S.A. Net cash used in investing activities was approximately
$1.2 million for the year ended December 31, 2006, primarily attributable to the
acquisition of certain assets and liabilities of TelSoft in July 2006.

     Net cash used in financing activities was approximately $398,000 for the
year ended December 31, 2007, compared to approximately $1.1 million provided by
financing activities for the year ended December 21, 2006. Of the cash used in
financing activities in 2007, approximately $417,000 was attributable to the
repayment of a long-term loan received from Bank Hapoalim to finance the
acquisition of Telsoft. Of the cash provided by financing activities in 2006,
approximately $1.0 million was attributable to the loan we obtained from Bank
Hapoalim and $100,000 was attributable to proceeds from exercise of stock
options.

     On July 27, 2006, we obtained a $1.0 million loan from Bank Hapoalim in
order to facilitate the funding of the TelSoft acquisition. The loan principal
is payable in 12 equal monthly installments commencing August 31, 2007 and bears
annual interest at the monthly London Inter Bank Offered Rate (LIBOR) plus 2%,
payable on a monthly basis commencing August 31, 2006. Under the terms of the
loan, we are required to maintain (i) shareholders' equity of not less than $5
million and 40% of our total assets; (ii) operating profit over two consecutive
quarters as of the second quarter of 2007; and (iii) cash and cash equivalents
of not less than $1 million. As a security interest for the repayment of the
loan, we agreed to grant Bank Hapoalim a floating-charge over all of our
company's assets, a fixed charge over our company's share capital, goodwill and
rights to an exemption from taxation or reduced tax, and a fixed charge over all
of the securities, documents and notes in the possession of Bank Hapoalim. We
are not in compliance with such covenants. As of December 31, 2007, we had
repaid five monthly installments including interest in an aggregate amount of
$417,000.

     We currently do not have significant capital spending or purchase
commitments, but we expect to engage in capital spending consistent with the
level of our operations. We anticipate that our cash on hand and cash flow from
operations will be sufficient to meet our working capital and capital
expenditure requirements for at least 12 months. However, if we do not generate
sufficient cash from operations, we may be required to obtain additional
financing or to reduce level of expenditure. There can be no assurance that such
financing will be available in the future, or, if available, will be on terms
satisfactory to us.

C.   RESEARCH AND DEVELOPMENT

     Our product development plans are market-driven and address the major,
fast-moving trends that are influencing the telecommunications industry. We
intend to expand upon our existing family of TEM solutions by adding new
features and functions to address evolving market needs. We work closely with
our customers and prospective customers to determine their requirements and
design enhancements and new releases to meet their needs. Research and
development activities take place in our facilities in Israel. We employed 29
persons in research and development as of December 31, 2007, as compared to 37
persons in research and development as of December 31, 2006.

     Our quality management system has been ISO 9001:2000 certified since the
beginning of 2006, and prior thereto was ISO 9001:1994 certified.

     We are evaluating approaches to solutions which will permit an information
technology manager to effectively measure the quality of the services received
from their service providers and to ensure that the users within the
organization received such services according to their needs and the overall
policy and priorities of the organization.


                                       35
<PAGE>


     We have committed substantial financial resources to research and
development for our TEM and billing solution activities. During 2005, 2006 and
2007, our net research and development expenditures were $4.4 million, $3.6
million and $2.6 million, respectively. In the past, we received funding from
the Israeli Ministry of Industry, Trade and Labor's Office of the Chief
Scientist for selected research and development projects, but we stopped seeking
funding for a number of years. In late 2005 and early 2006 and 2007, we applied
to the Office of the Chief Scientist for new grants for our research and
development projects and we have subsequently received approval for such
applications.

     Under the terms of research and development grants that we have received
from the Office of the Chief Scientist, we are required to pay royalties on the
revenues derived from products incorporating know-how developed with such grants
and ancillary services in connection therewith, up to 100% to 150% of the
dollar-linked value of the total grants, plus interest. We are required to pay
royalties at a rate of 3%-5%. The obligation to pay these royalties is
contingent on actual sales of the products and in the absence of such sales, no
payment is required. Since June 1997, we have paid the Office of the Chief
Scientist royalties on all call accounting product sales at the applicable rates
at the time of payment. See Item 10E. "Additional Information - Taxation -
Grants under the Law for the Encouragement of Industrial Research and
Development, 1984."

     We have expensed royalties relating to the repayment of the Office of the
Chief Scientist grants in the amounts of $198,000, $187,000 and $178,000 for the
years ended December 31, 2005, 2006 and 2007, respectively.

     As of December 31, 2007, we had a contingent obligation to pay royalties to
the Office of the Chief Scientist in the amount of approximately $9.8 million
(including a contingent obligation of approximately $1.8 million relating to
royalties from revenues derived from products that we acquired from
Teleknowledge that were funded by the Office of the Chief Scientist). The $4.4
million of grants received after January 1999 is subject to interest at a rate
equal to the 12 month LIBOR rate.

D.   TREND INFORMATION

     As a result of a less predictable business environment and the decline in
worldwide sales of PBX systems, we are unable to provide any guidance as to
current sales and profitability trends. We expect that our results will continue
to be impacted by a shift to a new line of products and increased marketing and
research and development expenditures.

E.   OFF-BALANCE SHEET ARRANGEMENTS

     We are not a party to any material off-balance sheet arrangements. In
addition, we have no unconsolidated special purpose financing or partnership
entities that are likely to create material contingent obligations.

F.   TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

     The following table summarizes our minimum contractual obligations and
commercial commitments as of December 31, 2007 and the effect we expect them to
have on our liquidity and cash flow in future periods.

<TABLE>
<CAPTION>
Contractual Obligations                      Payments due by period
---------------------------     --------------------------------------------------
                                         Less than                        More than
                                Total      1 year   1-3 years  3-5 years   5 years
                                ------     ------     ------     ------     ------
                                           (U.S. dollars in thousands)
<S>                             <C>        <C>        <C>        <C>        <C>
Operating lease obligations     $  932     $  455     $  477     $    -     $    -
Accrued severance pay*           1,157          -          -          -      1,157
                                ------     ------     ------     ------     ------
Total                           $2,089     $  455     $  477     $    -     $1,157
</TABLE>

----------

* See Item 6D. "Directors, Senior Management and Employees - Employees."


                                       36
<PAGE>


ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.   DIRECTORS AND SENIOR MANAGEMENT

     Set forth below are the name, age, principal position and a biographical
description of each of our directors and executive officers:

NAME                                  AGE   POSITION WITH THE COMPANY
----                                  ---   -------------------------

Chaim Mer                             60    Chairman of the Board

Eytan Bar                             42    Chief Executive Officer

Lior Salanksy                         43    President and Director

Alon Mualem                           40    Corporate Chief Financial Officer

Isaac Ben-Bassat                      54    Director

Eytan Barak(1)                        63    Outside Director

Dr. Orna Berry (1)                    58    Outside Director

Steven J. Glusband                    61    Director

Yaacov Goldman (1)                    53    Director

----------

(1) Member of our Audit Committee

     Messrs. Mer, Ben-Bassat, Glusband, Goldman and Salansky will serve as
directors until our 2008 Annual General Meeting of Shareholders. Mr. Barak and
Dr. Berry will serve as outside directors pursuant to the provisions of the
Israeli Companies Law for a three-year term until our 2010 annual general
meeting of shareholders and January 28, 2011 respectively, following which the
service of and the service of Mr. Barrak as an outside director may be renewed
for only one additional three-year term and the service of Dr. Berry as an
outside director may not be extended.

     CHAIM MER has served as Chairman of our Board of Directors and a director
since our inception in December 1995. Mr. Mer has been the Chairman of the Board
of Directors of C. Mer Industries Ltd., or C. Mer, a publicly traded company,
since 1988 and served as its President and Chief Executive Officer from 1988
until January 2005. Mr. Mer holds a B.Sc. degree in Computer Sciences and
Mathematics from the Technion - Israel Institute for Technology.

     EYTAN BAR has served as our Chief Executive Officer since December 2003 and
served as our President from December 2003 to February 2008. Prior to joining
our company and from 2001, Mr. Bar served as General Manager of the CEM product
division of NICE Systems Ltd. From 2000 through 2001, Mr. Bar served as Vice
President of Professional Services at NICE Systems Inc. From 1993 through 1999,
Mr. Bar served as General Manager of STS Software Systems Ltd., a company that
developed a unique VoIP technology for recording solutions.

     LIOR SALANKSY has served as our President since February 2008 and was
elected as a director by our Board of Directors on April 2, 2008. In 1991, Mr.
Salansky founded MIND C.T.I. Ltd., global provider of real-time, product-based
mediation, billing and customer care solutions for voice, data, video and
content services, where he served until February 2000 in a number of positions,
including Co-Chief Executive Officer, Vice President of Business Development and
R&D Manager and also served as a director from its inception until 2004. Mr.
Salansky holds a B.Sc. in Computer Science from the Technion, Israel Institute
of Technology and an M.B.A. from Tel Aviv University.

     ALON MUALEM has served as our Chief Financial Officer since September 2007.
Prior to joining our company and from June 2005, Mr. Mualem held the
responsibilities of chief financial officer at Xfone, Inc. (AMEX and TASE: XFN),
an international communications services company and its subsidiary, Xfone 018
Ltd. Prior to that Mr. Mualem served as chief financial officer of CheckM8,
Ltd., a high-tech Internet advertising firm located in Israel. From 1998 to
2004, Mr. Mualem served as the corporate controller of RADVISION Ltd. (NASDAQ:
RVSN) and from 1996 to 1998, Mr. Mualem served as a deputy controller of RAD
Data Communication Ltd. From 1992 to 1996, Mr. Mualem served as a certified
public accountant at Somekh Chaikin, a member firm of KPMG International. Mr.
Mualem holds a B.A. degree in Economics and Accounting from Tel Aviv University
and is Certified Public Accountant (Israel).


                                       37
<PAGE>


     ISAAC BEN-BASSAT has served as a director since our inception in December
1995. Mr. Ben-Bassat has been Executive Vice President and a director of C. Mer
Industries Ltd. since 1988. Mr. Ben-Bassat holds a B.Sc. degree in Civil
Engineering from the Technion - Israel Institute for Technology.

     EYTAN BARAK has served as an outside director since August 2007 and is a
member of our audit committee. Mr. Barak is joint owner and chief executive
officer of Dovrat - Barak, Investments in Advanced Technologies Ltd., a company
which provides financial resources and management assistance to start-up
companies. Mr Barak also serves as a member of the board of directors, audit
committee and investment committee of various Israeli companies, including ICTS
International N.V. traded on the OTC Bulletin Board (OTCBB: ICTS). From 1973 to
1997, Mr. Barak was with the Israel Corporation Ltd., initially serving as its
corporate controller and thereafter as its chief financial officer, and also
served as chairman or member of the board of directors of some of its
subsidiaries. From 1967 until 1973, Mr. Barak was associated with Kesselman &
Kesselman, the Israeli member firm of PricewaterhouseCoopers International
Limited. Mr. Barak is a Certified Public Accountant (Israel) since 1971 and
holds a B.A. degree in accounting from Tel Aviv University.

     DR. ORNA BERRY has served as an outside director since January 2005 and is
a member of our audit committee. Dr. Berry is a Venture Partner in Gemini Israel
Funds Ltd. and since 2000 has served as Chairperson of Lambda Crossing, Ltd. and
Riverhead Networks, Inc., which was sold to Cisco in March 2004. Dr. Berry
served as the Chief Scientist of the Ministry of Industry and Trade of the
Government of Israel from 1997 to 2000 and Co-President of Ornet Data
Communications Technologies Ltd., a provider of high-speed switches, which was
acquired by Siemens AG, from 1993 to 1997. From 1992 to 1993, Dr. Berry served
as a consultant to Intel Communications Division and Elbit Systems, Ltd. Dr.
Berry holds a B.A. degree in statistics and mathematics from Haifa University,
M.A. degree in statistics and mathematics from Tel Aviv University and Ph.D. in
computer science from the University of Southern California.

     STEVEN J. GLUSBAND has served as a director since August 1, 1996. Mr.
Glusband has been a partner with Carter Ledyard & Milburn LLP, our U.S. counsel,
since March 1987. Mr. Glusband holds a B.B.A. degree from the City College of
the City University of New York, a J.D. degree from Fordham University School of
Law and an L.L.M. degree from the New York University School of Law.

     YAACOV GOLDMAN has served as a director since May 2004 and is a member of
our audit committee. Mr. Goldman provides consulting services to companies in
strategic-financial areas, through his wholly owned company, Maanit-Goldman
Management & Investments (2002) Ltd. Mr. Goldman serves as a director of Bank
Leumi Le-Israel Ltd., Elron Electronic Industries Ltd, Golden House Ltd., Tagor
capital Ltd. and Renewable Resources Ltd. Mr. Goldman serves as the Professional
Secretary of the Peer Review Institute of the Certified Public accountants
Institute in Israel. From September 2000 until November 2001, Mr. Goldman served
as Managing Director of Argoquest Holdings, LLC, a U.S.-based investment company
focused on early stage high-technology companies. From November 1981 until
August 2000, Mr. Goldman was associated with Kessleman & Kessleman, the Israeli
member firm of PricewaterhouseCoopers, and was a Partner and Senior Partner at
such firm from January 1991 through August 2000. Mr. Goldman is a Certified
Public Accountant (Israel) since 1981 and holds a B.A. degree in Economics and
Accounting from Tel Aviv University.


                                       38
<PAGE>


B.   COMPENSATION

     The following table sets forth all compensation we paid with respect to all
of our directors and executive officers as a group for the year ended December
31, 2007.

                                        Salaries, fees,        Pension,
                                          commissions        retirement and
                                          and bonuses       similar benefits
                                          -----------       ----------------
All directors and executive officers
as a group (11 persons*)                   $589,086            $75,922

----------

     * Inlcudes our former chief executive officer, Shlomi Hagai, who ceased to
     serve in such capacity in September 2007 and two former directors who
     ceased to serve in such capacity in June 2007.

     All our executive officers work full time for us. Mr. Chaim Mer, the
Chairman of our Board of Directors, devotes approximately 20% of his time to the
management of our company in consideration of which we pay him a monthly salary
of $7,000 per month (as approved by our Audit Committee and Board of Directors
on November 8, 1999). We provide automobiles to our executive officers at our
expense.

     During the year ended December 31, 2007, we paid to our directors an annual
fee of approximately $8,400 (three of our directors who served in such capacity
for six months during 2007 received approximately $4,200) and a per meeting
attendance fee of $300, other than to Mr. Chaim Mer, the Chairman of our Board
of Directors and Mr. Yaacov Goldman, an independent director and our financial
expert. During the year ended December 31, 2007, we paid Mr. Yaacov Goldman an
annual fee of approximately $16,800 and a per meeting attendance fee of $400.

     As of December 31, 2007, our directors and executive officers as a group,
consisting of 11 persons, held options to purchase an aggregate 330,500 ordinary
shares, having exercise prices ranging from $1.23 to $3.87. The options vest
over a four-year period. Of such options, options to purchase 320,500 ordinary
shares were granted under our 2003 Israeli Share Option Plan (of which, options
to purchase 252,500 ordinary shares will expire in December 2008, options to
purchase 5,000 ordinary shares will expire in May 2010, options to purchase
30,000 ordinary shares will expire in September 2010, options to purchase 3,000
ordinary shares will expire on March 2011 and options to purchase 30,000
ordinary shares will expire on September 2012) and options to purchase 10,000
ordinary shares were granted under our 1996 Stock Option Plan (all of which will
expire in December 2008). See Item 6.E., "Directors, Senior Management and
Employees - Share Ownership - Stock Option Plans."

C.   BOARD PRACTICES

ELECTION OF DIRECTORS

     Our Articles of Association provide for a Board of Directors consisting of
up to ten members or such other number as may be determined from time to time at
a general meeting of shareholders. Our Board of Directors is currently composed
of seven directors.

     Pursuant to our articles of association, all of our directors (except the
outside directors) are elected at our annual general meeting of shareholders by
a vote of the holders of a majority of the voting power represented and voting
at such meeting and hold office until the next annual general meeting of
shareholders and until their successors have been elected. The Board of
Directors, may, at any time from time to time, appoint any other person as a
director, whether to fill a casual vacancy or to add to their number. All the
members of our Board of Directors (except the outside directors) may be
reelected upon completion of their term of office. All of our current directors
(except our outside directors) were elected by our shareholders at our annual
general meeting of shareholders held in August 2007, other than Mr. Lior
Salansky who was elected as a director by our Board of Directors on April 2,
2008.

     We do not follow the requirements of the NASDAQ Marketplace Rules with
regard to the nomination process of directors, and instead, we follow Israeli
law and practice, in accordance with which our directors are recommended by our
board of directors for election by our shareholders. See below in this Item 6C.
"Directors, Senior Management and Employees - Board Practices - NASDAQ
Marketplace Rules and Home Country Practices."

                                       39
<PAGE>


OUTSIDE AND INDEPENDENT DIRECTORS

     OUTSIDE DIRECTORS. Under the Israeli Companies Law, companies incorporated
under the laws of the State of Israel whose shares have been offered to the
public are required to appoint at least two outside directors. The Israeli
Companies Law provides that a person may not be appointed as an outside director
if the person, or the person's relative, partner, employer or an entity under
that person's control, has or had during the two years preceding the date of
appointment any affiliation with the company, or any entity controlling,
controlled by or under common control with the company. The term "relative"
means a spouse, sibling, parent, grandparent, child or child of spouse or spouse
of any of the above. The term affiliation includes:

     o    an employment relationship;

     o    a business or professional relationship maintained on a regular basis;

     o    control; and

     o    service as an officer holder, excluding service as an outside director
          of a company that is offering its shares to the public for the first
          time.

     In addition, no person may serve as an outside director if the person's
position or other activities create, or may create, a conflict of interest with
the person's responsibilities as director or may otherwise interfere with the
person's ability to serve as director. If, at the time an outside director is
appointed all members of the board of directors are of the same gender, then
that outside director must be of the other gender. A director of one company may
not be appointed as an outside director of another company if a director of the
other company is acting as an outside director of the first company at such
time.

     At least one of the outside directors elected must have "accounting and
financial expertise" and any other outside director must have "accounting and
financial expertise" or "professional qualification," as such terms are defined
by regulations promulgated under the Israeli Companies Law.

     Outside directors are elected by shareholders. The shareholders voting in
favor of their election must include at least one-third of the shares of the
non-controlling shareholders of the company who voted on the matter. This
minority approval requirement need not be met if the total shareholdings of
those non-controlling shareholders who vote against their election represent 1%
or less of all of the voting rights in the company.

     In general, outside directors serve for a three-year term, which may be
renewed for only one additional three-year term. Outside directors can be
removed from office only by the same special percentage of shareholders as can
elect them, or by a court, and then only if the outside directors cease to meet
the statutory qualifications with respect to their appointment or if they
violate their duty of loyalty to the company.

     Any committee of the board of directors must include at least one outside
director and the audit committee must include all of the outside directors. An
outside director is entitled to compensation as provided in regulations adopted
under the Israeli Companies Law and is otherwise prohibited from receiving any
other compensation, directly or indirectly, in connection with such service.

     INDEPENDENT DIRECTORS. In general, NASDAQ Marketplace Rules require that a
majority of our board of directors qualify as independent directors within the
meaning of the NASDAQ Marketplace Rules and our audit committee must have at
least three members and be comprised only of independent directors each of whom
satisfies the respective "independence" requirements of the Securities and
Exchange Commission and NASDAQ.


                                       40
<PAGE>


     Our Board of Directors has determined that Mr. Eytan Barak and Dr. Orna
Berry both qualify as independent directors under the rules of the Securities
and Exchange Commission and NASDAQ and as outside directors under the
requirements of the Israeli Companies Law. Our Board of Directors has further
determined that Messrs. Steven Glusband and Yaacov Goldman qualifies as an
independent director under the requirements of the Securities and Exchange
Commission and NASDAQ.

AUDIT COMMITTEE

     Our audit committee, which was established in accordance with Section 114
of the Israeli Companies Law and Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, assists our board of directors in overseeing the accounting and
financial reporting processes of our company and audits of our financial
statements, including the integrity of our financial statements, compliance with
legal and regulatory requirements, our independent public accountants'
qualifications and independence, the performance of our internal audit function
and independent public accountants, finding any defects in the business
management of our company and proposing to the board of directors ways to
correct such defects, and such other duties as may be directed by our board of
directors.

     The responsibilities of the audit committee also include approving
related-party transactions as required by law. Under Israeli law an audit
committee may not approve an action or a transaction with a controlling
shareholder, or with an office holder, unless at the time of approval two
outside directors are serving as members of the audit committee and at least one
of the outside directors was present at the meeting in which an approval was
granted.

     Our audit committee consists of three members of our Board of Directors who
satisfy the respective "independence" requirements of the Securities and
Exchange Commission, NASDAQ and Israeli Law for audit committee members. Our
audit committee is currently composed of Mr. Eytan Barak, Dr. Orna Berry and
Mr.Yaacov Goldman. Our Board of Directors has determined that Mr. Goldman
qualifies as a financial expert. The audit committee meets at least once each
quarter.

INTERNAL AUDIT

     Under the Israeli Companies Law, the board of directors of a public company
must appoint an internal auditor nominated by the audit committee. A person who
does not satisfy the Israeli Companies Law's independence requirements may not
be appointed as an internal auditor. The role of the internal auditor is to
examine, among other things, the compliance of the company's conduct with
applicable law and orderly business practice. Mr. Shaul Sofer, Certified Public
Accountant (Israel), serves as our internal auditor.

DIRECTORS' SERVICE CONTRACTS

     We do not have any service contracts with our directors. There are no
arrangements or understandings between us and any of our subsidiaries, on the
one hand, and any of our directors, on the other hand, providing for benefits
upon termination of their employment or service as directors of our company or
any of our subsidiaries.

APPROVAL OF RELATED PARTY TRANSACTIONS UNDER ISRAELI LAW

FIDUCIARY DUTIES OF OFFICE HOLDERS

     The Israeli Companies Law codifies the fiduciary duties that "office
holders," including directors and executive officers, owe to a company. An
"office holder" is defined in the Israeli Companies Law as a director, general
manager, chief business manager, deputy general manager, vice general manager,
other manager directly subordinate to the general manager or any other person
assuming the responsibilities of any of the foregoing positions without regard
to such person's title. An office holder's fiduciary duties consist of a duty of
care and a duty of loyalty. The duty of care requires an office holder to act at
a level of care that a reasonable office holder in the same position would
employ under the same circumstances. This includes the duty to utilize
reasonable means to obtain (i) information regarding the appropriateness of a
given action brought for his approval or performed by him by virtue of his
position and (ii) all other information of importance pertaining to the
foregoing actions. The duty of loyalty includes (i) avoiding any conflict of
interest between the office holder's position in the company and any other
position he holds or his personal affairs, (ii) avoiding any competition with
the company's business, (iii) avoiding exploiting any business opportunity of
the company in order to receive personal gain for the office holder or others,
and (iv) disclosing to the company any information or documents relating to the
company's affairs that the office holder has received due to his position as an
office holder.


                                       41
<PAGE>


DISCLOSURE OF PERSONAL INTERESTS OF AN OFFICE HOLDER

     The Israeli Companies Law requires that an office holder promptly, and no
later than the first board meeting at which such transaction is considered,
disclose any personal interest that he or she may have and all related material
information known to him or her and any documents in their position, in
connection with any existing or proposed transaction by us. In addition, if the
transaction is an extraordinary transaction, that is, a transaction other than
in the ordinary course of business, other than on market terms, or likely to
have a material impact on the company's profitability, assets or liabilities,
the office holder must also disclose any personal interest held by the office
holder's spouse, siblings, parents, grandparents, descendants, spouse's
descendants and the spouses of any of the foregoing, or by any corporation in
which the office holder or a relative is a 5% or greater shareholder, director
or general manager or in which he or she has the right to appoint at least one
director or the general manager.

APPROVAL OF TRANSACTIONS WITH OFFICE HOLDERS

     Under the Israeli Companies Law, all arrangements as to compensation of
office holders who are not directors require approval by the board of directors,
and exculpation, insurance and indemnification of, or an undertaking to,
indemnify an office holder who is not a director requires both board of
directors and audit committee approval. The compensation of office holders who
are directors must be approved by our audit committee, board of directors and
shareholders.

     Some transactions, actions and arrangements involving an office holder (or
a third party in which an office holder has an interest) must be approved by the
board of directors or as otherwise provided for in a company's articles of
association, however, a transaction that is adverse to the company's interest
may not be approved. In some cases, such a transaction must be approved by the
audit committee and by the board of directors itself, and under certain
circumstances shareholder approval may be required. A director who has a
personal interest in a transaction that is considered at a meeting of the board
of directors or the audit committee may not be present during the board of
directors or audit committee discussions and may not vote on the transaction,
unless the transaction is not an extraordinary transaction or the majority of
the members of the board or the audit committee have a personal interest, as the
case may be. In the event the majority of the members of the board of directors
or the audit committee have a personal interest, then the approval of the
general meeting of shareholders is also required.

DISCLOSURE OF PERSONAL INTERESTS OF A CONTROLLING SHAREHOLDER; APPROVAL OF
TRANSACTIONS WITH CONTROLLING SHAREHOLDERS

     The disclosure requirements which apply to an office holder also apply to
such transaction with respect to his or her personal interest in the
transaction. The Israeli Companies Law provides that an extraordinary
transaction with a controlling shareholder or an extraordinary transaction with
another person in whom the controlling shareholder has a personal interest or a
transaction with a controlling shareholder or his relative regarding terms of
service and employment, must be approved by the audit committee, the board of
directors and shareholders. The shareholder approval for such a transaction must
include at least one-third of the shareholders who have no personal interest in
the transaction who voted on the matter (not including abstentions). The
transaction can be approved by shareholders without this one-third approval if
the total shareholdings of those shareholders who have no personal interest and
voted against the transaction do not represent more than one percent of the
voting rights in the company.


                                       42
<PAGE>


     Under the Companies Regulations (Relief from Related Party Transactions),
5760-2000, promulgated under the Israeli Companies Law, as amended, certain
extraordinary transactions between a public company and its controlling
shareholder(s) do not require shareholder approval. In addition, under such
regulations, directors' compensation and employment arrangements in a public
company do not require the approval of the shareholders if both the audit
committee and the board of directors agree that such arrangements are solely for
the benefit of the company. Also, employment and compensation arrangements for
an office holder that is a controlling shareholder of a public company do not
require shareholder approval if certain criteria are met. The foregoing
exemptions from shareholder approval will not apply if one or more shareholders
holding at least 1% of the issued and outstanding share capital of the company
or of the company's voting rights, objects to the use of these exemptions
provided that such objection is submitted to the company in writing not later
than fourteen days from the date of the filing of a report regarding the
adoption of such resolution by the company pursuant to the requirements of the
Israeli Securities Law. If such objection is duly and timely submitted, then the
transaction or compensation arrangement of the directors will require
shareholders' approval as detailed above.

     In addition, a private placement of securities that will (i) cause a person
to become a controlling shareholder or (ii) increase the relative holdings of a
shareholder that holds 5% or more of the company's outstanding share capital, or
(iii) will cause any person to become, as a result of the issuance, a holder of
more than 5% of the company's outstanding share capital in a private placement
in which 20% or more of the company's outstanding share capital prior to the
placement are offered, the payment for which (in whole or in part) is not in
cash or not under market terms, requires approval by the board of directors and
the shareholders of the company.

     The Israeli Companies Law provides that an acquisition of shares in a
public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% or greater shareholder of the
company. This rule does not apply if there is already another 25% or greater
shareholder of the company. Similarly, the Israeli Companies Law provides that
an acquisition of shares in a public company must be made by means of a tender
offer if as a result of the acquisition the purchaser would hold greater than a
45% interest in the company, unless there is another shareholder holding more
than a 45% interest in the company. These requirements do not apply if, in
general, the acquisition was made in a private placement that received
shareholder approval, (i) was from a 25% or greater shareholder of the company
which resulted in the acquirer becoming a 25% or greater shareholder of the
company, if there is not already a 25% or greater shareholder of the company, or
(ii) was from a shareholder holding a 45% interest in the company which resulted
in the acquirer becoming a holder of a 45% interest in the company if there is
not already a 45% or greater shareholder of the company.

     If, as a result of an acquisition of shares, the acquirer will hold more
than 90% of a public company's outstanding shares or a class of shares, the
acquisition must be made by means of a tender offer for all of the outstanding
shares or a class of shares. If less than 5% of the outstanding shares are not
tendered in the tender offer, all the shares that the acquirer offered to
purchase will be transferred to the acquirer. The Israeli Companies Law provides
for appraisal rights if any shareholder files a request in court within three
months following the consummation of a full tender offer. If more than 5% of the
outstanding shares are not tendered in the tender offer, then the acquirer may
not acquire shares in the tender offer that will cause his shareholding to
exceed 90% of the outstanding shares.

EXCULPATION, INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS

     EXCULPATION OF OFFICE HOLDERS. The Israeli Companies Law provides that an
Israeli company cannot exculpate an office holder from liability with respect to
a breach of his or her duty of loyalty. If permitted by its articles of
association, a company may exculpate in advance an office holder from his or her
liability to the company, in whole or in part, with respect to a breach of his
or her duty of care. However, a company may not exculpate in advance a director
from his or her liability to the company with respect to a breach of his duty of
care in the event of distributions.


                                       43
<PAGE>


     INSURANCE OF OFFICE HOLDERS. Israeli law provides that a company may, if
permitted by its articles of association, enter into a contract to insure its
office holders for liabilities incurred by the office holder with respect to an
act or omission performed in his or her capacity as an office holder, as a
result of: (i) a breach of the office holders duty of care to the company or
another person; (ii) a breach of office holders duty of loyalty to the company,
provided that the office holder acted in good faith and had reasonable cause to
assume that the act would not prejudice the company's interests; and (iii) a
financial liability imposed upon the office holder in favor of another person.

     INDEMNIFICATION OF OFFICE HOLDERS. Under Israeli law a company may, if
permitted by its articles of association, indemnify an office holder for acts or
omissions performed by the office holder in such capacity for (a) monetary
liability imposed upon the office holder in favor of another person pursuant to
a court judgment, including a settlement or an arbitration award approved by a
court; (b) reasonable litigation expenses, including attorney's fees, actually
incurred by the office holder as a result of an investigation or proceeding
instituted against him or her by a competent authority, provided that such
investigation or proceeding concluded without the filing of an indictment
against the office holder or the imposition of any monetary liability in lieu of
criminal proceedings, or concluded without the filing of an indictment against
the office holder and a monetary liability was imposed on him or her in lieu of
criminal proceedings with respect to a criminal offense that does not require
proof of criminal intent; and (c) reasonable litigation expenses, including
attorneys' fees, actually incurred by the office holder or imposed upon the
office holder by a court: (i) in an action, suit or proceeding brought against
the office holder by or on behalf of the company or another person, (ii) in
connection with a criminal action in which the office holder was acquitted, or
(iii) in connection with a criminal action in which the office holder was
convicted of a crime that does not require proof of criminal intent.

     Israeli law provides that a company's articles of association may permit
the company to (a) indemnify an office holder retroactively, following a
determination to this effect made by the company after the occurrence of the
event in respect of which the office holder will be indemnified; and (b)
undertake in advance to indemnify an office holder, except that with respect to
a monetary liability imposed on the office holder by any judgment, settlement or
court-approved arbitration award, the undertaking must be limited to types of
occurrences, which, in the opinion of the company's board of directors, are, at
the time of the undertaking, foreseeable due to the company's activities and to
an amount or standard that the board of directors has determined is reasonable
under the circumstances.

     LIMITATIONS ON EXCULPATION, INSURANCE AND INDEMNIFICATION. These provisions
are specifically limited in their scope by Israeli law, which provides that a
company may not indemnify an office holder, nor exculpate an office holder, nor
enter into an insurance contract which would provide coverage for any monetary
liability, incurred as a result of certain improper actions.

     The term "office holder" of a company includes a director, general manager,
chief business manager, deputy general manager, vice general manager, or any
person filling any of these positions in a company even if he or she holds a
different title, and also includes any other manager directly subordinate to the
general manager.

     Pursuant to the Israeli Companies Law, exculpation of, procurement of
insurance coverage for, and an undertaking to indemnify or indemnification of,
our office holders must be approved by our audit committee and our board of
directors and, if the office holder is a director, also by our shareholders.

     Our Articles of Association allow us to insure, indemnify and exempt our
office holders, to the fullest extent permitted by the provisions of the Israeli
Companies Law. We maintain a directors' and officers' liability insurance policy
with a per claim and aggregate coverage limit of $5 million, including legal
costs incurred in Israel. We have provided several of our directors and officers
a letter of indemnification for liabilities or expenses incurred as a result of
their acts in their capacity as directors and officers of our company, in an
aggregate amount not to exceed $3 million.


                                       44
<PAGE>


NASDAQ MARKETPLACE RULES AND HOME COUNTRY PRACTICES

     Under NASDAQ Marketplace Rule 4350, or Rule 4350, foreign private issuers,
such as our company, are permitted to follow certain home country corporate
governance practices instead of certain provisions of Rule 4350. A foreign
private issuer that elects to follow a home country practice instead of any of
such provisions of Rule 4350, must submit to NASDAQ, in advance, a written
statement from an independent counsel in such issuer's home country certifying
that the issuer's practices are not prohibited by the home country's laws.

     On June 21, 2005, we provided NASDAQ with a notice of non-compliance with
Rule 4350 with respect to the requirements regarding the directors' nominations
process. Instead, we follow Israeli law and practice in accordance with which
our directors are recommended by our board of directors for election by our
shareholders. See above in this Item 6C. "Directors, Senior Management and
Employees - Board Practices - Election of Directors."

D.   EMPLOYEES

     On December 31, 2007, we and our consolidated subsidiaries employed 75
persons, of which 28 persons were employed in research and development, 18 in
training and technical support, 12 in sales and marketing and 17 in operations
and administration. As of December 31, 2007, 41 of our employees were located in
Israel, 20 of our employees were located in the United States, 4 of our
employees were located in Hong Kong and 10 of our employees were located in
Brazil.

     On December 31, 2006, we and our consolidated subsidiaries employed 104
persons, of which 37 persons were employed in research and development, 29 in
training and technical support, 20 in sales and marketing and 18 in operations
and administration. As of December 31, 2006, 60 of our employees were located in
Israel, 30 of our employees were located in the United States, 4 of our
employees were located in Hong Kong and 10 of our employees were located in
Brazil.

     On December 31, 2005, we and our consolidated subsidiaries employed 124
persons, of which 58 persons were employed in research and development, 30 in
training and technical support, 18 in sales and marketing and 18 in operations
and administration. As of December 31, 2005, 85 of our employees were located in
Israel, 23 of our employees were located in the United States, 5 of our
employees were located in Hong Kong, 1 of our employees was located in Holland
and 10 of our employees were located in Brazil.

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

     Cost of living adjustment of employees' wages are determined on a
nationwide basis and are legally binding, if and when applied. Israeli employers
and employees are required to pay predetermined amounts to the National
Insurance Institute, which is similar to the United States Social Security
Administration. In 2007, payments to the National Insurance Institute amounted
to approximately 15.2% of wages, of which approximately two-thirds was
contributed by employees with the balance contributed by the employer.

     Pursuant to Israeli law, we are legally required to pay severance benefits
upon certain circumstances, including the retirement or death of an employee or
the termination of employment of an employee without due cause. We partly
satisfy this obligation by contributing approximately 8.3% of between 80%-100%
of the employee's annual gross salary to a fund known as "Managers' Insurance"
or to pension fund. This fund provides a combination of savings plans, insurance
and severance pay benefits to the employee, giving the employee a lump sum
payment upon retirement and a severance payment, if legally entitled, upon
termination of employment. The remaining part of this obligation is presented in
our balance sheet as the difference between the "accrued severance pay" and
"severance pay fund."


                                       45
<PAGE>

E.   SHARE OWNERSHIP

     The following table sets forth certain information as of April 7, 2008
regarding the beneficial ownership of our ordinary shares by each of our
directors and executive officers.

                                              Percentage of
                      Number of Ordinary       Outstanding
                      Shares Beneficially       Ordinary
Name                        Owned(1)            Shares(2)
----                        --------            ---------

Chaim Mer                2,023,954 (3)            31.0%
Eytan Bar                  318,809 (4)             4.7%
Lior Salansky            1,052,484 (5)            16.1%
Alon Mualem                     --                  --
Isaac Ben-Bassat           689,214 (6)            10.6%
Eytan Barak                     --                  --
Dr. Orna Berry                  --                  --
Steven J. Glusband          11,000 (7)               *
Yaacov Goldman                  --                  --

----------

* Less than 1%.

(1)  Beneficial ownership is determined in accordance with the rules of the
     Securities and Exchange Commission and generally includes voting or
     investment power with respect to securities. Ordinary shares relating to
     options currently exercisable or exercisable within 60 days of the date of
     this table are deemed outstanding for computing the percentage of the
     person holding such securities but are not deemed outstanding for computing
     the percentage of any other person. Except as indicated by footnote, and
     subject to community property laws where applicable, the persons named in
     the table above have sole voting and investment power with respect to all
     shares shown as beneficially owned by them.

(2)  The percentages shown are based on 6,523,845 ordinary shares (excluding
     10,800 ordinary shares held as treasury stock) issued and outstanding as of
     April 7, 2008.

(3)  Mr. Chaim Mer and his wife, Mrs. Dora Mer, are the holders of 308,867
     ordinary shares, and are the beneficial owners of 1,703,453 ordinary shares
     through their controlling interest in Mer Ofekim Ltd., 11,539 ordinary
     shares through their controlling interest in Mer Services Ltd. and 95
     ordinary shares through their controlling interest in Mer & Co. (1982) Ltd.

(4)  Includes 250,000 ordinary shares subject to currently exercisable stock
     options that have an exercise price of $1.84 per share and expire on
     December 2008; 10,000 ordinary shares subject to currently exercisable
     stock options that have an exercise price of $3.87 per share and expire on
     September 2010; and 5,600 ordinary shares subject to currently exercisable
     warrants that have an exercise price of $4.00 per share and expire on
     August 10, 2009.

(5)  Based upon a Schedule 13D filed with the Securities and Exchange Commission
     on February 21, 2008 and other information available to the company.
     Includes 10,424 ordinary shares subject to currently exercisable warrants
     that have an exercise price of $4.00 per share and expire on August 10,
     2009.


                                       46
<PAGE>


(6)  Includes 630,045 ordinary shares held by Ron Dan Investments Ltd., a
     corporation controlled by Mr. Ben-Bassat.

(7)  Includes 10,000 ordinary shares subject to currently exercisable stock
     options that have an exercise price of $2.90 per share and expire on
     December 2008.

STOCK OPTION PLANS

1996 STOCK OPTION PLAN

     Under our 1996 Stock Option Plan, as amended, or the 1996 Plan, options to
purchase up to 400,000 ordinary shares were issuable under options granted to
our employees, management, officers and directors or those of our subsidiaries.
Any options which are canceled or forfeited within the option period became
available for future grants. The 1996 Plan terminated on May 31, 2006.

     The 1996 Plan provides that it is administered by the Board of Directors or
an Option Committee which may be appointed by the Board of Director. The
exercise price of options granted under the 1996 Plan may not be less than 100%
of the fair market value of our ordinary shares on the date of the grant of
incentive stock options and 75% in the case of options not designated as
incentive stock options. Fair market value is the mean between the highest and
lowest quoted selling prices on the date of grant of our shares traded on NASDAQ
or a stock exchange on which such shares are principally traded.

     Options granted under the 1996 Plan are generally exercisable under such
circumstances as the Board or Option Committee determines. Such options are not
transferable by an optionee other than by will or by laws of descent and
distribution, and during an option holder's lifetime are exercisable only by
such option holder or by his or her legal representative. Options granted under
the 1996 Plan terminate at such time and under such circumstances as the Board
or Option Committee determines.

     During 2007, no options were granted under the 1996 Plan and no options
were exercised into ordinary shares. At December 31, 2007, options to purchase
62,100 ordinary shares were outstanding under the 1996 Plan, exercisable at an
average exercise price of $3.44 per share.

1996 SECTION 102 STOCK OPTION PLAN

     In 1996, we adopted a Section 102 Stock Option Plan, as amended, or the
1996 102 Plan, providing for the grant of options to our Israeli employees,
management, officers and directors or those of our subsidiaries. The 1996 102
Plan was adopted pursuant to Section 102 of the Israeli Income Tax Ordinance
[New Version] - 1961, or Section 102, and provided recipients with tax
advantages under the Israeli Income Tax Ordinance. As of January 1, 2003,
Section 102 was amended, pursuant to which certain new tax advantages are
afforded with respect to option grants to employees and directors. In order to
enable employees and directors to benefit from such tax advantages with respect
to future grants of options and issuance of shares upon exercise thereof, such
grants have to be performed under a share option plan that is adjusted to the
amended Section 102, and therefore we adopted our 2003 Israeli Share Option
Plan. Upon the adoption of our 2003 Israeli Share Option Plan, we did not intend
to grant any more options under the 1996 102 Plan and the ordinary shares that
remained available for grant under the 1996 102 Plan were rolled-over into our
2003 Israeli Share Option Plan for issuance thereunder. The 1996 102 Plan
terminated on May 31, 2006.

     Options granted under our 1996 102 Plan are exercisable under such
circumstances as the Board of Directors or Option Committee determined. Options
granted under the this plan are not transferable by an optionee other than by
will or by laws of descent and distribution, and during an option holder's
lifetime will be exercisable only by such option holder or by his or her legal
representative.

     During 2007, no options were granted under the 1996 102 Plan and no options
were exercised into ordinary shares. At December 31, 2007, no options were
outstanding under the 1996 102 Plan.


                                       47
<PAGE>


2003 ISRAELI SHARE OPTION PLAN

     Under our 2003 Israeli Share Option Plan, or the 2003 Plan, options to
purchase up to 893,915 ordinary shares may be granted to directors, employees,
consultants, advisors, service providers, controlling shareholders and other
persons not employed by us or by our affiliates. Any options which are canceled
or forfeited within the option period will become available for future grants.
The 2003 Plan will terminate in 2013, unless earlier terminated by the Board of
Directors.

     Options to Israeli employees, directors and officers, other than
controlling shareholders (as such term is defined in the Israeli Income Tax
Ordinance), under the 2003 Plan may only be granted under Section 102. Under
amended Section 102, options granted pursuant to Section 102 may be designated
as "Approved 102 Options" or "Unapproved 102 Options." An Approved 102 Option
may either be classified as a capital gains option or an ordinary income option.
We elected to initially grant our options pursuant to Section 102 as capitals
gain options. Such election is effective as of the first date of grant of such
capital gains options under the 2003 Plan and shall remain in effect at least
until the lapse of one year following the end of the tax year during which we
first granted capital gains options. All Approved 102 Options (or the ordinary
shares issued upon exercise thereof) must be held in trust by a trustee for the
requisite holding period under Section 102 in order to benefit from the certain
tax advantages. We may also grant Unapproved 102 Options, which do not have any
tax benefit and are not held by a trustee. Options granted under Section 102 are
taxed on the date of sale of the exercised ordinary shares and/or the date of
the release of the options or such exercised ordinary shares from the trust.

     The 2003 Plan is administered by the Board of Directors or a committee of
the Board of Directors, if appointed, which has the authority, subject to
applicable law, to determine, the persons to whom options will be granted, the
terms and conditions of the respective options, including the time and the
extent to which the options may be exercised, may designate the type of options,
make an election as to the type of Approved 102 Option. The exercise price of
options granted under the 2003 Plan will be based on the fair market value of
our ordinary shares and is determined by the Board of Directors or the committee
at the time of the grant.

     Options granted under the 2003 Plan are not assignable or transferable by
an optionee, other than by will or by laws of descent and distribution, and
during the lifetime of an optionee may be exercised only by the optionee or by
the optionee's legal representative. Such options may be exercised as long as
the optionee is employed by, or providing services to us or any of our
affiliates, to the extent the options have vested.

     During 2007, options to purchase an aggregate of 90,000 ordinary shares
were granted under the 2003 Plan at an average exercise price of $1.23 per
share, and no options were exercised. At December 31, 2007, options to purchase
594,500 ordinary shares were outstanding under the 2003 Plan, exercisable at an
average exercise price of $2.36 per share.

2006 STOCK OPTION PLAN

     In June 2006, we adopted our 2006 Stock Option Plan, or the 2006 Plan,
under which up to 400,000 ordinary shares may be issued (subject to standard
adjustments) to employees, officers and non-employee directors of ours and our
affiliates. Ordinary shares as to which an option granted under the 2006 Plan
has not been exercised at the time of its expiration, cancellation or forfeiture
may again be subject to new awards under the 2006 Plan. The total number of
ordinary shares with respect to which options may be granted to any eligible
employee during any period of 12 consecutive months may not exceed 100,000
ordinary shares (subject to adjustment as provided in the 2006 Plan).

     The 2006 Plan will be administered by our Board of Directors or to the
extent permitted by Israeli law, a Compensation Committee of our Board of
Directors, if established by our Board of Directors at its discretion. All
references below to the "Committee" refers to the Board of Directors or
compensation committee established by our Board of Directors, as applicable. The
Committee will have the authority, in its discretion, to establish from time to
time guidelines or regulations for the administration of the 2006 Plan, to
interpret the 2006 Plan, and to make all determinations it considers necessary
or advisable for the administration of the 2006 Plan, in addition to the other
responsibilities and powers assigned to the Committee in the 2006 Plan. All
decisions, actions or interpretations of the Committee under the 2006 Plan will
be final, conclusive and binding upon all parties.


                                       48
<PAGE>


     Each option granted under the 2006 Plan will be either an option intended
to be treated as an "incentive stock option," within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended, or the Code, or an option that
will be treated as a "non-qualified stock option." No incentive stock may be
granted to any individual who is not an eligible employee of our company or a
"subsidiary" within the meaning of the Code. No incentive stock option may be
granted to an employee if, as of the date of grant of such option, such employee
owns stock possessing more than ten percent of the total combined voting power
of all classes of stock of our company or any affiliated company, a "10%
Holder," unless (a) the exercise price per share under such option is at least
110% of the fair market value of an ordinary share determined as of the date of
grant of such option, and (b) such option is not exercisable after the
expiration of five years from the date of grant of such option. No incentive
stock option may be granted under the 2006 Plan after the ten year anniversary
of its adoption.

     In no event may the term of any option exceed ten years from the date of
grant of the option. However, in no event may the term of any option granted to
a 10% Holder exceed five years from the date of grant of the option. No option
may be exercised after its expiration.

     Each option granted under the 2006 Plan will become exercisable, in whole
or in part, at such time or times during its term as the instrument evidencing
the grant of such option may specify.

     The price at which ordinary shares may be purchased upon any exercise of an
option granted under the 2006 Plan will be the price per share determined by the
Committee, and specified in the instrument evidencing the grant of such option,
but in no event may the exercise price per share be less than (i) the fair
market value of an ordinary share determined as of the date of grant of the
option, or (ii), if greater, the par value of an ordinary share. However, with
respect to an option granted to a 10% Holder, in no event may the exercise price
per share be less than 110% of the fair market value of our ordinary shares
determined as of the date of grant of such option.

     Options granted under the 2006 Plan are nontransferable, other than by will
or the laws of descent and distribution, and may be exercised during the
grantee's lifetime only by the grantee. However, if the instrument evidencing
the grant of an option other than an incentive stock option so provides, the
grantee may transfer his or her rights with respect to such option or any
portion thereof, without consideration, to any "family member," as such term is
defined in the 2006 Plan.

     The terms and conditions of an option grant may not be waived or amended
without the consent of the grantee if it would adversely affect, to any material
extent, any of the rights or obligations of the grantee with respect to such
grant, or in the case of any option that was intended to constitute an incentive
stock option, if such waiver or amendment would cause such option to fail to be
treated as an incentive stock option.

     Our Board of Directors may, with prospective or retroactive effect, amend,
suspend or terminate the 2006 Plan or any portion of the 2006 Plan at any time.
However, no amendment, suspension or termination of the 2006 Plan may adversely
affect the rights of any grantee with respect to any options previously granted
to the grantee without his or her written consent. Also, no amendment which
constitutes a "material revision" of the 2006 Plan, as the term material
revision is defined in the applicable rules of the National Association of
Securities Dealers, may be effective unless approved by our shareholders in the
manner required by such rules and by applicable law.

     During 2007, options to purchase an aggregate of 20,000 ordinary shares
were granted under the 2006 Plan at an average exercise price of $1.23 per
share, and no options were exercised. At December 31, 2007, options to purchase
20,000 ordinary shares were outstanding under the 2006 Plan, exercisable at an
average exercise price of $1.23 per share.


                                       49
<PAGE>


WARRANTS

     On August 3, 2005, we issued a warrant to purchase 37,000 ordinary shares
to Mr. Avraham Ziv in connection with financial services that he provided to our
company. The warrant has an exercise price of $4.00 per share, subject to
anti-dilution adjustments, and is exercisable from February 3, 2006 until August
3, 2009. Mr. Ziv provided financial services to us from to time during the last
five years.

     In connection with our August 2005 private placement to institutional and
private investors, we issued to the investors warrants to purchase an aggregate
375,000 ordinary shares at an exercise price of $4.00 per share (subject to
anti-dilution adjustments), exercisable from February 10, 2006 until August 10,
2009.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.   MAJOR SHAREHOLDERS

     The following table sets forth certain information as of April 7, 2008
regarding the beneficial ownership by all shareholders known to us to own
beneficially 5.0% or more of our ordinary shares:

                                     Number of                 Percentage of
                                   Ordinary Shares              Outstanding
Name                             Beneficially Owned(1)       Ordinary Shares(2)
----                             ---------------------       ------------------

Chaim Mer and Dora Mer               2,023,954 (3)               31.0%
Lior Salanksy                        1,052,484 (4)               16.1%
Roni Ben David                         764,963 (5)               11.7%
Isaac Ben-Bassat                       689,214 (6)               10.6%

----------

(1)  Beneficial ownership is determined in accordance with the rules of the
     Securities and Exchange Commission and generally includes voting or
     investment power with respect to securities. Ordinary shares relating to
     options currently exercisable or exercisable within 60 days of the date of
     this table are deemed outstanding for computing the percentage of the
     person holding such securities but are not deemed outstanding for computing
     the percentage of any other person. Except as indicated by footnote, and
     subject to community property laws where applicable, the persons named in
     the table above have sole voting and investment power with respect to all
     shares shown as beneficially owned by them.

(2)  The percentages shown are based on 6,523,845 ordinary shares (excluding
     10,800 ordinary shares held as treasury stock) issued and outstanding as of
     April 7, 2008.

(3)  Mr. Chaim Mer and his wife, Mrs. Dora Mer, are the holders of 159,971
     ordinary shares, and are the beneficial owners of 1,703,453 ordinary shares
     through their controlling interest in Mer Ofekim Ltd., 11,539 ordinary
     shares through their controlling interest in Mer Services Ltd. and 95
     ordinary shares through their controlling interest in Mer & Co. (1982) Ltd.

(4)  Based upon a Schedule 13D filed with the Securities and Exchange Commission
     on February 21, 2008 and other information available to the company.
     Inlcudes 10,424 ordinary shares subject to currently exercisable warrants
     that have an exercise price of $4.00 per share and expire on August 10,
     2009.


(5)  Based solely upon, and qualified in its entirety with reference to, a
     Schedule 13G filed with the Securities and Exchange Commission on February
     6, 2008.

(6)  Includes 630,045 ordinary shares held by Ron Dan Investments Ltd., a
     corporation controlled by Mr. Ben-Bassat.


                                       50
<PAGE>


SIGNIFICANT CHANGES IN THE OWNERSHIP OF MAJOR SHAREHOLDERS

     On February 11, 2008, we issued in a private placement 750,000 ordinary
shares to Mr. Lior Salanksy at a price per share of $1.0 and for a total
consideration of $750,000. On February 21, 2008, Mr. Lior Salanksy filed a
Schedule 13D with the Securities and Exchange Commission reflecting ownership of
1,042,060, or 15.97%, of our ordinary shares

MAJOR SHAREHOLDERS VOTING RIGHTS

     Our major shareholders do not have different voting rights

RECORD HOLDERS

     Based on a review of the information provided to us by our transfer agent,
as of April 2, 2008, there were 37 holders of record of our ordinary shares, of
which six record holders holding approximately 41.80% of our ordinary shares had
registered addresses in the United States. These numbers are not representative
of the number of beneficial holders of our shares nor are they representative of
where such beneficial holders reside, since many of these ordinary shares were
held of record by brokers or other nominees (including one U.S. nominee company,
CEDE & Co., which held approximately 41.78% of our outstanding ordinary shares
as of such date).

B.   RELATED PARTY TRANSACTIONS

     Ms. Dora Mer, the wife of Chaim Mer, provides legal services to us and
receives a monthly retainer of $5,000. The conditions of retaining the services
of Ms. Mer were approved by our Board of Directors and Audit Committee.

     Our subsidiaries, MTS Asia Ltd. and MTS IntegraTRAK, entered into an
agreement with C. Mer Industries Ltd., or C. Mer, pursuant to which they
distribute and support certain of C. Mer's 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%. C.
Mer is a publicly traded company controlled by Mr. Chaim Mer, and Mr. Mer has
been the Chairman of its Board of Directors since 1988 and served as its
President and Chief Executive Officer from 1988 until January 2005. Presently,
the only service provided to us by C. Mer is our participation in its umbrella
liability insurance coverage. We believe that the terms under which C. Mer
provides such participation to us is on a basis no less favorable than could be
obtained from an unaffiliated third party.

     On August 10, 2005, we entered into definitive agreements with
institutional and private investors, including our Chief Executive Officer, Mr.
Eytan Bar, for a private placement of ordinary shares and warrants to purchase
ordinary shares that raised $2.8 million. Pursuant to the agreements, the
investors, other than our Chief Executive Officer, Mr. Eytan Bar, paid $3.00 per
share for the aggregate 937,500 ordinary shares issued in the private placement.
Mr. Bar purchased 14,000 shares at $3.88 per share, the closing price of our
ordinary shares on the day prior to the closing of the private placement. The
private placement also involved the acquisition by the investors of warrants to
purchase an aggregate 375,000 additional ordinary shares at an exercise price of
$4.00 per share (subject to anti-dilution adjustments), exercisable from
February 10, 2006 until August 10, 2009. Each investor, including Mr. Eytan Bar,
received warrants to purchase two ordinary shares for each five ordinary shares
purchased. Mr. Lior Salansky, a principal shareholder and our President since
February 2008, also participated in the private placement.

     Mr. Chaim Mer, a major shareholder and the Chairman of our Board of
Directors, devotes approximately 20% of his time to the management of our
company in consideration of which we pay him a monthly salary of $7,000 per
month (as approved by our Audit Committee and Board of Directors on November 8,
1999). Mr. Isaac Ben-Bassat, a major shareholder and a director, receives an
annual fee of approximately $8,400 and a per meeting attendance fee of $300 in
connection with his service as a director of our company. See Item. 6B.
"Directors and Senior Management - Compensation." Mr. Lior Salansky, a major
shareholder and our President, devotes approximately 60% of his time to the
management of our company in consideration of which we pay him a monthly salary
of approximately $9,900 per month plus social benefits (as approved by our Board
of Directors on January 24, 2008).


                                       51
<PAGE>


C.   INTERESTS OF EXPERTS AND COUNSEL

     Not applicable.

ITEM 8. FINANCIAL INFORMATION

A.   CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

FINANCIAL STATEMENTS

     See the consolidated financial statements, including the notes thereto, and
the exhibits listed in Item 19 hereof and incorporated herein by this reference.

EXPORT SALES

     See Note 16 of our consolidated financial statements.

LEGAL PROCEEDINGS

     On April 18, 2005, Amdocs (Israel) Ltd. and Amdocs Ltd. filed a complaint
in the Tel Aviv District Court naming our company, our chief executive officer
and others as defendants (Civil File No. 32419-05/05). The complaint alleges,
among other things, that professional and commercial information belonging to
the plaintiffs was transferred to the defendants for use in our 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, and mandatory injunctions requiring the return of any such
information and the payment of estimated damages of NIS 14,775,000
(approximately $3.5 million). On June 27, 2005, we and the other defendants
filed a statement of defense, claiming that the factual and legal allegations
made by the plaintiffs have no basis and the causes of action and relief
requested are without merit. On March 22, 2007, the complaint was dismissed
without prejudice by mutual agreement and following a settlement between all
parties to the complaint and with no payment by any of the litigants.

     In April 2000, the tax authorities in Israel issued to us a demand for a
tax payment in the amount of approximately NIS 6.0 million (approximately $1.6
million) for the 1997-1999 period. We have appealed to the Israeli district
court in respect of this tax demand. We believe that certain defenses can be
raised against the demand of the tax authorities. We have made a provision in
our financial statements for this tax demand for the amount deemed probable,
based on the current evidence, which we believe is adequate.

     On November 22, 2005, we received a letter from one of our customer's legal
counsel alleging, among other things, that we materially breached an agreement
relating to our billing solutions that we entered into with the customer on
March 9, 2005, as subsequently amended on June 6, 2005. The customer is seeking
full repayment of the amounts that were paid by him under the agreement in the
amount of approximately $100,000, plus interest and indemnification for damages
that he claims to have suffered as a result of our alleged breach. We and the
customer have since exchanged correspondence. We cannot currently assess the
outcome or possible adverse effect on our financial position or results of
operations.

     On February 21, 2007, one of our suppliers filed a complaint in the
Kfar-Saba Magistrate Court against us, under which he seeks the payment of NIS
179,000 (approximately $47,000) for electronic components that were ordered by
us for a third party, which is the customer referred to in the foregoing
paragraph. On March 13, 2007, we filed a statement of defense. We have made a
provision in our financial statements for the claimed amount. Due to the
preliminary stage of this litigation, we and our legal advisors cannot currently
assess the outcome or possible adverse effect on our financial position or
results of operations.


                                       52
<PAGE>


     On July 24, 2006, a claim was filed in the Tel-Aviv Magistrate Court
against our company and Tim Computers and Systems Ltd, or TIM, for an order of
inspection and monetary relief in the total amount of NIS 313,000 ($81,000), of
which NIS 113,000 ($29,000) is demanded from our company and NIS 200,000
($52,000) is demanded from TIM. The plaintiff is a former minority shareholder
of a company in which we were the major shareholder. The claim relates to the
rights to proceeds received under a software development project in which TIM
and our company participated and in which the plaintiff was involved. A
preliminary hearing was held on Jan. 15, 2007. Due to the preliminary stage of
this litigation, we and our legal advisors cannot currently assess the outcome
or possible adverse effect on our financial position or results of operations.

     On March 15, 2007, we received a letter from one of our customer's legal
counsel alleging, among other things, that we materially breached an agreement
relating to our billing solutions that we entered into with the customer on
March 30, 2006. The customer is seeking full repayment of the amounts that were
paid by him under the agreement in the amount of approximately $141,000, plus
liquidated damages as provided in the agreement. We believe that the agreement
cancellation was unfounded and intend to vigorously pursue our rights under the
contract. Due to the preliminary stage of this matter, we and our legal advisors
cannot currently assess the outcome or possible adverse effect on our financial
position or results of operations.

     During August 2007, our Brazilian subsidiary, TABS Brazil Ltda., was
ordered by the Labor Law Court in Brazil to pay approximately 180,000 Brazilian
Reais (approximately $101,000) to one of its former employees. TABS Brazil Ltda.
has filed an appeal against the Labor Law Court ruling. We recorded a provision
in our financial statements for the amount deemed probable.

     Other than the above, we are not involved in any legal proceedings nor are
we subject to any threatened litigation that are material to our business or
financial condition.

DIVIDEND DISTRIBUTION POLICY

     We have never paid cash dividends to our shareholders. We intend to retain
future earnings for use in our business and do not anticipate paying cash
dividends on our ordinary shares in the foreseeable future. Any future dividend
policy will be determined by our Board of Directors and will be based upon
conditions then existing, including our results of operations, financial
condition, current and anticipated cash needs, contractual restrictions and
other conditions as the Board of Directors may deem relevant.

     According to the Israeli Companies Law, a company may distribute dividends
out of its profits (as such term is defined in the Israeli Companies Law),
provided that there is no reasonable concern that payment of the dividend will
prevent the company from satisfying all its current and foreseeable obligations,
as they become due. Notwithstanding the foregoing, dividends may be paid with
the approval of a court, at the company's request, provided that there is no
reasonable concern that payment of the dividend will prevent the company from
satisfying its current and foreseeable obligations, as they become due. In the
event cash dividends are declared, such dividends will be paid in NIS.

B.   SIGNIFICANT CHANGES

     Except as otherwise disclosed in this annual report, no significant change
has occurred since December 31, 2007.

ITEM 9. THE OFFER AND LISTING

A.   OFFER AND LISTING DETAILS

ANNUAL STOCK INFORMATION

     The following table sets forth, for each of the years indicated, the range
of high ask and low bid prices of our ordinary shares on the NASDAQ Capital
Market.

YEAR            HIGH         LOW
----            ----         ---

2007            $3.26       $0.02
2006            $3.50       $1.50
2005            $4.23       $3.01
2004            $4.00       $1.90
2003            $3.56       $0.87


                                       53
<PAGE>


QUARTERLY STOCK INFORMATION

     The following table sets forth, for each of the full financial quarters in
the years indicated, the range of high ask and low bid prices of our ordinary
shares on the NASDAQ Capital Market.

                     HIGH         LOW
                     ----         ---

2006
First Quarter        $3.50       $2.94
Second Quarter       $3.34       $2.32
Third Quarter        $2.85       $2.01
Fourth Quarter       $2.49       $1.50

2007
First Quarter        $1.92       $1.53
Second Quarter       $1.65       $1.35
Third Quarter        $3.26       $0.75
Fourth Quarter       $1.65       $0.02

2008
First Quarter        $1.55       $0.75


MONTHLY STOCK INFORMATION

     The following table sets forth, for each of the most recent six months, the
range of high ask and low bid prices of our ordinary shares on the NASDAQ
Capital Market.

MONTH               HIGH      LOW
-----               ----      ---

October 2007        $1.65    $1.10
November 2007       $1.65    $1.10
December 2007       $1.17    $0.02
January 2008        $1.09    $0.75
February 2008       $1.14    $0.90
March 2008          $1.55    $1.04

B.   PLAN OF DISTRIBUTION

     Not applicable.

C.   MARKETS

     Our ordinary shares were listed on the NASDAQ National Market in connection
with our initial public offering on May 21, 1997. On December 23, 1998, the
listing of our ordinary shares was transferred to the NASDAQ Capital Market
(symbol: MTSL).

D.   SELLING SHAREHOLDERS

     Not applicable.

E.   DILUTION

     Not applicable.


                                       54
<PAGE>


F.   EXPENSE OF THE ISSUE

     Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A.   SHARE CAPITAL

     Not applicable.

B.   MEMORANDUM AND ARTICLES OF ASSOCIATION

     SET OUT BELOW IS A DESCRIPTION OF CERTAIN PROVISIONS OF OUR ARTICLES OF
ASSOCIATION AND OF THE ISRAELI COMPANIES LAW RELATED TO SUCH PROVISIONS. THIS
DESCRIPTION IS ONLY A SUMMARY AND DOES NOT PURPORT TO BE COMPLETE AND IS
QUALIFIED BY REFERENCE TO THE FULL TEXT OF THE ARTICLES OF ASSOCIATION, WHICH
ARE INCORPORATED BY REFERENCE AS EXHIBITS TO THIS ANNUAL REPORT, AND TO ISRAELI
LAW.

PURPOSES AND OBJECTS OF THE COMPANY

     We are a public company registered under the Israel Companies Law,
1999-5759, or the Israeli Companies Law, as MER Telemanagement Solutions Ltd.,
registration number 520042904. Our objects and purposes, as provided by our
Articles of Association, are to carry on any lawful activity.

     On February 1, 2000, the Israeli Companies Law came into effect and
superseded most of the provisions of the Israeli Companies Ordinance (New
Version), 5743-1983, except for certain provisions which relate to bankruptcy,
dissolution and liquidation of companies. Under the Israeli Companies Law,
various provisions, some of which are detailed below, overrule the current
provisions of our Articles of Association.

THE POWERS OF THE DIRECTORS

     Under the provisions of the Israeli Companies Law and our Articles of
Association, a director cannot participate in a meeting nor vote on a proposal,
arrangement or contract in which he or she is materially interested. In
addition, our directors cannot vote compensation to themselves or any members of
their body without the approval of our audit committee and our shareholders at a
general meeting. See Item 6C. "Directors, Senior Management and Employees -
Board Practices - Approval of Related Party Transactions Under Israeli Law."

     The authority of our directors to enter into borrowing arrangements on our
behalf is not limited, except in the same manner as any other transaction by us.

     Under our Articles of Association, retirement of directors from office is
not subject to any age limitation and our directors are not required to own
shares in our company in order to qualify to serve as directors.

RIGHTS ATTACHED TO SHARES

     Our authorized share capital consists of 12,000,000 ordinary shares of a
nominal value of NIS 0.01 each. All outstanding ordinary shares are validly
issued, fully paid and non-assessable.

     The rights attached to the ordinary shares are as follows:

     DIVIDEND RIGHTS. Holders of our ordinary shares are entitled to the full
amount of any cash or share dividend subsequently declared. The board of
directors may declare interim dividends and propose the final dividend with
respect to any fiscal year only out of the retained earnings, in accordance with
the provisions of the Israeli Companies Law. Our Articles of Association provide
that the declaration of a dividend requires approval by an ordinary resolution
of the shareholders, which may decrease but not increase the amount proposed by
the board of directors. See Item 8A. "Financial Information - Consolidated and
Other Financial Information - Dividend Distribution Policy." If after one year a
dividend has been declared and it is still unclaimed, the board of directors is
entitled to invest or utilize the unclaimed amount of dividend in any manner to
our benefit until it is claimed. We are not obligated to pay interest or linkage
differentials on an unclaimed dividend.


                                       55
<PAGE>


     VOTING RIGHTS. Holders of ordinary shares have one vote for each ordinary
share held on all matters submitted to a vote of shareholders. Such voting
rights may be affected by the grant of any special voting rights to the holders
of a class of shares with preferential rights that may be authorized in the
future.

     The quorum required for an ordinary meeting of shareholders consists of at
least two shareholders present in person or represented by proxy who hold or
represent, in the aggregate, at least one third of the voting rights of the
issued share capital. A meeting adjourned for lack of a quorum generally is
adjourned to the same day in the following week at the same time and place or
any time and place as the directors designate in a notice to the shareholders.
At the reconvened meeting, the required quorum consists of any two members
present in person or by proxy.

     An ordinary resolution, such as a resolution for the declaration of
dividends, requires approval by the holders of a majority of the voting rights
represented at the meeting, in person, by proxy or by written ballot, and voting
thereon. Under our Articles of Association, a special resolution, such as
amending our memorandum of association or articles of association, approving any
change in capitalization, winding-up, authorization of a class of shares with
special rights, or other changes as specified in our Articles of Association,
requires approval of a special majority, representing the holders of no less
than 65% of the voting rights represented at the meeting in person, by proxy or
by written ballot, and voting thereon.

     Pursuant to our articles of association, our directors (other than outside
directors) are elected at our annual general meeting of shareholders by a vote
of the holders of a majority of the voting power represented and voting at such
meeting and hold office until the next annual general meeting of shareholders
and until their successors have been elected. All the members of our Board of
Directors (except the outside directors) may be reelected upon completion of
their term of office. For information regarding the election of outside
directors, see Item 6C. "Directors, Senior Management and Employees - Board
Practices - Election of Directors."

     RIGHTS TO SHARE IN OUR COMPANY'S PROFITS. Our shareholders have the right
to share in our profits distributed as a dividend and any other permitted
distribution. See this Item 10B. "Additional Information - Memorandum and
Articles of Association - Rights Attached to Shares - Dividend Rights."

     RIGHTS TO SHARE IN SURPLUS IN THE EVENT OF LIQUIDATION. In the event of our
liquidation, after satisfaction of liabilities to creditors, our assets will be
distributed to the holders of ordinary shares in proportion to the nominal value
of their holdings. This right may be affected by the grant of preferential
dividend or distribution rights to the holders of a class of shares with
preferential rights that may be authorized in the future.

     LIABILITY TO CAPITAL CALLS BY OUR COMPANY. Under our memorandum of
association and the Israeli Companies Law, the liability of our shareholders is
limited to the par value of the shares held by them.

     LIMITATIONS ON ANY EXISTING OR PROSPECTIVE MAJOR SHAREHOLDER. See Item 6C.
"Directors and Senior Management -Board Practices - Approval of Related Party
Transactions Under Israeli Law."

CHANGING RIGHTS ATTACHED TO SHARES

     According to our Articles of Association, in order to change the rights
attached to any class of shares, unless otherwise provided by the terms of the
class, such change must be adopted by a general meeting of the shareholders and
by a separate general meeting of the holders of the affected class with a
majority of 75% of the voting power participating in such meeting.


                                       56
<PAGE>


ANNUAL AND EXTRAORDINARY MEETINGS

     Under the Israeli Companies Law a company must convene an annual meeting of
shareholders at least once every calendar year and within fifteen months of the
last annual meeting. Depending on the matter to be voted upon, notice of at
least 21 days or 35 days prior to the date of the meeting is required. Our board
of directors may, in its discretion, convene additional meetings as "special
general meetings." With respect to "special general meetings notice of at least
35 days prior to the date of the meeting is required. In addition, the board
must convene a special general meeting upon the demand of two of the directors,
25% of the nominated directors, one or more shareholders having at least 5% of
the outstanding share capital and at least 1% of the voting power in the
company, or one or more shareholders having at least 5% of the voting power in
the company. See Item 10B. "Additional Information - Memorandum and Articles of
Association - Rights Attached to Shares - Voting Rights."

LIMITATIONS ON THE RIGHTS TO OWN SECURITIES IN OUR COMPANY

     Neither our memorandum of association or our articles of association nor
the laws of the State of Israel restrict in any way the ownership or voting of
shares by non-residents, except with respect to subjects of countries, which are
in a state of war with Israel.

PROVISIONS RESTRICTING CHANGE IN CONTROL OF OUR COMPANY

     The Israeli Companies Law requires that mergers between Israeli companies
be approved by the board of directors and general meeting of shareholders of
both parties to the transaction. The approval of the board of directors of both
companies is subject to such boards' confirmation that there is no reasonable
doubt that after the merger the surviving company will be able to fulfill its
obligations towards its creditors. Each company must notify its creditors about
the contemplated merger. Under our articles of association, such merger must be
approved by a resolution of the shareholders, as explained above. The approval
of the merger by the general meetings of shareholders of the companies is also
subject to additional approval requirements as specified in the Israeli
Companies Law and regulations promulgated thereunder. See also Item 6C.
"Directors, Senior Management and Employees - Board Practices - Approval of
Related Party Transactions Under Israeli Law."

DISCLOSURE OF SHAREHOLDERS OWNERSHIP

     The Israeli Securities Law and regulations promulgated thereunder do not
require a company whose shares are publicly traded solely on a stock exchange
outside of Israel, as in the case of our company, to disclose its share
ownership.

CHANGES IN OUR CAPITAL

     Changes in our capital are subject to the approval of the shareholders at a
general meeting by a special majority of 65% of the votes of shareholders
participating and voting in the general meeting.

C.   MATERIAL CONTRACTS

     On August 10, 2005, we entered into definitive agreements with
institutional and private investors, including our Chief Executive Officer, Mr.
Eytan Bar, for a private placement of ordinary shares and warrants to purchase
ordinary shares that raised $2.8 million. Mr. Lior Salansky, a principal
shareholder and our President since February 2008, also participated in the
private placement. Pursuant to the agreements, the investors, other than Mr.
Bar, paid $3.00 per share for the aggregate 923,500 ordinary shares issued in
the private placement. Mr. Bar purchased 14,000 shares at $3.88 per share, the
closing price of our ordinary shares on the day prior to the closing of the
private placement. The private placement also involved the acquisition by the
investors of warrants to purchase an aggregate 375,000 additional ordinary
shares at an exercise price of $4.00 per share (subject to anti-dilution
adjustments), exercisable from February 10, 2006 until August 10, 2009. Each
investor, including Mr. Eytan Bar, received warrants to purchase two ordinary
shares for each five ordinary shares purchased. To date, no warrants have been
exercised.


                                       57
<PAGE>


     On July 31, 2006, we completed the acquisition of certain assets and
liabilities of TelSoft, a California-based provider of call accounting and TEM
solutions. TelSoft products offer a complementary solution to our products. In
connection with the acquisition, we paid an initial consideration of $1.1
million and agreed to pay additional contingent consideration based on post
acquisition revenue performance during the 12 month period following the
acquisition.

D.   EXCHANGE CONTROLS

     Israeli law and regulations do not impose any material foreign exchange
restrictions on non-Israeli holders of our ordinary shares. In May 1998, a new
"general permit" was issued under the Israeli Currency Control Law, 1978, which
removed most of the restrictions that previously existed under such law, and
enabled Israeli citizens to freely invest outside of Israel and freely convert
Israeli currency into non-Israeli currencies.

     Non-residents of Israel who purchase our ordinary shares will be able to
convert dividends, if any, thereon, and any amounts payable upon our
dissolution, liquidation or winding up, as well as the proceeds of any sale in
Israel of our ordinary shares to an Israeli resident, into freely repatriable
dollars, at the exchange rate prevailing at the time of conversion, provided
that the Israeli income tax has been withheld (or paid) with respect to such
amounts or an exemption has been obtained.

E.   TAXATION

     The following is a discussion of Israeli and United States tax consequences
material to our shareholders. To the extent that the discussion is based on new
tax legislation which has not been subject to judicial or administrative
interpretation, the views expressed in the discussion might not be accepted by
the tax authorities in question. The discussion is not intended, and should not
be construed, as legal or professional tax advice and does not exhaust all
possible tax considerations.

     HOLDERS OF OUR ORDINARY SHARES SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO
THE UNITED STATES, ISRAELI OR OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF ORDINARY SHARES, INCLUDING, IN PARTICULAR, THE EFFECT OF ANY
FOREIGN, STATE OR LOCAL TAXES.

ISRAELI TAX CONSIDERATIONS

     The following is a summary of the current tax structure applicable to
companies in Israel, with special reference to its effect on us. The following
also contains a discussion of the material Israeli tax consequences to
purchasers of our ordinary shares and Israeli government programs benefiting us.
This summary does not discuss all the aspects of Israeli tax law that may be
relevant to a particular investor in light of his or her personal investment
circumstances or to some types of investors subject to special treatment under
Israeli law.

GENERAL CORPORATE TAX STRUCTURE

     Israeli companies are generally subject to income tax on their taxable
income. The applicable rate for 2007 is 29%, which was reduced to 27% in 2008
and will be further reduced to 26% in 2009 and 25% in 2010 and thereafter.
However, the effective tax rate payable by a company, which derives income from
an approved enterprise (as further discussed below), may be considerably less.

CONTROLLED FOREIGN COMPANIES

     Under the controlled foreign companies rules an Israeli company may become
subject to Israeli taxes (as deemed dividends) on non-distributed profits of a
non-Israeli subsidiary if the subsidiary's primary source of income is passive
income (such as interest, dividends, royalties, rental income or capital gains)
and if the taxes imposed outside of Israel are no more than 20% of the profits.


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TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959

     The Law for the Encouragement of Capital Investments, 1959, commonly
referred to as the Investment Law, provides that a proposed capital investment
in eligible facilities may, upon application to the Investment Center of the
Ministry of Industry, Trade and Labor of the State of Israel, be designated as
an approved enterprise. Each certificate of approval for an approved enterprise
relates to a specific investment program delineated both by its financial scope,
including its capital sources, and by its physical characteristics, E.G., the
equipment to be purchased and utilized pursuant to the program. An approved
enterprise is entitled to benefits including Israeli Government cash grants and
tax benefits in specified development areas. The tax benefits derived from any
such certificate of approval relate only to taxable income attributable to the
specific approved enterprise. If a company has more than one approval or only a
portion of its capital investments is approved, its effective tax rate is the
result of a weighted average of the applicable rates.

     Taxable income of a company derived from an approved enterprise is subject
to corporate tax at the maximum rate of 25% (rather than the regular corporate
tax rate) for the benefit period. This period is ordinarily seven years (or ten
years if the company qualifies as a foreign investors' company as described
below) commencing with the year in which the approved enterprise first generates
taxable income, and is limited to twelve years from commencement of production
or 14 years from the date of approval, whichever is earlier. Tax benefits under
the Investments Law also apply to income generated from the grant of a usage
right with respect to know-how developed by the approved enterprise, income
generated from royalties, and income derived from a service which is auxiliary
to such usage right or royalties, provided that such income is generated within
the approved enterprise's ordinary course of business. The Investment Law also
provides that a company that has an approved enterprise within Israel will be
eligible for a reduced tax rate and is entitled to claim accelerated
depreciation on buildings, machinery and equipment used by the approved
enterprise during the first five years of use.

     A company owning an approved enterprise may elect to forego entitlement to
the grants otherwise available under the Investment Law and in lieu thereof
participate in an alternative track of benefits. Under the alternative track of
benefits, a company's undistributed income derived from an approved enterprise
will be exempt from company tax for a period of two years from the first year of
taxable income and such company will be eligible for a reduced tax rate for the
remainder, if any, of the otherwise applicable benefits period.

     A company that has an approved enterprise program is eligible for further
tax benefits if it qualifies as a foreign investors' company. A foreign
investors' company is a company that more than 25% of its share capital and
combined share and loan capital is owned by non-Israeli residents. A company,
which qualifies as a foreign investors' company and has an approved enterprise
program is eligible for tax benefits for a ten-year benefit period. The company
tax rate applicable to income from the approved enterprise earned in the benefit
period (distributed or not) is as follows:

                                              THE COMPANY
FOR A COMPANY WITH FOREIGN INVESTMENT OF      TAX RATE IS
----------------------------------------      -----------

over 25% but less than 49%                      25%
49% or more but less than 74%                   20%
74% or more but less than 90%                   15%
90% or more                                     10%

     In addition, the dividend recipient is taxed at the reduced rate applicable
to dividends from approved enterprises income (15%), if the dividend, deriving
from the approved enterprises, is distributed during the tax benefit period or
within 12 years thereafter, yet, no time limit is applicable to dividends from a
foreign investment company. The company must withhold this tax at source,
regardless of whether the dividend is converted into foreign currency. However,
if retained tax-exempt income is distributed in a manner other than upon the
complete liquidation of the company, the company would be taxed at the reduced
corporate tax rate applicable to such profits (between 10%-25%). Our company is
not obliged to distribute exempt retained profits under the alternative track of
benefits, and may generally decide from which source of income to declare
dividends. We intend to reinvest any income derived from our approved enterprise
programs and not to distribute such income as a dividend.


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<PAGE>


     We have been granted approved enterprise status with respect to several
investment programs and chose the alternative track with respect to each of
these programs. See Item 5A. "Operating and Financial Review and Prospects -
Operating Results - Effective Corporate Tax Rate."

     The benefits available to an approved enterprise are conditional upon the
fulfillment of conditions stipulated in the Investment Law and its regulations
and the criteria set forth in the specific certificate of approval, as described
above. In the event that a company does not meet these conditions, its tax
benefits could be canceled, in whole or in part, and it would be required to
refund the amount of tax benefits, with the addition of the Israeli consumer
price index linkage adjustment and interest.

     AMENDMENT TO THE INVESTMENTS LAW

     An amendment to the Investments Law, which came into effect on April 1,
2005, has changed certain provisions of such law, including the criteria for
investments qualified to receive tax benefits under such law. An eligible
investment program under the amendment will qualify for benefits as a
"Privileged Enterprise" (rather than the previous terminology of Approved
Enterprise). As a result of the amendment, a company is no longer obliged to
acquire approved enterprise status in order to receive the tax benefits
previously available under the alternative benefits track, and therefore there
is no need to apply to the Investment Center for this purpose (however, approved
enterprise status remains mandatory for companies seeking grants). Rather, a
company may claim the tax benefits offered by the Investment Law directly in its
tax returns, provided that its facilities meet the criteria for tax benefits set
out by the amendment. Companies may also approach the Israeli Tax Authority for
a pre-ruling regarding its eligibility for benefits under the amendment. The
amendment does not apply to investment programs approved prior to December 31,
2004. The new tax regime will apply only to new investment programs.

     Tax benefits are available under the April 2005 amendment to production
facilities (or other eligible facilities), which are generally required to
derive more than 25% of their business income from export. In order to receive
the tax benefits, a company must make an investment in the Privileged Enterprise
exceeding a minimum amount specified in the Investment Law. Such investment may
be made over a period of no more than three years ending at the end of the year
in which the company requested to have the tax benefits apply to the Privileged
Enterprise, referred to as the Year of Election. Where the company requests to
have the tax benefits apply to an expansion of existing facilities, only the
expansion will be considered a Privileged Enterprise and the company's effective
tax rate will be the result of a weighted combination of the applicable rates.
In such case, the minimum investment required in order to qualify as a
Privileged Enterprise is required to exceed a certain percentage of the
company's production assets before the expansion.

TAX BENEFITS FOR RESEARCH AND DEVELOPMENT

     Israeli tax law allows, under specified conditions, a tax deduction for
expenditures, including capital expenditures, in the year incurred relating to
scientific research and development projects, if the expenditures are approved
by the relevant Israeli Government ministry, determined by the field of
research, and the research and development is for the promotion of the company
and is carried out by or on behalf of the company seeking such deduction.
However, the amount of such deductible expenses shall be reduced by the sum of
any funds received through government grants for the finance of such scientific
research and development projects. Expenditures not so approved are deductible
over a three-year period.


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TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969

     Under the Law for the Encouragement of Industry (Taxes), 1969, or the
Industry Encouragement Law, Industrial Companies are entitled to certain
corporate tax benefits, including, among others:

     o    deduction, under certain conditions, of purchases of know-how and
          patents over an eight-year period for tax purposes;

     o    right to elect, under specified conditions, to file a consolidated tax
          return with additional related Israeli Industrial Companies;

     o    accelerated depreciation rates on equipment and buildings; and

     o    deductions over a three-year period of expenses involved with the
          issuance and listing of shares on the Tel Aviv Stock Exchange or, on
          or after January 1, 2003, on a recognized stock market outside of
          Israel.

     Eligibility for benefits under the Industry Encouragement Law is not
subject to receipt of prior approval from any governmental authority. Under the
Industry Encouragement Law, an "Industrial Company" is defined as a company
resident in Israel, at least 90% of the income of which, in any tax year,
determined in Israeli currency, exclusive of income from government loans,
capital gains, interest and dividends, is derived from an "Industrial
Enterprise" owned by it. An "Industrial Enterprise" is defined as an enterprise
owned by an Industrial Company, whose major activity in a given tax year is
industrial production activity.

     We believe that we currently qualify as an Industrial Company within the
definition of the Industry Encouragement Law. No assurance can be given that we
will continue to qualify as an Industrial Company or that the benefits described
above will be available in the future.

GRANTS UNDER THE LAW FOR THE ENCOURAGEMENT OF INDUSTRIAL RESEARCH AND
DEVELOPMENT, 1984

     The Government of Israel encourages research and development projects
through the Office of Chief Scientist of the Israeli Ministry of Industry, Trade
and Labor, or the Office of the Chief Scientist, pursuant to the Law for the
Encouragement of Industrial Research and Development, 1984, and the regulations
promulgated thereunder, commonly referred to as the Research Law. Grants
received under such programs are repaid through a mandatory royalty based on
revenues from products incorporating know-how developed with the grants. This
government support is conditioned upon the ability of the participant to comply
with certain applicable requirements and conditions specified in the Office of
the Chief Scientist's programs and with the provisions of the Research Law.

     Under the Research Law, research and development programs which meet
specified criteria and are approved by a research committee of the Office of the
Chief Scientist are eligible for grants of up to 50% of certain of the project's
approved expenditure, as determined by the research committee.

     In exchange, the recipient of such grants is required to pay the Office of
the Chief Scientist royalties from the revenues derived from products
incorporating technology developed within the framework of the approved research
and development program or derived from such program (including ancillary
services in connection with such program), usually up to100% of the U.S.
dollar-linked value of the total grants received in respect of such program,
plus LIBOR interest.

     The terms of the Israeli Government participation generally requires that
the products developed with such grants be manufactured in Israel. However,
under regulations promulgated under the Research Law, upon the approval of the
Chief Scientist, some of the manufacturing volume may be performed outside
Israel, provided that the grant recipient pays royalties at an increased rate.
The Research Law also allows for the approval of grants in cases in which the
applicant declares that part or all of the manufacturing will be performed
outside of Israel or by non-Israeli residents and the research committee is
convinced that this is essential for the execution of the program. The Research
Law also provides that know-how developed under an approved research and
development program may not be transferred to third parties in Israel without
the prior approval of the research committee. The Research Law further provides
that the know-how developed under an approved research and development program
may not be transferred to any third parties outside Israel. No approval is
required for the sale or export of any products resulting from such research and
development.


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<PAGE>


     However, in June 2005, an amendment to the Research Law became effective,
which amendment was intended to make the Research Law more compatible with the
global business environment by, among other things, relaxing restrictions on the
transfer of manufacturing rights outside Israel and on the transfer of Office of
the Chief Scientist-funded know-how outside of Israel. The amendment permits the
Office of the Chief Scientist, among other things, to approve the transfer of
manufacturing rights outside Israel in exchange for an import of different
manufacturing into Israel as a substitute, in lieu of demanding the recipient to
pay increased royalties as described above. The amendment further permits, under
certain circumstances and subject to the Office of the Chief Scientist's prior
approval, the transfer outside Israel of know-how that has been funded by Office
of the Chief Scientist, generally in the following cases: (a) the grant
recipient pays to the Office of the Chief Scientist a portion of the
consideration paid for such funded know-how (according to certain formulas), (b)
the grant recipient receives know-how from a third party in exchange for its
funded know-how, or (c) such transfer of funded know-how arises in connection
with certain types of cooperation in research and development activities.

     The Research Law imposes reporting requirements with respect to certain
changes in the ownership of a grant recipient. The law requires the grant
recipient and its controlling shareholders and interested parties to notify the
Office of the Chief Scientist of any change in control of the recipient or a
change in the holdings of the means of control of the recipient that results in
a non-Israeli becoming an interested party directly in the recipient and
requires the new interested party to undertake to the Office of the Chief
Scientist to comply with the Research Law. In addition, the rules of the Office
of the Chief Scientist may require prior approval of the Office of the Chief
Scientist or additional information or representations in respect of certain of
such events. For this purpose, "control" is defined as the ability to direct the
activities of a company other than any ability arising solely from serving as an
officer or director of the company. A person is presumed to have control if such
person holds 50% or more of the means of control of a company. "Means of
control" refers to voting rights or the right to appoint directors or the chief
executive officer. An "interested party" of a company includes a holder of 5% or
more of its outstanding share capital or voting rights, its chief executive
officer and directors, someone who has the right to appoint its chief executive
officer or at least one director, and a company with respect to which any of the
foregoing interested parties owns 25% or more of the outstanding share capital
or voting rights or has the right to appoint 25% or more of the directors.
Accordingly, any non-Israeli who acquires 1% or more of our ordinary shares will
be required to notify the Office of the Chief Scientist that it has become an
interested party and to sign an undertaking to comply with the Research Law.
Additionally, procedures regulated under the Research Law require the grant
recipient to obtain the approval of the Office of the Chief Scientist prior to a
change in the holdings of the recipient or change in the holdings of the means
of control of the recipient if the recipient's shares are being issued to a
non-Israeli person or entity and require the new non-Israeli party to undertake
to the Office of the Chief Scientist to comply with the Research Law.

     In the past, we received funding from the Office of the Chief Scientist for
selected research and development projects, but we stopped seeking funding for a
number of years. In 2005, 2006 and 2007, we received the approval of the Office
of the Chief Scientist for new research and development grants in the aggregate
amount of $130,000, $578,000 and $469,000, respectively. See Item 5C. "Operating
and Financial Review and Prospects - Research and Development, Patents and
Licenses" for additional details on the grants that we have received and our
contingent liability to the Office of the Chief Scientist.

SPECIAL PROVISIONS RELATING TO TAXATION UNDER INFLATIONARY

     The Income Tax Law (Inflationary Adjustments), 1985, generally referred to
as the Inflationary Adjustments Law, represents an attempt to overcome the
problems presented to a traditional tax system by an economy undergoing rapid
inflation. The Inflationary Adjustments Law is highly complex. Its features,
which are material to us, can be summarized as follows:

     o    There is a special tax adjustment for the preservation of equity
          whereby some corporate assets are classified broadly into fixed assets
          and non-fixed assets. Where a company's equity, as defined in such
          law, exceeds the depreciated cost of fixed assets, a deduction from
          taxable income that takes into account the effect of the applicable
          annual rate of inflation on such excess is allowed up to a ceiling of
          70% of taxable income in any single tax year, with the unused portion
          permitted to be carried forward on a linked basis. If the depreciated
          cost of fixed assets exceeds a company's equity, then such excess
          multiplied by the applicable annual rate of inflation is added to
          taxable income.


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<PAGE>


     o    Subject to specific limitations, depreciation deductions on fixed
          assets and losses carried forward are adjusted for inflation based on
          the increase in the consumer price index.

     On February 26, 2008, the Israeli Parliament (the Knesset) enacted the
Income Tax Law (Inflationary Adjustments) (Amendment No. 20) (Restriction of
Effective Period), 2008, which we refer to as the Inflationary Adjustments
Amendment. In accordance with the Inflationary Adjustments Amendment, the
effective period of the Inflationary Adjustments Law will cease at the end of
the 2007 tax year and as of the 2008 tax year the provisions of the law shall no
longer apply, other than the transitional provisions intended at preventing
distortions in the tax calculations. In accordance with the Inflationary
Adjustments Amendment, commencing the 2008 tax year, income for tax purposes
will no longer be adjusted to a real (net of inflation) measurement basis.
Furthermore, the depreciation of inflation immune assets and carried forward tax
losses will no longer be linked to the Israeli consumer price index.

TAXATION OF NON-ISRAELI SHAREHOLDERS ON RECEIPT OF DIVIDENDS

     Under Israeli tax law, a distribution of dividends from income attributable
to an Approved Enterprise and Privileged Enterprise will be subject to tax in
Israel at the rate of 15%, which is withheld and paid by the company paying the
dividend, if the dividend is distributed during the benefits period or within
the following 12 years (but the 12-year limitation does not apply to a Foreign
Investors Company). Any distribution of dividends from income that is not
attributable to an Approved Enterprise will be subject to tax in Israel at the
rate of 25%, except that dividends distributed on or after January 1, 2006 to an
individual and an entity who is deemed "a non-substantial shareholder" will be
subject to tax at the rate of 20%.

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

CAPITAL GAINS TAXES APPLICABLE TO NON-ISRAELI SHAREHOLDERS

     Capital gains from the sale of our ordinary shares by non-Israeli
shareholders are exempt from Israeli taxation, provided that the capital gain is
not derived from a permanent establishment in Israel. However, non-Israeli
corporations will not be entitled to such exemption, if an Israeli resident (i)
has a controlling interest of 25% or more in such non-Israeli corporation, or
(ii) is the beneficiary or is entitled to 25% or more of the revenues or profits
of such non-Israeli corporation, whether directly or indirectly. In the event
that an exemption is not available, taxation of the non-Israeli resident may be
subject to the provisions of a tax treaty, if such treaty exists between Israel
and the applicable country. In some instances where our shareholders may be
subject to Israeli tax on the sale of their ordinary shares, the payment of the
consideration may be subject to the withholding of Israeli tax at the source.

     In addition, the United States-Israel tax treaty exempts U.S. residents who
hold less than 10% of our voting rights, and who held less than 10% of our
voting rights during the 12 months prior to a sale of their shares, from Israeli
capital gains tax in connection with such sale.


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FOREIGN EXCHANGE REGULATIONS

     Dividends (if any) paid to the holders of our ordinary shares, and any
amounts payable with respect to our ordinary shares upon dissolution,
liquidation or winding up, as well as the proceeds of any sale in Israel of the
ordinary shares to an Israeli resident, may be paid in non-Israeli currency or,
if paid in Israeli currency, may be converted into freely reparable U.S. dollars
at the rate of exchange prevailing at the time of conversion, however, Israeli
income tax is required to have been paid or withheld on these amounts.

UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

     The following is a summary of certain material U.S. federal income tax
consequences that apply to U.S. Holders who hold ordinary shares as capital
assets. This summary is based on the United States Internal Revenue Code of
1986, as amended, or the Code, Treasury regulations promulgated thereunder,
judicial and administrative interpretations thereof, and the U.S.-Israel Tax
Treaty, all as in effect on the date hereof and all of which are subject to
change either prospectively or retroactively. This summary does not address all
tax considerations that may be relevant with respect to an investment in
ordinary shares. This summary does not account for the specific circumstances of
any particular investor, such as:

     o    broker-dealers,

     o    financial institutions,

     o    certain insurance companies,

     o    regulated investment companies,

     o    investors liable for alternative minimum tax,

     o    tax-exempt organizations,

     o    non-resident aliens of the U.S. or taxpayers whose functional currency
          is not the U.S. dollar,

     o    persons who hold the ordinary shares through partnerships or other
          pass-through entities,

     o    persons who acquired their ordinary shares through the exercise or
          cancellation of employee stock options or otherwise as compensation
          for services,

     o    certain expatriates or former long-term residents of the United
          States,

     o    investors that own or have owned, directly, indirectly or by
          attribution, 10 percent or more of our voting shares, and

     o    investors holding ordinary shares as part of a straddle or appreciated
          financial position or a hedging or conversion transaction.

     If a partnership or an entity treated as a partnership for U.S. federal
income tax purposes owns ordinary shares, the U.S. federal income tax treatment
of a partner in such a partnership will generally depend upon the status of the
partner and the activities of the partnership. A partnership that owns ordinary
shares and the partners in such partnership should consult their tax advisors
about the U.S. federal income tax consequences of holding and disposing of
ordinary shares.


                                       64
<PAGE>


     This summary does not address the effect of any U.S. federal taxation other
than U.S. federal income taxation. In addition, this summary does not include
any discussion of state, local or foreign taxation.

     You are urged to consult your tax advisors regarding the foreign and United
States federal, state and local tax considerations of an investment in ordinary
shares.

     For purposes of this summary, a U.S. Holder is any beneficial owner of
ordinary shares that is:

     o    an individual who is a citizen or, for U.S. federal income tax
          purposes, a resident of the United States;

     o    a corporation or other entity created or organized in or under the
          laws of the United States or any political subdivision thereof;

     o    an estate whose income is subject to U.S. federal income tax
          regardless of its source; or

     o    a trust that (a) is subject to the primary supervision of a court
          within the United States and the control of one or more U.S. persons
          or (b) has a valid election in effect under applicable U.S. Treasury
          regulations to be treated as a U.S. person.

TAXATION OF DIVIDENDS

     SUBJECT TO THE DISCUSSION BELOW UNDER THE HEADING "PASSIVE FOREIGN
INVESTMENT COMPANIES," the gross amount of any distributions received with
respect to ordinary shares, including the amount of any Israeli taxes withheld
therefrom, will constitute dividends for U.S. federal income tax purposes, to
the extent of our current and accumulated earnings and profits as determined for
U.S. federal income tax purposes. You will be required to include this amount of
dividends in gross income as ordinary income. Distributions in excess of our
earnings and profits will be treated as a non-taxable return of capital to the
extent of your tax basis in the ordinary shares, and any amount in excess of
your tax basis will be treated as gain from the sale of ordinary shares. See
"--Disposition of Ordinary Shares" below for the discussion on the taxation of
capital gains. Dividends will not qualify for the dividends-received deduction
generally available to corporations under Section 243 of the Code.

     Dividends that we pay in NIS, including the amount of any Israeli taxes
withheld therefrom, will be included in your income in a U.S. dollar amount
calculated by reference to the exchange rate in effect on the day such dividends
are received. A U.S. Holder who receives payment in NIS and converts NIS into
U.S. dollars at an exchange rate other than the rate in effect on the day of
receipt may have a foreign currency exchange gain or loss that would be treated
as ordinary income or loss. U.S. Holders should consult their own tax advisors
concerning the U.S. tax consequences of acquiring, holding and disposing of NIS.

     Subject to complex limitations, any Israeli withholding tax imposed on such
dividends will be a foreign income tax eligible for credit against a U.S.
Holder's U.S. federal income tax liability, subject to certain limitations set
out in the Code (or, alternatively, for deduction against income in determining
such tax liability). The limitations set out in the Code include computational
rules under which foreign tax credits allowable with respect to specific classes
of income cannot exceed the U.S. federal income taxes otherwise payable with
respect to each such class of income. Dividends generally will be treated as
foreign-source passive category income or general category income for United
States foreign tax credit purposes. A U.S. Holder will be denied a foreign tax
credit with respect to Israeli income tax withheld from dividends received on
the ordinary shares to the extent such U.S. Holder has not held the ordinary
shares for at least 16 days of the 31-day period beginning on the date which is
15 days before the ex-dividend date or to the extent such U.S. Holder is under
an obligation to make related payments with respect to substantially similar or
related property. Any days during which a U.S. Holder has substantially
diminished its risk of loss on the ordinary shares are not counted toward
meeting the 16-day holding period required by the statute. Further, there are
special rules for computing the foreign tax credit limitation of a taxpayer who
receives dividends subject to a reduced tax rate. The rules relating to the
determination of the foreign tax credit are complex, and you should consult with
your personal tax advisors to determine whether and to what extent you would be
entitled to this credit.


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<PAGE>


     Subject to certain limitations, "qualified dividend income" received by a
noncorporate U.S. Holder through 2010 will be subject to tax at a reduced
maximum tax rate of 15 percent. The rate reduction does not apply to dividends
received from passive foreign investment companies, see discussion below.
Distributions taxable as dividends paid on the ordinary shares should qualify
for the 15 percent rate provided that either: (i) we are entitled to benefits
under the income tax treaty between the United States and Israel (the "Treaty")
or (ii) the ordinary shares are readily tradable on an established securities
market in the United States and certain other requirements are met. We believe
that we are entitled to benefits under the Treaty and that the ordinary shares
currently are readily tradable on an established securities market in the United
States. However, no assurance can be given that the ordinary shares will remain
readily tradable. The rate reduction does not apply unless certain holding
period requirements are satisfied. With respect to the ordinary shares, the U.S.
Holder must have held such shares for at least 61 days during the 121-day period
beginning 60 days before the ex-dividend date. The rate reduction also does not
apply in respect of certain hedged positions or in certain other situations. The
legislation enacting the reduced tax rate contains special rules for computing
the foreign tax credit limitation of a taxpayer who receives dividends subject
to the reduced tax rate. U.S. Holders of ordinary shares should consult their
own tax advisors regarding the effect of these rules in their particular
circumstances.

DISPOSITION OF ORDINARY SHARES

     If you sell or otherwise dispose of ordinary shares, you will recognize
gain or loss for U.S. federal income tax purposes in an amount equal to the
difference between the amounts realized on the sale or other disposition and the
adjusted tax basis in ordinary shares. SUBJECT TO THE DISCUSSION BELOW UNDER THE
HEADING "PASSIVE FOREIGN INVESTMENT COMPANIES," such gain or loss generally will
be capital gain or loss and will be long-term capital gain or loss if you have
held the ordinary shares for more than one year at the time of the sale or other
disposition. In general, any gain that you recognize on the sale or other
disposition of ordinary shares will be U.S.-source for purposes of the foreign
tax credit limitation; losses will generally be allocated against U.S. source
income. Deduction of capital losses is subject to certain limitations under the
Code.

     In the case of a cash basis U.S. Holder who receives NIS in connection with
the sale or disposition of ordinary shares, the amount realized will be based on
the U.S. dollar value of the NIS received with respect to the ordinary shares as
determined on the settlement date of such exchange. A U.S. Holder who receives
payment in NIS and converts NIS into United States dollars at a conversion rate
other than the rate in effect on the settlement date may have a foreign currency
exchange gain or loss that would be treated as ordinary income or loss.

     An accrual basis U.S. Holder may elect the same treatment required of cash
basis taxpayers with respect to a sale or disposition of ordinary shares,
provided that the election is applied consistently from year to year. Such
election may not be changed without the consent of the Internal Revenue Service.
In the event that an accrual basis U.S. Holder does not elect to be treated as a
cash basis taxpayer (pursuant to the Treasury regulations applicable to foreign
currency transactions), such U.S. Holder may have a foreign currency gain or
loss for U.S. federal income tax purposes because of differences between the
U.S. dollar value of the currency received prevailing on the trade date and the
settlement date. Any such currency gain or loss would be treated as ordinary
income or loss and would be in addition to gain or loss, if any, recognized by
such U.S. Holder on the sale or disposition of such ordinary shares.


                                       66
<PAGE>


PASSIVE FOREIGN INVESTMENT COMPANIES

     There is a substantial risk that we may become a passive foreign investment
company, or PFIC, for U.S. federal income tax purposes. Our treatment as a PFIC
could result in a reduction in the after-tax return to the U.S. Holders of our
ordinary shares and may cause a reduction in the value of such shares.

     For U.S. federal income tax purposes, we will be classified as a PFIC for
any taxable year in which either (i) 75% or more of our gross income is passive
income, or (ii) at least 50% of the average value of all of our assets for the
taxable year produce or are held for the production of passive income. For this
purpose, cash is considered to be an asset which produces passive income.
Passive income generally includes dividends, interest, royalties, rents,
annuities and the excess of gains over losses from the disposition of assets
which produce passive income. As a result of our relatively substantial cash
position at the time, we believe that we were a PFIC in certain periods in the
past under a literal application of the asset test described above, which looks
solely to the market value of our assets. We do not believe that we were a PFIC
in 2007.

     If we are a PFIC, dividends will not qualify for the reduced maximum tax
rate, applicable to qualified dividend income, discussed above, and, unless you
timely elect to "mark-to-market" your ordinary shares, as described below:

     o    you will be required to allocate income recognized upon receiving
          certain dividends or gain recognized upon the disposition of ordinary
          shares ratably over the holding period for such ordinary shares,

     o    the amount allocated to each year during which we are considered a
          PFIC other than the year of the dividend payment or disposition would
          be subject to tax at the highest individual or corporate tax rate, as
          the case may be, in effect for that year and an interest charge would
          be imposed with respect to the resulting tax liability allocated to
          each such year,

     o    the amount allocated to the current taxable year and any taxable year
          before we became a PFIC would be taxable as ordinary income in the
          current year, and

     o    you will be required to make an annual return on IRS Form 8621
          regarding distributions received with respect to ordinary shares and
          any gain realized on your ordinary shares.

     In addition, holders of stock in a PFIC may not receive a "step-up" in
basis on shares acquired from a decedent.

     The PFIC provisions discussed above apply to U.S. persons who directly or
indirectly hold stock in a PFIC. Generally, a U.S. person is considered an
indirect shareholder of a PFIC if it is:

     o    A direct or indirect owner of a pass-through entity, including a trust
          or estate, that is a direct or indirect shareholder of a PFIC,

     o    A shareholder of a PFIC that is a shareholder of another PFIC, or

     o    A 50%-or-more shareholder of a foreign corporation that is not a PFIC
          and that directly or indirectly owns stock of a PFIC.


                                       67
<PAGE>


     An indirect shareholder may be taxed on a distribution paid to the direct
owner of the PFIC and on a disposition of the stock indirectly owned. Indirect
shareholders are strongly urged to consult their tax advisors regarding the
application of these rules.

     If we become a PFIC and cease to be a PFIC in a future year, a U.S. Holder
may avoid the continued application of the tax treatment described above by
electing to be treated as if it sold its ordinary shares on the last day of the
last taxable year in which we were a PFIC. Any gain would be recognized and
subject to tax under the rules described above. Loss would not be recognized. A
U.S. Holder's basis in its ordinary shares would be increased by the amount of
gain, if any, recognized on the sale. A U.S. Holder would be required to treat
its holding period for its ordinary shares as beginning on the day following the
last day of the last taxable year in which we were a PFIC.

     If the ordinary shares are considered "marketable stock" and if you elect
to "mark-to-market" your ordinary shares, you would not be subject to the rules
described above. Instead, you will generally include in income any excess of the
fair market value of the ordinary shares at the close of each tax year over your
adjusted basis in the ordinary shares. If the fair market value of the ordinary
shares had depreciated below your adjusted basis at the close of the tax year,
you may generally deduct the excess of the adjusted basis of the ordinary shares
over its fair market value at that time. However, such deductions generally
would be limited to the net mark-to-market gains, if any, that you included in
income with respect to such ordinary shares in prior years. Income recognized
and deductions allowed under the mark-to-market provisions, as well as any gain
or loss (to the extent of net mark-to-market gains) on the disposition of
ordinary shares with respect to which the mark-to-market election is made, is
treated as ordinary income or loss. Loss on a disposition, to the extent in
excess of net mark-to-market gains, would be treated as capital loss. Gain or
loss from the disposition of ordinary shares (as to which a "mark-to-market"
election was made) in a year in which we are no longer a PFIC will be capital
gain or loss. Loss on a disposition, to the extent in excess of net
mark-to-market gains, would be treated as capital loss. Our ordinary shares
should be considered "marketable stock" if they traded at least 15 days during
each calendar quarter of the relevant calendar year in more than de minimis
quantities.

     A U.S. Holder of ordinary shares will not be able to avoid the tax
consequences described above by electing to treat us as a qualified electing
fund, or QEF, because we do not intend to prepare the information that U.S.
Holders would need to make a QEF election.

BACKUP WITHHOLDING AND INFORMATION REPORTING

     Payments in respect of ordinary shares may be subject to information
reporting to the U.S. Internal Revenue Service and to U.S. backup withholding
tax at a rate equal to the fourth lowest income tax rate applicable to
individuals which, under current law, is 28%. Backup withholding will not apply,
however, if you (i) are a corporation or come within certain exempt categories,
and demonstrate the fact when so required, or (ii) furnish a correct taxpayer
identification number and make any other required certification.

     Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules may be credited against a U.S. Holder's U.S. tax
liability, and a U.S. Holder may obtain a refund of any excess amounts withheld
under the backup withholding rules by filing the appropriate claim for refund
with the IRS.

     Any U.S. Holder who holds 10% or more in vote or value of our ordinary
shares will be subject to certain additional United States information reporting
requirements.

U.S. GIFT AND ESTATE TAX

     An individual U.S. Holder of ordinary shares will be subject to U.S. gift
and estate taxes with respect to ordinary shares in the same manner and to the
same extent as with respect to other types of personal property.


                                       68
<PAGE>


F.   DIVIDEND AND PAYING AGENTS

     Not applicable.

G.   STATEMENT BY EXPERTS

     Not applicable.

H.   DOCUMENTS ON DISPLAY

     We are subject to the reporting requirements of the United States
Securities Exchange Act of 1934, as amended, as applicable to "foreign private
issuers" as defined in Rule 3b-4 under the Exchange Act, and in accordance
therewith, we file annual and interim reports and other information with the
Securities and Exchange Commission.

     As a foreign private issuer, we are exempt from certain provisions of the
Exchange Act. Accordingly, our proxy solicitations are not subject to the
disclosure and procedural requirements of Regulation 14A under the Exchange Act,
transactions in our equity securities by our officers and directors are exempt
from reporting and the "short-swing" profit recovery provisions contained in
Section 16 of the Exchange Act. In addition, we are not required under the
Exchange Act to file periodic reports and financial statements as frequently or
as promptly as U.S. companies whose securities are registered under the Exchange
Act. However, we distribute annually to our shareholders an annual report
containing financial statements that have been examined and reported on, with an
opinion expressed by, an independent public accounting firm, and we file reports
with the Securities and Exchange Commission on Form 6-K containing unaudited
financial information for the first three quarters of each fiscal year.

     This annual report and the exhibits thereto and any other document we file
pursuant to the Exchange Act may be inspected without charge and copied at
prescribed rates at the following Securities and Exchange Commission public
reference rooms: 100 F Street, N.E., Room 1580, Washington, D.C. 20549; and on
the Securities and Exchange Commission Internet site (http://www.sec.gov) and on
our website www.mtsint.com. You may obtain information on the operation of the
Securities and Exchange Commission's public reference room in Washington, D.C.
by calling the Securities and Exchange Commission at 1-800-SEC-0330 or by
visiting the Securities and Exchange Commission's website at http://www.sec.gov,
and may obtain copies of our filings from the public reference room by calling
1-800-SEC-0330. The Exchange Act file number for our Securities and Exchange
Commission filings is 0-28950.

     The documents concerning our company referred to in this annual report may
also be inspected at our offices located at 22 Zarhin Street, Ra'anana 43662,
Israel.

I.   SUBSIDIARY INFORMATION

     Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

EXPOSURE TO MARKET RISKS

     We are exposed to a variety of risks, including changes in interest rates
affecting primarily the interest received on short-term deposits, and foreign
currency fluctuations. We do not use derivative financial instruments to hedge
against such exposure.

INTEREST RATE RISK

     Our exposure to market risk for changes in interest rates relates primarily
to our long term loan. Our long term loan is held in dollars and bears annual
interest of the London Inter Bank Offered Rate (LIBOR) + 2%. For purposes of
specific risk analysis, we use sensitivity analysis to determine the impact that
market risk exposure may have on the financial income derived from our long term
loan. The potential annual increase in expenses that would result from a
hypothetical change of 10% in the LIBOR rate would be approximately $30,000.


                                       69
<PAGE>


FOREIGN CURRENCY EXCHANGE RISK

     We have operations in several countries in connection with the sale of our
products. A substantial portion of our sales and expenditures are denominated in
dollars. We have mitigated, and expect to continue to mitigate, a portion of our
foreign currency exposure through salaries, marketing and support operations in
which all costs are local currency based. As a result, our results of operations
and cash flows can be affected by fluctuations in foreign currency exchange
rates (primarily the Euro and NIS). A hypothetical 10% movement in foreign
currency rates (primarily the Euro and NIS) against the dollar, with all other
variables held constant on the expected sales, would result in a decrease or
increase in expected 2008 sales revenues of approximately $380,000.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     Not applicable.

                                     PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     None.

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

     Not applicable.

ITEM 15. CONTROLS AND PROCEDURES

     Not applicable.

ITEM 15T. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

     We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in its Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to our chief executive officer and
chief financial officer to allow timely decisions regarding required disclosure.
Our management, including our chief executive officer and chief financial
officer, conducted an evaluation of our disclosure controls and procedures, as
defined under Exchange Act Rule 13a-15(e), as of the end of the period covered
by this Annual Report on Form 20-F. Based upon that evaluation, our chief
executive officer and chief financial officer have concluded that, as of such
date, our disclosure controls and procedures were effective.

MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

     Our management is responsible for establishing and maintaining adequate
internal control over our financial reporting. Internal control over financial
reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the
Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the company's principal executive and principal financial
officers and effected by the company's board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:


                                       70
<PAGE>


     o    Pertain to the maintenance of records that in reasonable detail
          accurately and fairly reflect the transaction and dispositions of the
          assets of the company;

     o    Provide reasonable assurance that transactions are recorded as
          necessary to permit preparation of financial statements in accordance
          with generally accepted accounting principles, and that receipts and
          expenditures of the company are being made only in accordance with
          authorizations of management and directors of the company; and

     o    Provide reasonable assurance regarding prevention or timely detection
          of unauthorized acquisition, use of disposition of the company's
          assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

     Our management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2007. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on that assessment, our management concluded that as of
December 31, 2007, our internal control over financial reporting is effective.

     This annual report does not include an attestation report of our
independent registered public accounting firm regarding internal control over
financial report. Management's report was not subject to attestation by our
independent registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit us to provide only management's
report in this annual report.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

     There was no change in our internal control over financial reporting that
occurred during the period covered by this annual report that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.

ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

     Our board of directors has determined that Mr. Yaacov Goldman, an
independent director, meets the definition of an audit committee financial
expert, as defined by rules of the Securities and Exchange Commission.

ITEM 16B. CODE OF ETHICS

     We have adopted a code of ethics that applies to our chief executive
officer and all senior financial officers of our company, including the chief
financial officer, chief accounting officer or controller, or persons performing
similar functions. Our code of ethics has been filed as an exhibit to this
annual report. Written copies are available upon request. If we make any
substantive amendment to the code of ethics or grant any waivers, including any
implicit waiver, from a provision of the codes of ethics, we will disclose the
nature of such amendment or waiver on our website.


                                       71
<PAGE>


ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES

FEES PAID TO INDEPENDENT PUBLIC ACCOUNTANTS

     The following table sets forth, for each of the years indicated, the fees
paid to our principal independent registered public accounting firm. All of such
fees were pre-approved in advance by our Audit Committee.

                      Year Ended December 31,
                        ------------------
Services Rendered       2006          2007
-----------------       ----          ----

Audit (1)             $ 83,173      $ 93,000
Audit-related(2)         8,601        15,000
Tax (3)                 20,528         7,000
Total                 $112,302      $115,000

----------

     (1)  Audit fees relate to services that would normally be provided in
          connection with statutory and regulatory filings or engagements,
          including services that generally only the independent registered
          public accounting firm can reasonably provide.

     (2)  Audit-related fees for 2006 and 2007 relate to services provided in
          connection with the filing of a Report on Form 6-K for the six months
          period ended June 30, 2006 and the nine month period ended September
          30, 2007, respectively.

     (3)  Tax fees relate to services performed by the tax division for tax
          compliance, planning, and advice.

PRE-APPROVAL POLICIES AND PROCEDURES

     Our audit committee has adopted a policy and procedures for the
pre-approval of audit and non-audit services rendered by our independent
registered public accountants, Kost Forer Gabbay & Kasierer, a member firm of
Ernst & Young Global. Pre-approval of an audit or non-audit service may be given
as a general pre-approval, as part of the audit committee's approval of the
scope of the engagement of our independent auditor, or on an individual basis.
Any proposed services exceeding general pre-approved levels also require
specific pre-approval by our audit committee. The policy prohibits retention of
the independent public accountants to perform the prohibited non-audit functions
defined in Section 201 of the Sarbanes-Oxley Act or the rules of the Securities
and Exchange Committee, and also requires the audit committee to consider
whether proposed services are compatible with the independence of the public
accountants.

ITEM 16D. EXEMPTIONS FROM THE LISTING REQUIREMENTS AND STANDARDS FOR AUDIT
          COMMITTEE

     Not applicable.

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

ISSUER PURCHASE OF EQUITY SECURITIES

     Neither we nor any affiliated purchaser has purchased any of our securities
during 2007.


                                       72
<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 -F-4

Consolidated Statements of Operations                           F-5

Consolidated 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-42

FINANCIAL STATEMENTS OF JUSAN, S.A. AS OF DECEMBER 31, 2006 AND FOR EACH OF THE
TWO YEARS ENDED DECEMBER 31, 2005 AND 2006

Index to Financial Statements of Jusan, S.A                     F-0

Report of Independent Registered Public Accounting Firm         F-1

Balance Sheets                                                  F-2

Statements of Income                                            F-3

Statements of Changes in Shareholders' Equity                   F-4

Statements of Cash Flows                                        F-5

Notes to Financial Statements                                   F-6 - F-17

ITEM 19. EXHIBITS

     Index to Exhibits

     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            1996 Employee Stock Option Plan (1)


                                       73
<PAGE>


     4.2            Section 102 Stock Option Plan (1)

     4.3            2003 Israeli Share Option Plan (2)

     4.4            2006 Stock Option Plan (3)

     4.5            Asset Purchase Agreement dated December 30, 2004 among the
                    Registrant and Teleknowledge Group Ltd. (4)

     4.6            Securities Purchase Agreement dated August 10, 2005 among
                    the Registrant and the Investors therein (5)

     4.7            Form of Warrant (6)

     4.8            Registration Rights Agreement dated August 10, 2005 (7)

     4.9            Form of Warrant issued to Mr. Avi Ziv (8)

     5.0            Asset Purchase Agreement dated July 25, 2006 by and among
                    MTS Acquisition Corp. (now named MTS TelSoft Inc.), MTS
                    IntegraTRAK Inc., TelSoft Solutions, Inc. (now named
                    Strategic Sciences Inc.), Consulting Sciences, Inc., Donald
                    Simons and Dale Zuehls (9)

     5.1            Purchase Agreement dated January 24, 2008, by and between
                    the Registrant and Lior Salansky (10)

     8.1            List of Subsidiaries of the Registrant

     11.1           Code of Ethics (11)

     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.

     15.1           Consent of Kost Forer Gabbay & Kasierer, a Member of Ernst &
                    Young Global

     15.2           Consent of BDO Audiberia Auditores, S.L.

----------

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

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


                                       74
<PAGE>


     (3)  Filed as Appendix B to Item 1 of the Registrant's Report on Form 6-K
          for the month of June 2006 submitted on June 23, 2006, and
          incorporated herein by reference.

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

     (5)  Filed as Item 1 to the Registrant's Report on Form 6-K for the month
          of August 2005 submitted on August 19, 2005, and incorporated herein
          by reference.

     (6)  Filed as Item 3 to the Registrant's Report on Form 6-K for the month
          of August 2005 submitted on August 19, 2005, and incorporated herein
          by reference.

     (7)  Filed as Item 2 to the Registrant's Report on Form 6-K for the month
          of August 2005 submitted on August 19, 2005, and incorporated herein
          by reference.

     (8)  Filed as Exhibit 4.6 to the Registrant's Registration Statement on
          Form F-3, registration number 333-128225, and incorporated herein by
          reference.

     (9)  Filed as Exhibit 5.0 to the Registrants Annual Report on Form 20-F for
          the year ended December 31, 2006, and incorporated herein by
          reference.

     (10) Filed as Item 2 to the Registrant's Report on Form 6-K for the month
          of January 2008 submitted on January 28, 2008, and incorporated herein
          by reference.

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


                                       75
<PAGE>


             MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 2007

                            U.S. DOLLARS IN THOUSANDS

                                      INDEX

                                                                         PAGE
                                                                      ----------

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                   F-2

CONSOLIDATED BALANCE SHEETS                                            F-3 - F-4

CONSOLIDATED STATEMENTS OF OPERATIONS                                     F-5

CONSOLIDATED 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-42


                                       F-1
<PAGE>

[ERNST & YOUNG LOGO]

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                  TO THE BOARD OF DIRECTORS AND 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, 2006 and 2007, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2007. These financial statements are the
responsibility of 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, 2006, in which the Company's investments totaled $ 1,598 thousand
and the Company's equity in its income in 2005 and 2006 constitutes $ 2 thousand
and $ 159 thousand, respectively. We also did not audit the financial statements
of MTS Asia Ltd., a wholly-owned subsidiary, which statements reflect total
assets of $ 221 thousand and $ 302 thousand as of December 31, 2007 and 2006,
respectively, and total revenues of $ 565 thousand and $ 624 thousand for the
years ended December 31, 2007 and 2006, respectively. Those statements were
audited by other auditors whose reports have been furnished to us and our
opinion, insofar as it relates to amounts emanating from the financial
statements of Jusan SA and MTS Asia Ltd., is based solely on the reports of the
other auditors.

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

     In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2006 and 2007, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2007, in conformity with accounting principles generally
accepted in the United States.

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



                                              /s/ Kost, Forer, Gabbay & Kasierer
Tel-Aviv, Israel                                 KOST FORER GABBAY & KASIERER
April 2, 2008                                  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,
                                                                                        ---------------------------------
                                                                                            2006                2007
                                                                                        -------------       -------------
<S>                                                                                     <C>                 <C>
      ASSETS

CURRENT ASSETS:
   Cash and cash equivalents                                                            $       1,474       $       1,437
   Short term bank deposits                                                                       100                   -
   Marketable securities (Note 3)                                                                 159                 169
   Trade receivables (net of allowance for doubtful accounts of $ 505 and $ 882 at
     December 31, 2006 and 2007, respectively)                                                  2,484               1,172
   Unbilled receivables                                                                            51                 129
   Other accounts receivable and prepaid expenses (Note 4)                                        763                 544
   Investment in other companies (Note 5b)                                                          -                 221
   Inventories                                                                                    138                  66
                                                                                        -------------       -------------

TOTAL current assets                                                                            5,169               3,738
                                                                                        -------------       -------------

LONG-TERM ASSETS:
   Investments in an affiliate (Note 6)                                                         1,598                   -
   Severance pay fund                                                                             673                 730
   Other investments (Note 7)                                                                     366                   3
   Deferred income taxes (Note 13)                                                                112                 123
                                                                                        -------------       -------------

TOTAL long-term assets                                                                          2,749                 856
                                                                                        -------------       -------------

PROPERTY AND EQUIPMENT, NET (Note 8)                                                              439                 283
                                                                                        -------------       -------------

OTHER ASSETS:
   Goodwill (Note 9a)                                                                           4,058               2,796
   Other intangible assets, net (Note 9b)                                                       1,639                 805
                                                                                        -------------       -------------

TOTAL other assets                                                                              5,697               3,601
                                                                                        -------------       -------------

TOTAL assets                                                                            $      14,054       $       8,478
                                                                                        =============       =============
</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,
                                                                                        ---------------------------------
                                                                                            2006                2007
                                                                                        -------------       -------------
<S>                                                                                     <C>                 <C>
      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Short term bank credit and current maturities on bank loan                           $         421       $         606
   Trade payables                                                                                 510                 447
   Accrued expenses and other liabilities (Note 10)                                             2,507               3,309
   Deferred revenues                                                                            1,545               1,390
                                                                                        -------------       -------------

TOTAL current liabilities                                                                       4,983               5,752
                                                                                        -------------       -------------

LONG-TERM LIABILITIES:
   Long term bank loan (Note 11)                                                                  583                   -
   Accrued severance pay                                                                          946               1,157
                                                                                        -------------       -------------

TOTAL long-term liabilities                                                                     1,529               1,157
                                                                                        -------------       -------------

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 at
         December 31, 2006 and 2007; Issued: 5,784,645 shares at December 31,
         2006 and 2007; Outstanding: 5,773,845 shares at December 31, 2006
         and 2007                                                                                  17                  17
   Additional paid-in capital                                                                  16,109              16,201
   Treasury shares (10,800 Ordinary shares at December 31, 2006 and 2007)                         (29)                (29)
   Accumulated other comprehensive income                                                         254                  12
   Accumulated deficit                                                                         (8,809)            (14,632)
                                                                                        -------------       -------------

TOTAL shareholders' equity                                                                      7,542               1,569
                                                                                        -------------       -------------

TOTAL liabilities and shareholders' equity                                              $      14,054       $       8,478
                                                                                        =============       =============
</TABLE>

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,
                                                                          -----------------------------------------------
                                                                             2005              2006              2007
                                                                          -----------       -----------       -----------
<S>                                                                       <C>               <C>               <C>
Revenues (Note 16):
   Product sales                                                          $     7,628       $     7,518       $     5,760
   Services                                                                     3,935             2,966             3,578
                                                                          -----------       -----------       -----------

TOTAL revenues                                                                 11,563            10,484             9,338
                                                                          -----------       -----------       -----------

Cost of revenues:
   Product sales                                                                2,968             2,631             1,872
   Services                                                                       834               724               864
                                                                          -----------       -----------       -----------

TOTAL cost of revenues                                                          3,802             3,355             2,736
                                                                          -----------       -----------       -----------

Gross profit                                                                    7,761             7,129             6,602
                                                                          -----------       -----------       -----------

Operating expenses:
   Research and development, net of grants from the OCS in the amount
      of $ 130, $ 578 and $ 469 in 2005, 2006 and 2007, respectively            4,395             3,633             2,640
   Selling and marketing                                                        4,797             3,078             3,481
   General and administrative                                                   2,830             2,651             3,695
   Impairment of goodwill and other intangible assets                               -                 -             2,312
                                                                          -----------       -----------       -----------

TOTAL operating expenses                                                       12,022             9,362            12,128
                                                                          -----------       -----------       -----------

Operating loss                                                                 (4,261)           (2,233)           (5,526)
Financial income (expenses), net                                                   53               (54)             (105)
Capital loss on sale of long-term investment                                                                          (63)
                                                                          -----------       -----------       -----------

Loss before taxes on income                                                    (4,208)           (2,287)           (5,694)
Taxes on income (benefit), net (Note 13)                                           10               118               (68)
                                                                          -----------       -----------       -----------

Loss before equity in earnings (loss) of affiliate                             (4,218)           (2,405)           (5,626)
Equity in earnings (loss) of affiliate                                              2               159              (197)
                                                                          -----------       -----------       -----------

Net loss                                                                  $    (4,216)      $    (2,246)      $    (5,823)
                                                                          ===========       ===========       ===========

Net loss per share:

Basic and diluted net loss per Ordinary share                             $     (0.83)      $     (0.39)      $     (1.01)
                                                                          ===========       ===========       ===========

Weighted average number of Ordinary shares used in computing basic
   and diluted net loss per share                                           5,092,117         5,762,311         5,773,845
                                                                          ===========       ===========       ===========
</TABLE>

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

                                       F-5

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
                                                                               SHARE CAPITAL     ADDITIONAL              DEFERRED
                                                                            -------------------    PAID-IN   TREASURY     STOCK
                                                                             NUMBER      AMOUNT    CAPITAL    SHARES   COMPENSATION
                                                                            ---------   -------  ----------  --------  ------------
<S>                                                                         <C>         <C>      <C>         <C>       <C>
Balance as of January 1, 2005                                               4,638,004   $    14  $   12,879  $    (29) $       (208)
   Issuance of shares, net                                                    937,500         2       2,623         -             -
   Exercise of options                                                        158,000         1         308         -             -
   Stock based compensation related to warrants issued to non employees             -         -         156         -             -
   Amortization of deferred stock compensation                                      -         -           -         -            66
   Other comprehensive loss:
      Unrealized losses on available-for-sale marketable securities, net            -         -           -         -             -
      Foreign currency translation adjustments                                      -         -           -         -             -
   Total other comprehensive loss
   Net loss                                                                         -         -           -         -             -
                                                                            ---------   -------  ----------  --------  ------------
   Total comprehensive loss

Balance as of December 31, 2005                                             5,733,504        17      15,966       (29)         (142)
   Exercise of options                                                         40,341     (*) -          65         -             -
   Stock based compensation related to warrants issued to non employees             -         -          10         -             -
   Stock based compensation related to options issued to employees                  -         -         210         -             -
   Reclassification of deferred stock compensation due to implementation
      of SFAS 123R                                                                  -         -        (142)        -           142
   Other comprehensive loss:
      Unrealized gains on available-for-sale marketable securities, net             -         -           -         -             -
      Foreign currency translation adjustments                                      -         -           -         -             -

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

Balance as of December 31, 2006                                             5,773,845        17      16,109       (29)            -
   Stock based compensation related to options issued to employees                  -         -          92         -             -
   Other comprehensive loss:
      Unrealized gains on available-for-sale marketable securities, net             -         -           -         -             -
      Foreign currency translation adjustments                                      -         -           -         -             -

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

Balance as of December 31, 2007                                             5,773,845   $    17  $   16,201  $    (29) $          -
                                                                            =========   =======  ==========  ========  ============
Accumulated unrealized gains from available-for-sale marketable securities

<CAPTION>
                                                                            ACCUMULATED
                                                                               OTHER      ACCUMULATED       TOTAL          TOTAL
                                                                           COMPREHENSIVE   EARNINGS     COMPREHENSIVE  SHAREHOLDERS'
                                                                           INCOME (LOSS)    DEFICIT)    INCOME (LOSS)     EQUITY
                                                                           -------------  -----------   -------------  -------------
<S>                                                                        <C>            <C>           <C>            <C>
Balance as of January 1, 2005                                              $        348   $    (2,347)                 $     10,657
   Issuance of shares, net                                                            -             -                         2,625
   Exercise of options                                                                -             -                           309
   Stock based compensation related to warrants issued to non employees               -             -                           156
   Amortization of deferred stock compensation                                        -             -                            66
   Other comprehensive loss:
      Unrealized losses on available-for-sale marketable securities, net            (76)            -   $        (76)           (76)
      Foreign currency translation adjustments                                     (347)            -           (347)          (347)
                                                                                                        ------------
   Total other comprehensive loss                                                                               (423)
   Net loss                                                                           -        (4,216)        (4,216)        (4,216)
                                                                           ------------   -----------   ------------   ------------
   Total comprehensive loss                                                                             $     (4,639)
                                                                                                        ============
Balance as of December 31, 2005                                                     (75)       (6,563)                        9,174
   Exercise of options                                                                -             -                            65
   Stock based compensation related to warrants issued to non employees               -             -                            10
   Stock based compensation related to options issued to employees                    -             -                           210
   Reclassification of deferred stock compensation due to implementation
      of SFAS 123R                                                                    -             -                             -
   Other comprehensive loss:
      Unrealized gains on available-for-sale marketable securities, net               1             -   $          1              1
      Foreign currency translation adjustments                                      328             -            328            328
                                                                                                        ------------
   Total other comprehensive income                                                   -             -            329
   Net loss                                                                           -        (2,246)        (2,246)        (2,246)
                                                                           ------------   -----------   ------------   ------------
   Total comprehensive loss                                                                             $     (1,917)
                                                                                                        ============
Balance as of December 31, 2006                                                     254        (8,809)                        7,542
   Stock based compensation related to options issued to employees                    -             -                            92
   Other comprehensive loss:
      Unrealized gains on available-for-sale marketable securities, net               1             -   $          1              1
      Foreign currency translation adjustments                                     (243)            -           (243)          (243)
                                                                                                        ------------
   Total other comprehensive income                                                   -             -           (242)
   Net loss                                                                           -        (5,823)        (5,823)        (5,823)
                                                                           ------------   -----------   ------------   ------------
   Total comprehensive loss                                                                             $     (6,065)
                                                                                                        ============
Balance as of December 31, 2007                                            $         12   $   (14,632)                 $      1,569
                                                                           ============   ===========                  ============
Accumulated unrealized gains from available-for-sale marketable
   securities                                                              $         12
                                                                           ============
</TABLE>

*)   Represents an amount lower than $ 1.

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,
                                                                                  --------------------------------
                                                                                    2005        2006        2007
                                                                                  --------    --------    --------
<S>                                                                               <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

   Net loss                                                                       $ (4,216)   $ (2,246)   $ (5,823)
   Adjustments required to reconcile net loss to net cash used in
      operating activities:
      Gains on sale of available-for-sale marketable securities                        (77)        (13)        (13)
      Loss on sale of an affiliate                                                       -           -         197
      Loss on sale of other investments                                                  -           -          63
      Impairment of other investments                                                   27           -           -
      Impairment of goodwill and other intangible assets                                 -           -       2,312
      Equity in earnings of affiliate                                                   (2)       (159)          -
      Depreciation and amortization                                                    655         675         651
      Deferred income taxes, net                                                        10           3         (18)
      Employee stock-based compensation                                                 66         210          92
      Stock based compensation related to warrants issued to non
         employees                                                                     156          10           -
      Accrued severance pay, net                                                       119          38         154
      Decrease (increase) in trade receivables and unbilled receivables               (672)       (549)      1,229
      Decrease (increase) in other accounts receivable and prepaid
         expenses                                                                      (99)       (321)        296
      Decrease (increase) in inventories                                                (3)         43          72
      Increase (decrease) in trade payables                                             16        (218)        (63)
      Increase (decrease) in accrued expenses and other liabilities                    (46)        168         516
      Increase (decrease) in deferred revenues                                        (366)        610        (155)
      Decrease in lease deposits                                                         -           -          12
      Increase (decrease) in related parties, net                                       15         140        (137)
                                                                                  --------    --------    --------

Net cash used in operating activities                                               (4,417)     (1,609)       (615)
                                                                                  --------    --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:

   Proceeds from sale of property and equipment                                          7           1           -
   Proceeds from sale of an affiliate                                                    -           -       1,031
   Purchase of property and equipment                                                 (251)       (107)        (95)
   Investment in short term bank deposit                                                 -        (100)        100
   Investment in lease deposits                                                        (26)         (6)         (3)
   Investment in available-for-sale marketable securities                             (163)       (221)       (209)
   Proceeds from sale of available-for-sale marketable securities                    1,089         208         213
   Additional investment in goodwill in consideration of
      TeleKnowledge acquisition                                                        (21)       (204)          -
   Acquisition of certain assets and liabilities of Telsoft (a)                          -      (1,202)       (200)
   Dividend from an affiliate                                                          195         409         134
   Others                                                                               63          16           5
                                                                                  --------    --------    --------

Net cash provided by (used in) investing activities                                    893      (1,206)        976
                                                                                  --------    --------    --------
</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,
                                                                                  --------------------------------
                                                                                    2005        2006        2007
                                                                                  --------    --------    --------
<S>                                                                               <C>         <C>         <C>
CASH FLOWS FROM FINANCING ACTIVITIES:

   Proceeds from long term loan                                                   $      -    $  1,000    $      -
   Proceeds from short term bank credit                                                  -           4          19
   Repayment of long-term loans                                                          -           -        (417)
   Proceeds from issuance of shares and warrants, net                                2,625           -           -
   Proceeds from exercise of options and warrants                                      281          94           -
                                                                                  --------    --------    --------

Net cash provided by (used in) financing activities                                  2,906       1,098        (398)
                                                                                  --------    --------    --------

Effect of exchange rate changes on cash and cash equivalents                            (5)          -           -
                                                                                  --------    --------    --------

Decrease in cash and cash equivalents                                                 (623)     (1,717)        (37)
Cash and cash equivalents at the beginning of the year                               3,814       3,191       1,474
                                                                                  --------    --------    --------

Cash and cash equivalents at the end of the year                                  $  3,191    $  1,474    $  1,437
                                                                                  ========    ========    ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS ACTIVITIES:

   Cash paid during the year for:

      Interest                                                                    $      3    $     38    $     81
                                                                                  ========    ========    ========

      Income taxes                                                                $     17    $    118    $     69
                                                                                  ========    ========    ========

(a)      IN CONJUNCTION WITH THE ACQUISITIONS, THE FAIR VALUES OF ASSETS
            ACQUIRED AND LIABILITIES ASSUMED AT THE DATE OF ACQUISITION WERE AS
            FOLLOWS (SEE NOTE 1d):

            Working capital (excluding cash and cash equivalents)                 $      -    $    (47)   $      -
            Property and equipment                                                       -           5           -
            Goodwill                                                                     -         166         200
            Developed technology                                                         -         433           -
            Customer relationship                                                        -         645           -
                                                                                  --------    --------    --------

                                                                                  $      -    $  1,202    $    200
                                                                                  ========    ========    ========
(b)      SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:

            Sale of other investments                                                    -           -          36
            Earn out in respect of Telsoft acquisition                                   -           -         406
            Earn out in respect of Teleknowledge acquisition                      $    264    $    123    $     10
                                                                                  ========    ========    ========
</TABLE>

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 AND PER 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") design, develop, market and support 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 17.

          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 2005, 2006 and 2007, one major customer
               generated 36%, 29% and 27% 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 Capital Market.

               The Company has an accumulated deficit of approximately $ 14,632
               and has negative working capital of $2,014 as of December 31,
               2007. On November 2007, the Company sold its 50% ownership
               interest in Jusan S.A. in consideration of 700 Euros
               (approximately $1,031). In addition, in February, 2008 the
               company consummated the sale of its ownership interest in Cvidya,
               in consideration of approximately $ 603. Moreover, on January 24,
               2008, the Company and a private investor entered into a
               definitive agreement for a private placement of 750,000 ordinary
               shares at a price per share of $ 1 for the aggregate purchase
               price of $ 750.

          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.

                                       F-9

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 1:-  GENERAL (CONT.)

               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
                    (see Note 9a). In 2005, 2006 and 2007 additional
                    considerations of $285 $192 and $85, respectively, were
                    recorded, in accordance with the agreement.

               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)
                                                                        -------

               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.

               During the second quarter of 2007, the Company reviewed its
               goodwill and determined that there was an indication that the
               goodwill relating to the acquisition of the Teleknowledge billing
               activity had been impaired. The Company assessed the recoverable
               amount of such goodwill, based on its projections and using
               expected future discounted operating cashflows. Based on such
               review, the Company determined that the goodwill and other
               intangible assets relating to the acquisition of the
               Teleknowledge billing activity in the amount of $2,312 had been
               impaired and the carrying value was written-off.

                                      F-10

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 1:-  GENERAL (CONT.)

          d.   On July 25, 2006, the Company and Telsoft Solutions, Inc.
               ("Telsoft") consummated an Asset Purchase Agreement ("APA").
               Telsoft is a provider of call accounting and TEM solutions to
               organizations and the acquisition shall enable the Company to
               increase its customer base. Under the terms of the APA, the
               Company acquired certain assets and assumed certain enumerated
               liabilities of Telsoft for the following consideration:

               1.   An initial consideration of $ 1,100 in cash.

               2.   Additional earn-out payments based on revenue milestones for
                    the 12 months period following the acquisition. Such
                    payments were recorded as additional goodwill during 2007,
                    when actual revenue performance was evaluated (see Note 9a).

               The acquisition was completed on July 31, 2006.

               In order to finance the acquisition, the Company signed a loan
               agreement with Bank Hapoalim (the "Bank"), according to which the
               Bank granted the Company a loan in the amount of approximately $
               1,000 (see also Note 11).

               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 TelSoft's net assets at the
               date of acquisition, as follows:

               Property and equipment                                         5
               Intangible assets:
               Developed technology - Product A (six-year useful life)      270
               Developed technology - Product B (four-year useful life)     163
               Customer relationship (six-year useful life)                 645
               Goodwill                                                     166
                                                                        -------

               Total assets acquired                                      1,249
               Liabilities assumed - Deferred maintenance                   (47)
                                                                        -------

               Net assets acquired                                      $ 1,202
                                                                        =======

               The valuation of the Company's developed technology was based on
               the income approach, which reflects the future economic benefits
               from TelSoft products. The value assigned to customer
               relationship was based on the income approach. The fair value of
               customer relationship was estimated by discounting to present
               value, the cash flows that will be derived from TelSoft's
               customers retained by MTS.

               Goodwill, including accumulated earn-out in the amount of $606,
               as of December 31, 2007 amounted to $ 772.

                                      F-11

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 1:-  GENERAL (CONT.)

               Pro forma results (Unaudited):

               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, 2006, nor does
               it purport to represent the results of operations of the Company
               for any future period.

                                                                    YEAR ENDED
                                                                   DECEMBER 31,
                                                                   ------------
                                                                       2006
                                                                   ------------

               Revenues                                            $     12,032
                                                                   ============

               Net loss from continuing operations                 $     (1,888)
                                                                   ============
               Basic and diluted net loss per share for
                  continuing operations                            $      (0.33)
                                                                   ============
               Weighted average number of Ordinary shares
                  in computation of basic and diluted net
                  loss per share                                      5,762,311
                                                                   ============

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES

          The consolidated financial statements have been prepared in accordance
          with accounting principles generally accepted 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 or linked to the U.S. dollar
               ("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 currency of
               the primary 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-12

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

               For those foreign subsidiaries and affiliates, whose functional
               currency has been determined to be their local currency, assets
               and liabilities are translated at the year end exchange rates and
               statements of operations items are translated at the average
               exchange rate prevailing during the period. The resulting
               translation adjustments are recorded as a separate component of
               accumulated other comprehensive income (loss) in shareholders'
               equity.

          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 determinations at each balance sheet date.

               The Company classifies all of its securities as available for
               sale. Available for sale securities are carried at fair value,
               with unrealized gains and losses reported in "accumulated other
               comprehensive income (loss)" in shareholders' equity. Realized
               gains and losses on sales of investments, are included in
               earnings and are derived using the specific identification method
               for determining the cost of securities.

               Interest and dividends on securities are included in financial
               income, net.

          f.   Inventories:

               Inventories are stated at the lower of cost or market value.
               Inventory write-offs and write-down provisions are provided to
               cover risks arising from slow moving items or technological
               obsolescence.

               The Company and its subsidiaries periodically evaluate the
               quantities on hand relative to current and historical selling
               prices and historical and projected sales volume. Based on this
               evaluation, provisions are recorded when required to write-off
               inventory according to its market value. The provision for
               obsolescence inventory amounted to $72 for the year ended
               December 31, 2007.

                                      F-13

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

               Cost is determined as follows:

               Raw materials - using the "first in, first out" method.

               Finished products are recorded on the basis of direct
               manufacturing costs with the addition of allocable indirect
               manufacturing costs.

          g.   Investments in an affiliate:

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

               The investment in the affiliate 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 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").

               Under APB 18, an impairment of 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 lower 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 an impairment of value
               of the investment. During 2007 the Company recorded an equity
               loss of $197 from the sale of Jusan S.A. (see also Note 6).

          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, 2007 the Company
               recorded $63 loss from investment in other companies (see also
               Note 5).

                                      F-14

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          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                        Shorter of useful
                                                            life or lease term

          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, 2007, no impairment losses have been identified.

          k.   Goodwill:

               Goodwill has been recorded as a result of acquisitions. Goodwill
               is not amortized, but rather is subject to an annual impairment
               test. SFAS No. 142 requires goodwill to be tested for impairment
               at least annually or between annual tests if certain events or
               indicators of impairment occur. The impairment test consists of a
               comparison of the fair value of goodwill with its carrying
               amount. If the carrying amount of goodwill exceeds its fair
               value, an impairment loss is recognized in an amount equal to
               that excess. Goodwill is tested for impairment at the reporting
               unit level by a comparison of the fair value of a reporting unit
               with its carrying amount. The Company has elected to perform its
               analysis of goodwill at the end of the third quarter of the year.
               During 2007, impairment loss in the amount of $1,878 was
               identified and recorded (see also Note 9a).

          l.   Intangible assets:

               Intangible assets are amortized over their useful lives using a
               method of amortization that reflects the pattern in which the
               economic benefits of the intangible assets are consumed or
               otherwise used up, in accordance with SFAS 142. Developed
               technology is amortized over a weighted average of four-six years
               and customer relationship is amortized over a period of six
               years. As for capitalized software costs, see n below. During
               2007 an impairment loss of intangible assets in the amount of
               $434 was recorded (see also Note 9d).

                                      F-15

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          m.   Revenue recognition:

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

               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 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. If sufficient specific objective evidence does
               not exist for all undelivered elements, revenue is deferred for
               the entire arrangement until all revenue recognition criteria are
               met for such undelivered elements.

               Revenues from maintenance and support services are recognized
               over the term of the maintenance and support agreement on a
               straight line basis.

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

               Revenues from billing products which involve significant
               customization of the Company's software to customer specific
               specifications are recognized in accordance with Statement of
               Position 81-1, "Accounting for Performance of Construction-Type
               and Certain Production- Type Contracts", using contract
               accounting on a percentage of completion method, over the period
               from signing of the license through to customer acceptance in
               accordance with the "Input Method". The amount of revenue
               recognized is based on the total arrangement and the percentage
               to completion achieved. The percentage to completion is measured
               by monitoring progress using records of actual costs incurred to
               date in the project compared with the total estimated project
               requirement. Estimates of total project requirements are based on
               prior experience of customization, delivery and acceptance of the
               same or similar technology and are reviewed and updated regularly
               by management.

                                      F-16

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

               After delivery, if uncertainty exists about customer acceptance
               of the software, license revenue is not recognized until
               acceptance. Provisions for estimated losses on uncompleted
               contracts are made in the period in which such losses are first
               determined, in the amount of the estimated loss on the entire
               contract. As of December 31, 2007, no such estimated losses were
               identified.

               Estimated gross profit or loss from long-term contracts may
               change due to changes in estimates resulting from differences
               between actual performance and original forecasts. Such changes
               in estimated gross profit are recorded in results of operations
               when they are reasonably determinable by management, on a
               cumulative catch-up basis.

               The Company believes that the use of the percentage of completion
               method is appropriate as the Company has the ability to make
               reasonably dependable estimates of the extent of progress towards
               completion, contract revenues and contract costs. In addition,
               contracts executed include provisions that clearly specify the
               enforceable rights regarding services to be provided and received
               by the parties to the contracts, the consideration to be
               exchanged and the manner and terms of settlement. In all cases
               the Company expects to perform its contractual obligations and
               its licensees are expected to satisfy their obligations under the
               contract.

               Where arrangements recognized according to SOP 81-1 involve
               maintenance and support services, revenues are recognized
               according to Emerging Issues Task Force ("EITF"), Issue No. 00-21
               "Revenue Arrangement with Multiple Deliverables" ("EITF 00-21").

               According to EITF 00-21 a multiple-element arrangement (an
               arrangement that involves the delivery or performance of multiple
               products, services and/or rights to use assets) is separated into
               more than one unit of accounting, if the functionality of the
               delivered element is not dependent on the undelivered element,
               there is vendor-specific objective evidence (VSOE) of fair value
               of the undelivered element and delivery of the delivered
               element(s) represents the culmination of the earnings process for
               these elements. The Company has established VSOE for maintenance
               and support services based on the renewal rate charged when these
               elements are sold separately and therefore, the arrangement
               consideration is allocated to maintenance and support services
               based on their relative VSOE.

          n.   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.

               Research and development costs incurred in the process of
               developing product improvements or new products, are generally
               charged to expenses as incurred, net of grants received from the
               Office of the Chief Scientist of Israel's Ministry of Industry,
               Trade and Labor (see Note 12b).

                                      F-17

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

               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 that 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.

          o.   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. Research and development grants
               amounted $ 130, $ 578 and $ 469 in 2005, 2006 and 2007,
               respectively. Total royalties accrued or paid amounted to $ 198,
               $ 187 and $ 178 in 2005, 2006 and 2007, respectively and were
               recorded as part of the cost of goods sold.

          p.   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.

               In July 2006 the FASB issued Interpretation, or FIN, No. 48,
               "Accounting for Uncertainty in Income Taxes - an Interpretation
               of FASB Statement No. 109", or FIN 48. FIN 48 provides detailed
               guidance for the financial statement recognition, measurement and
               disclosure of uncertain tax positions recognized in an
               enterprise's financial statements in accordance with SFAS 109.
               Income tax positions must meet a more-likely-than-not recognition
               threshold at the effective date to be recognized upon the
               adoption of FIN 48 and in subsequent periods. The Company adopted
               FIN 48 effective January 1, 2007 and the provisions of FIN 48
               have been applied to all income tax positions commencing from
               that date. As of January 1, 2007 there was no difference between
               the provisions of SFAS 109 and FIN 48 therefore no adjustment was
               recorded to the retained earnings.

               Prior to 2007 the Company determined its tax contingencies in
               accordance with SFAS 5, Accounting for Contingencies, or SFAS 5.
               The Company recorded estimated tax liabilities to the extent the
               contingencies were probable and could be reasonably estimated.

                                      F-18

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          q.   Accounting for stock-based compensation:

               On January 1, 2006, the Company adopted SFAS No. 123 (revised
               2004), "Share-Based Payment" ("SFAS No. 123(R)") which requires
               the measurement and recognition of compensation expense based on
               estimated fair values for all share-based payment awards made to
               employees and directors. SFAS No. 123(R) supersedes Accounting
               Principles Board Opinion No. 25, "Accounting for Stock Issued to
               Employees" ("APB No. 25"), for periods beginning in fiscal year
               2006. In March 2005, the Securities and Exchange Commission
               issued Staff Accounting Bulletin No. 107 ("SAB 107") relating to
               SFAS No. 123(R). The Company has applied the provisions of SAB
               107 in its adoption of SFAS No. 123(R). SFAS No. 123(R) requires
               companies to estimate the fair value of equity-based payment
               awards on the date of grant using an option-pricing model. The
               value of the portion of the award that is ultimately expected to
               vest is recognized as an expense over the requisite service
               periods in the Company's consolidated operations statements.

               Prior to the adoption of SFAS No. 123(R), the Company accounted
               for equity-based awards to employees and directors using the
               intrinsic value method in accordance with APB No. 25 as allowed
               under SFAS No. 123, "Accounting for Stock-Based Compensation"
               ("SFAS No. 123"). Pursuant to these accounting standards, the
               Company recorded deferred compensation for stock options granted
               to employees at the date of grant equal to the excess of the
               market value of the underlying shares at that date over the
               exercise price of the options.

               The Company adopted SFAS No. 123(R) using the modified
               prospective transition method, which requires the application of
               the accounting standard starting from January 1, 2006, the first
               day of the Company's fiscal year 2006. Under that transition
               method, compensation cost recognized in the year ended December
               31, 2006, includes: (a) compensation cost for all share-based
               payments granted prior to, but not yet vested as of January 1,
               2006, based on the grant date fair value estimated in accordance
               with the original provisions of SFAS No. 123, and (b)
               compensation cost for all share-based payments granted subsequent
               to January 1, 2006, based on the grant-date fair value estimated
               in accordance with the provisions of SFAS No. 123(R). Results for
               prior periods have not been restated.

               The Company recognizes compensation expenses for the value of its
               awards granted subsequent to January 1, 2006 based on the
               straight line method over the requisite service period of each of
               the awards, net of estimated forfeitures. SFAS No. 123(R)
               requires forfeitures to be estimated at the time of grant and
               revised, if necessary, in subsequent periods if actual
               forfeitures differ from those estimates. Estimated forfeitures
               are based on actual historical pre-vesting forfeitures.
               Forfeitures were previously accounted for as they occurred, but
               have been estimated with the adoption of SFAS No. 123(R) for
               those awards not yet vested. For awards granted prior to January
               1, 2006, the Company recognizes compensation expenses based on
               the accelerated attribution method over the requisite service
               period of each of the awards.

               The Company estimates the fair value of stock options granted
               using the Black-Scholes- option pricing model. The option-pricing
               model requires a number of assumptions, of which the most
               significant are the expected stock price volatility and the
               expected option term. Expected volatility was calculated based
               upon actual historical stock price movements. The expected term
               of options granted is based upon historical experience and
               represents the period of time that options granted are expected
               to be outstanding. The risk-free interest rate is based on the
               yield from U.S. treasury bonds with an equivalent term. The
               Company has historically not paid dividends and has no
               foreseeable plans to pay dividends.

                                      F-19

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

               The fair value for options granted in 2005, 2006 and 2007 is
               estimated at the date of grant using a Black-Scholes options
               pricing model with the following weighted average assumptions:

                                                       YEAR ENDED DECEMBER 31,
                                                    ----------------------------
               EMPLOYEE STOCK OPTIONS                2005       2006       2007
               ----------------------               ------     ------     ------

               Expected volatility                   56.9%      74.5%      45.4%
               Risk-free interest                     3.9%       4.6%       4.2%
               Dividend yield                         0.0%       0.0%       0.0%
               Expected life (years)                    4          4          4

               The following table illustrates the effect on 2005 net loss and
               earnings per share, assuming that the Company had applied the
               fair value recognition provision of SFAS No. 123 on its
               stock-based employee compensation:

                                                                     YEAR ENDED
                                                                      DECEMBER
                                                                         31,
                                                                     -----------
                                                                         2005
                                                                     -----------

               Net loss available to Ordinary shares, as reported    $   (4,216)
               Add: Stock-based employee compensation - intrinsic
                  value                                                      66
               Deduct: Stock-based compensation expense
                  determined under fair value method for all
                  awards, net of related tax effect                        (264)
                                                                     ----------

               Pro forma net loss                                    $   (4,414)
                                                                     ==========

               Basic and diluted net loss per share, as reported     $    (0.83)
                                                                     ==========

               Basic and diluted net loss per share, pro forma       $    (0.87)
                                                                     ==========

          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, short-term
               bank deposits, trade receivables, other accounts receivable,
               short-term bank credit 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).

                                      F-20

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          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.

               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 expense for the years ended December 31, 2005, 2006 and
               2007 amounted to approximately $ 585, $ 339 and $ 400,
               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, short-term bank deposits, trade receivables,
               marketable securities and long-term loans.

               Cash and cash equivalents and short-term bank deposits 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 customers of the Company are located mainly in the U.S. and
               Europe (see Note 16). The Company performs ongoing credit
               evaluations of its customers. In certain circumstances, the
               Company may require letters of credit, other collateral or
               additional guarantees. The allowance for doubtful accounts is
               determined with respect to specific debts that are doubtful of
               collection according to management estimates.

               The Company's marketable securities include investments in equity
               securities and Israeli government securities. 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 loss per share:

               Basic net loss per share is computed based on the weighted
               average number of Ordinary shares outstanding during each year.
               The total number of shares related to the outstanding options
               excluded from the calculation of diluted net loss per share was
               1,011,584, 685,410 and 602,487 for the years ended December 31,
               2005, 2006 and 2007, respectively.

                                      F-21

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          v.   Impact of recently issued accounting standards:

               In September 2006, the FASB issued Statement of Financial
               Accounting Standards ("SFAS") No. 157, "Fair Value Measurements,"
               ("SFAS No. 157"). SFAS No. 157 provides a single definition of
               fair value, a framework for measuring fair value, and expanded
               disclosures concerning fair value. Previously, different
               definitions of fair value were contained in various accounting
               pronouncements creating inconsistencies in measurement and
               disclosures. SFAS No. 157 applies under those previously issued
               pronouncements that prescribe fair value as the relevant measure
               of value, except SFAS No. 123(R) and related interpretations.
               SFAS No. 157 does not apply to accounting standards that require
               or permit measurement similar to fair value but are not intended
               to measure fair value. SFAS No. 157 is effective for fiscal years
               beginning after November 15, 2007. The Company is currently
               evaluating the impact of the adoption of SFAS No. 157.

               In February 2007, the FASB issued SFAS No. 159, "The Fair Value
               Option Financial Assets and Financial Liabilities," ("SFAS No.
               159"). SFAS No. 159 for provides companies with an option to
               report selected financial assets and liabilities at fair value.
               Generally accepted accounting principles have required different
               measurement attributes for different assets and liabilities that
               can create artificial volatility in earnings. The Standard's
               objective is to reduce both complexity in accounting for
               financial instruments and the volatility in earnings caused by
               measuring related assets and liabilities differently. SFAS No.
               159 is effective as of the beginning of an entity's first fiscal
               year beginning after November 15, 2007. The Company is currently
               evaluating the impact of the adoption of SFAS No. 159.

               In June 2007, the FASB ratified Emerging Issues Task Force
               ("EITF") No. 07-3, "Accounting for Non Refundable Advance
               Payments for Goods or Services Received for Use in Future
               Research and Development Activities" ("EITF 07-3"). EITF 07-3
               requires that nonrefundable advance payments for goods or
               services that will be used or rendered for future research and
               development activities be deferred and capitalized and recognized
               as an expense as the goods are delivered or the related services
               are performed. EITF 07-3 is effective, on a prospective basis,
               for fiscal years beginning after December 15, 2007 and will be
               adopted in the first quarter of fiscal 2008. The Company is
               currently evaluating the impact of the adoption of EITF 07-3 on
               its consolidated financial statements.

               In December 2007, the FASB issued SFAS No. 141R, Business
               Combinations, or SFAS 141R. SFAS 141R establishes principles and
               requirements for how the acquirer of a business recognizes and
               measures in its financial statements the identifiable assets
               acquired, the liabilities assumed, and any non-controlling
               interest in the acquiree. The statement also provides guidance
               for recognizing and measuring the goodwill acquired in the
               business combination and determines what information to disclose
               to enable users of the financial statement to evaluate the nature
               and financial effects of the business combination. SFAS 141R is
               effective for financial statements issued for fiscal years
               beginning after December 15, 2008. Accordingly, any business
               combinations the Company executes will be recorded and disclosed
               following existing GAAP until January 1, 2009. The Company
               expects SFAS No. 141R will have an impact on its consolidated
               financial statements when effective, but the nature and magnitude
               of the specific effects will depend upon the nature, terms and
               size of the acquisitions it consummates after the effective date.
               The Company is still assessing the impact of this standard on its
               future consolidated financial statements.

                                      F-22

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

               In December 2007, the FASB issued SFAS No. 160, "Noncontrolling
               Interests in Consolidated Financial Statements - an amendment of
               ARB No. 51." SFAS No. 160 establishes accounting and reporting
               standards pertaining to ownership interests in subsidiaries held
               by parties other than the parent, the amount of net income
               attributable to the parent and to the noncontrolling interest,
               changes in a parent's ownership interest, and the valuation of
               any retained noncontrolling equity investment when a subsidiary
               is deconsolidated. This Statement also establishes disclosure
               requirements that clearly identify and distinguish between the
               interests of the parent and the interests of the noncontrolling
               owners. SFAS No. 160 is effective for fiscal years beginning on
               or after December 15, 2008. The Company is currently evaluating
               the impact that the adoption of FAS 160 would have on its
               consolidated financial statements.

               In December 2007, the U.S. Securities and Exchange Commission
               ("SEC") issued Staff Accounting Bulletin 110 ("SAB No. 110") to
               amend the SEC's views discussed in Staff Accounting Bulletin 107
               ("SAB No. 107") regarding the use of the simplified method in
               developing an estimate of expected life of share options in
               accordance with SFAS No. 123(R). SAB No. 110 is effective for the
               company beginning in the first quarter of fiscal year 2008. The
               Company does not expect the adoption of SAB No. 110 will have
               significant impact on its consolidated financial statement.

NOTE 3:-  MARKETABLE SECURITIES

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

<TABLE>
<CAPTION>
                                               DECEMBER 31, 2006                               DECEMBER 31, 2007
                                 --------------------------------------------   ---------------------------------------------
                                               GROSS         GROSS      FAIR                  GROSS        GROSS        FAIR
                                 AMORTIZED   UNREALIZED   UNREALIZED   MARKET   AMORTIZED   UNREALIZED   UNREALIZED    MARKET
                                    COST       GAINS        LOSSES      VALUE     COST        GAINS        LOSSES       VALUE
                                 ---------   ----------   ----------   ------   ---------   ----------   ----------   -------
<S>                              <C>         <C>          <C>          <C>      <C>         <C>          <C>          <C>
Available-for-sale:

Equity securities                $      40   $        5   $       (2)  $   43   $      72   $        5   $       (4)  $    73
Corporate bonds                         45            1            -       46          16            -            -        16
Israeli Government debts                63            7            -       70          68           12            -        80
                                 ---------   ----------   ----------   ------   ---------    ---------   ----------   -------

                                 $     148   $       13   $       (2)  $  159   $     156   $       17   $       (4)  $   169
                                 =========   ==========   ==========   ======   =========   ==========   ==========   =======
</TABLE>

          The gross realized gains on sales of available-for-sale securities
          totaled $ 77, $ 13 and $ 13 in 2005, 2006 and 2007, respectively,
          recorded in financial income. 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 $ (76), $ 1 and $ 1 in 2005, 2006 and
          2007, respectively.

          None of the unrealized loss as of December 31, 2007, are outstanding
          over than 12 months period.

                                      F-23

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 3:-  MARKETABLE SECURITIES (CONT.)

          The amortized cost and fair value of debt and marketable equity
          securities as of December 31, 2007, by contractual maturity, are shown
          below.

                                                        DECEMBER 31, 2007
                                                   ----------------------------
                                                                       FAIR
                                                     AMORTIZED        MARKET
                                                       COST            VALUE
                                                   ------------    ------------
          Matures after one year through
             five years                            $         68    $         80
          Matures after ten years                            16              16
          Equity securities - No definite
             maturity date                                   72              73
                                                   ------------    ------------

          Total                                    $        156    $        169
                                                   ============    ============

NOTE 4:-  OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

                                                            DECEMBER 31,
                                                   ----------------------------
                                                       2006             2007
                                                   ------------    ------------
          Grants receivable from the Office
             of the Chief Scientist                $        454    $        335
          Government authorities                             77              17
          Prepaid expenses                                  147              29
          Deferred income taxes (1)                          14              21
          Others (2)                                         71             142
                                                   ------------    ------------

                                                   $        763    $        544
                                                   ============    ============

          (1) See Note 13d.
          (2) See Note 5a.

NOTE 5:-  INVESTMENTS IN OTHER COMPANIES

          a.   On December 10, 2007 the Company was notified that a
               privately-owned leading online advertising company, in which the
               Company hold approximately a 1% of its common shares, was sold to
               a third party for a total estimated consideration of $16,000 out
               of which the company proceeds' are approximately $36. The
               transaction was consummated on December 31, 2007 with the
               approval of the General Shareholders Meeting of this online
               advertising company and therefore was classified to other
               accounts receivable. Consequently the company recorded a capital
               loss in the amount of $63.

          b.   On January 31, 2008 the company consummated the sale of its
               ownership interest in Cvidya to a third party, in consideration
               of approximately $ 603. This consideration reflects a capital
               gain of $ 382. The Company recorded its investment in Cvidya as
               of December 31, 2007 in the amount of $ 221 in the current
               assets.

                                      F-24

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 6:-  INVESTMENTS IN AFFILIATE

          Composed as follows:

                                                            DECEMBER 31,
                                                   ----------------------------
                                                       2006            2007
                                                   ------------    ------------
             Investment in Jusan S.A. (50% owned)

                Equity, net (1)                    $      1,563    $          -
                Goodwill                                     35               -
                                                   ------------    ------------

                                                   $      1,598    $          -
                                                   ============    ============

             (1)   Investment as of purchase date  $      1,171    $          -
                   Retained earnings (Net of
                      dividends)                            392               -
                                                   ------------    ------------

                                                   $      1,563    $          -
                                                   ============    ============

             Dividend received from Jusan S.A.
                during the year                    $        409    $        134
                                                   ============    ============

          On November 29, 2007, the Company sold its 50% ownership interest in
          Jusan S.A., an affiliate, to the affiliate's other shareholders, in
          consideration of 700 Euros ($ 1,031) plus the payment of 25% of the
          net income of Jusan S.A. during the period commencing as of the date
          of the sale and ending June 30, 2008. This consideration reflects a
          loss of $ 197 recorded in equity in loss of affiliate.

NOTE 7:-  OTHER INVESTMENTS

                                                            DECEMBER 31,
                                                   ----------------------------
                                                       2006            2007
                                                   ------------    ------------
          Long-term leasing deposits (1)           $         46    $          3
          Investment in other companies (see
             also Note 5)                                   320               -
                                                   ------------    ------------

                                                   $        366    $          3
                                                   ============    ============

          (1) Linked to the Israeli CPI.

NOTE 8:-  PROPERTY AND EQUIPMENT

                                                            DECEMBER 31,
                                                   ----------------------------
                                                       2006            2007
                                                   ------------    ------------
          Cost:
             Computers and peripheral equipment    $      3,118    $      3,097
             Office furniture and equipment                 572             579
             Motor vehicles                                  48              48
             Leasehold improvements                         150              93
                                                   ------------    ------------

                                                          3,888           3,817
          Accumulated depreciation:                       3,449           3,534
                                                   ------------    ------------

          Depreciated cost                         $        439    $        283
                                                   ============    ============

          The depreciation expense for the years ended December 31, 2005, 2006
          and 2007 amounted to $ 254, $ 243 and $ 251, respectively.

                                      F-25

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 9:-  GOODWILL AND OTHER INTANGIBLE ASSETS

          a.   Goodwill:

               The changes in the carrying amount of goodwill for the year ended
               December 31, 2006 and 2007 are as follows:

<TABLE>
<CAPTION>
<S>                                                                             <C>
Balance as of January 1, 2006                                                   $   3,700

Additional consideration in conjunction with TK
   acquisition based on post-contract billing revenues, see Note 1(c)                 192
Goodwill acquired during the year (see Note 1d)                                       166

                                                                                ---------
Balance as of December 31, 2006                                                     4,058
                                                                                ---------

Additional consideration in conjunction with TK
   acquisition based on post-contract billing revenues, see Note 1(c)                  10
Additional consideration based on post-contract
   Telecom Expense Management activity that was
   acquired from TelSoft (see Note 1d)                                                606
Impairment of goodwill related to billing activity that
   was acquired from Teleknowledge (1)                                             (1,878)
                                                                                ---------

Balance as of December 31, 2007                                                 $   2,796
                                                                                =========
</TABLE>

          (1)  During 2007, the Company reviewed its goodwill for impairment and
               determined that there was an indication that the goodwill
               relating to the acquisition of the Teleknowledge billing activity
               had been impaired. The Company assessed the recoverable amount of
               such goodwill, based on its projections and using expected future
               discounted operating cashflows. Based on such review the Company
               determined that the goodwill relating to the acquisition of the
               Teleknowledge billing activity in the amount of $1,878 had been
               impaired and the carrying value was written-off.

          b.   Other intangibles consist of the following:

<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                                -------------------------
                                                                   2006           2007
                                                                ----------      ---------
<S>                                                             <C>             <C>
Cost:
   Development technology                                       $    1,873      $   1,183
   Capitalized software development costs                              386            386
   Customer relationship                                               945            645
                                                                ----------      ---------

                                                                     3,204          2,214
                                                                ----------      ---------
Accumulated amortization:
   Development technology                                            1,131            871
   Capitalized software development costs                              289            386
   Customer relationship                                               145            152
                                                                ----------      ---------

                                                                     1,565          1,409
                                                                ----------      ---------

Amortized cost                                                  $    1,639      $     805
                                                                ==========      =========
</TABLE>

                                      F-26

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 9:-  GOODWILL AND OTHER INTANGIBLE ASSETS (CONT.)

               Intangible assets resulted from acquisitions of IntegraTrak and
               TelSoft (see Note 1d), the Company's U.S. subsidiaries and
               TeleKnowledge (see Note 1c).

          c.   Amortization expenses amounted to $ 401, $ 432 and $ 401 for each
               of the years ended December 31, 2005, 2006 and 2007,
               respectively.

          d.   During 2007, the Company determined that intangible assets
               relating to the billing activity that was acquired from
               Teleknowledge had been impaired and as a result, recorded an
               impairment loss in the amount of $259 and $175 for developed
               technology and customer relationship, respectively.

          e.   Estimated amortization expenses for:

               YEAR ENDED DECEMBER 31,
               ---------------------------

               2008                                    $      193
               2009                                           193
               2010                                           176
               2011                                           152
               2012                                            91
                                                       ----------

                                                       $      805
                                                       ==========

NOTE 10:- ACCRUED EXPENSES AND OTHER LIABILITIES

                                                               DECEMBER 31,
                                                       -------------------------
                                                          2006            2007
                                                       ----------      ---------
          Employees and payroll accruals               $      949      $     919
          Income tax payable                                  498            735
          Accrued expenses                                    638          1,314
          Customer advances                                   205            261
          Related parties                                     217             80
                                                       ----------      ---------

                                                       $    2,507      $   3,309
                                                       ==========      =========

NOTE 11:- LONG-TERM BANK LOAN

          a.   Composed as follows:

                                                               DECEMBER 31,
                                                       -------------------------
                                                          2006           2007
                                                       ----------      ---------
          Long-term loan                               $    1,000      $     583
          Less - current maturities                           417            583
                                                       ----------      ---------

                                                       $      583      $       -
                                                       ==========      =========

               The loan bears annual interest at a rate of the monthly LIBOR +
               2%, payable on a monthly basis on the outstanding loan amount
               commencing August 31, 2006. The loan principal is repaid in
               twelve equal monthly installments commencing August 31, 2007.

                                      F-27

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 11:- LONG-TERM BANK LOAN (CONT.)

          b.   The loan agreement includes the following covenants:

               (i)  The ratio between shareholders equity and total shareholders
                    equity and liabilities shall not be less than 40% and in no
                    event shall the Company's shareholders equity decrease below
                    $ 5,000 thousand.

               (ii) The Company will generate operating income for each of the
                    two subsequent quarters commencing the second quarter of
                    2007 and onwards.

               (iii) The Company's cash and cash equivalents shall not decrease
                    below $ 1,000 at any given time.

               In the event that the Company violates one of the above covenants
               the loan shall become immediately due. As of December 31, 2007
               the Company is not in compliance with such covenants.

          c.   To secure the loan, the Company provided the Bank a floating
               charge on all its current and long term assets and a fixed charge
               on its goodwill and on its authorized but not outstanding
               shareholders equity.

NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES

          a.   Lease commitments:

               The facilities of the Company and its subsidiaries are rented
               under operating leases for periods ending May 2007 through June
               2010.

               Future minimum lease commitments under non-cancelable operating
               leases as of December 31, 2007 are as follows:

               2008                                    $      455
               2009                                           327
               2010                                           150
               2011                                             -
                                                       ----------

                                                       $      932
                                                       ==========

               Lease expenses for the years ended December 31, 2005, 2006 and
               2007 were approximately $ 489, $ 479 and $ 544, respectively.

                                      F-28

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

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

          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,
                    2007, the Company has a contingent liability to pay
                    royalties in the amount of $ 9,842. 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 $ 198, $ 186 and $ 178 for the years ended
                    December 31, 2005, 2006 and 2007, respectively.

               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, 2007, the
                    Company has a contingent obligation to pay royalties in the
                    amount of $ 259.

          c.   Claims and demands:

               1.   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 6,000 thousand
                    ($ 1,560).

                    The Company has appealed to the Israeli Tel Aviv district
                    court in respect of the abovementioned tax demand. The
                    Company believes that certain defenses can be raised against
                    the demand of the tax authorities. The Company has provided
                    a provision in the amount considered probable.

               2.   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
                    was 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
                    thousand (approximately $ 3,500).

                    On March 22, 2007, the complaint had been dismissed without
                    prejudice by mutual agreement and following a settlement
                    between all parties to the complaint and with no payment by
                    any of the litigants.

                                      F-29

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

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

               3.   On November 22, 2005, the Company received a letter from one
                    of its customer's legal counsel alleging, among other
                    things, that the Company materially breached the agreement
                    that was entered into with the customer who is seeking full
                    repayment of the amounts that were paid by him under the
                    agreement, including interest and indemnification for
                    damages. The Company cannot currently assess the outcome of
                    this claim or its adverse effect on the Company's financial
                    position or results of operations.

               4.   On July 24, 2006, a claim was filed in the Tel-Aviv Superior
                    Court against the company and Tim Computers and Systems Ltd,
                    or TIM, for an order of inspection and monetary relief in
                    the total amount of NIS 313 thousand ($82 thousand), of
                    which NIS 112 thousand ($30 thousand) is demanded from the
                    company and NIS 200 thousand ($52 thousand) is demanded from
                    TIM. The plaintiff is a former minority shareholder of a
                    company in which we were the major shareholder. The claim
                    relates to the rights to proceeds received under a software
                    development project in which TIM and the company
                    participated and in which the plaintiff was involved. A
                    preliminary hearing was held on Jan. 15, 2007. Due to the
                    preliminary stage of this litigation, the company and its
                    legal advisors cannot currently assess the outcome or
                    possible adverse effect on the company's financial position
                    or results of operations.

               5.   On February 21, 2007, one of the Company's suppliers ("the
                    plaintiffs") filed a complaint with the Kfar-Saba Magistrate
                    Court against the Company, in which he demands payment of
                    NIS 179 thousand (approximately $ 47) with respect to
                    electronic components that were ordered by the Company. The
                    Company made a provision in its financial statements for
                    this claimed amount. The abovementioned claim is related to
                    the claim raised in Note 12c(3).

               6.   On March 15, 2007, The Company received a letter from one of
                    its customer's legal counsel alleging, among other things,
                    that the Company materially breached an agreement relating
                    to its billing solutions that the Company entered into with
                    the customer on March 30, 2006. The customer is seeking full
                    repayment of the amounts that were paid by him under the
                    agreement in the amount of approximately $141, plus
                    liquidated damages as provided in the agreement. Due to the
                    preliminary stage of this matter, the Company cannot
                    currently assess the outcome or possible adverse effect on
                    its financial position or results of operations.

               7.   During August 2007, TABS Brazil, was ordered by the Labor
                    Law Court in Brazil to pay approximately 180 Brazilian Reais
                    (approximately $101) to one of its former employees. TABS
                    Brazil has filed an appeal against the Labor Law Court
                    ruling. The Company recorded a provision in its financial
                    statements for the amount of the award considered probable.

          d.   Guarantees:

               The Company provided a bank guarantee through September 2010 in
               the amount of $ 190 to secure its obligations under one of its
               leasing agreements.

                                      F-30

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 13:- TAXES ON INCOME

          a.   ISRAELI TAXATION:

               1.   CORPORATE TAX STRUCTURE:

                    Taxable income of Israeli companies is subject to tax at the
                    rate of 31% in 2006, 29% in 2007, 27% in 2008, 26% in 2009
                    and 25% in 2010 and thereafter.

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

                    The Investment Law empowers the Israeli Investment Center to
                    grant Approved Enterprise status to capital investments in
                    production facilities that meet certain relevant criteria
                    ("Approved Enterprise"). In general, such capital
                    investments will receive Approved Enterprise status if the
                    enterprise is expected to contribute to the development of
                    the productive capacity of the economy, absorption of
                    immigrants, creation of employment opportunities, or
                    improvement in the balance of payments.

                    The tax benefits derived from any such Approved Enterprise
                    relate only to taxable income attributable to the specific
                    program of investment to which the status was granted. Since
                    MTS is operating more than one "Approved Enterprise" program
                    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.

                    MTS was granted the status of an "Approved Enterprise" under
                    the Law in respect of several different capital expenditure
                    programs. For all of such Approved Enterprises, the Company
                    elected to apply for alternative tax benefits ("Alternative
                    Package").

                    Accordingly, MTS Ltd.'s income attributed to the Approved
                    Enterprise under the alternative package is tax exempt for a
                    period of two years, commencing with the year the Company
                    earns taxable income, and subject to corporate tax at the
                    rate of 10%-25% (depending on the rate of foreign holdings
                    in the Company), for additional periods of five to eight
                    years.

                    In the event of distribution of dividends from the said
                    tax-exempt income, the amount distributed will be subject to
                    corporate tax at the rate ordinarily applicable to the
                    Approved Enterprise's income.

                    The duration of tax benefits, for each of the Programs is
                    subject to limitations of the earlier of 12 years from
                    completion of the investment or commencement of production,
                    or 14 years from receipt of approval, as an Approved
                    Enterprise under the Law.

                    The entitlement to the above benefits is conditional upon
                    the Company's fulfilling the conditions stipulated by the
                    Law and regulations published thereunder.

                                      F-31

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 13:- TAXES ON INCOME (CONT.)

                    Should MTS Ltd. fail to meet such requirements in the
                    future, income attributable to its Approved Enterprise
                    programs could be subject to the statutory Israeli corporate
                    tax rate and the Company could be required to refund a
                    portion of the tax benefits already received, with respect
                    to such programs.

                    On April 1, 2005, an amendment to the Investment Law came
                    into effect ("the Amendment") and has significantly changed
                    the provisions of the Investment Law. The Amendment limits
                    the scope of enterprises which may be approved by the
                    Investment Center by setting criteria for the approval of a
                    facility as a "Privileged Enterprise" (rather than the
                    previous terminology of Approved Enterprise), such as a
                    provision requiring that at least 25% of the "Privileged
                    Enterprise's" income will be derived from export.
                    Additionally, the Amendment enacted major changes in the
                    manner in which tax benefits are awarded under the
                    Investment Law so that companies are no longer required for
                    Investment Center approval in order to qualify for tax
                    benefits. The period of tax benefits for a new "Privileged
                    Enterprise" commences in the "Year of Commencement". This
                    year is the later of: (1) the year in which taxable income
                    is first generated by the company, or (2) the Year of
                    Election.

                    If a company requested the "Alternative Package" of benefits
                    for an Approved Enterprise under the old law before the 2005
                    amendment, it is precluded from filing a Year of Election
                    notice for a "Privileged Enterprise" for three years after
                    the year in which the Approved Enterprise was activated.

                    In addition, the Investment Law provides that terms and
                    benefits included in any certificate of approval already
                    granted will remain subject to the provisions of the law as
                    they were on the date of such approval. Therefore, the
                    existing Approved Enterprises will not be subject to the
                    provisions of the Amendment.

                    As a result of the amendment, tax-exempt income generated
                    under the provisions of the amended law, will subject the
                    Company to taxes upon dividend distribution or complete
                    liquidation.

                    Dividend distributed by an Approved Enterprise and
                    "Privileged Enterprise" will be subject to withholding tax
                    of 15%.

                    Out of the Company's retained earnings as of December 31,
                    2007 approximately $2,250 are tax exempt attributable to its
                    Approved Enterprise programs. If such tax exempt income is
                    distributed in a manner other than upon the complete
                    liquidation of the Company, it would be taxed at the reduced
                    corporate tax rate applicable to such profits (between
                    10%-25%) and an income tax liability of up to approximately
                    $ 562 would be incurred as of December 31, 2007.

                    The Company's board of directors has determined that it
                    would not distribute any amounts of its undistributed tax
                    exempt income as dividend. The Company intends to reinvest
                    the amount of its tax exempt income. Accordingly, no
                    deferred income taxes have been provided on income
                    attributable to the Company's "Approved Enterprise" as the
                    undistributed tax exempt income is essentially permanent in
                    duration.

                    Income from sources other than the Approved Enterprise is
                    subject to tax at regular Israeli corporate tax rate.

                                      F-32

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 13:- TAXES ON INCOME (CONT.)

               3.   Tax assessments:

                    Regarding the claim from the tax authorities in Israel, see
                    Note 12c(1). The Company has received final tax assessments
                    until the 1996 tax year.

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

               5.   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.

          b.   Income taxes on non-Israeli subsidiaries:

               Non Israeli subsidiaries are taxed according to the tax laws in
               their respective country of residence.

          c.   Net operating losses carryforward:

               As of December 31, 2007, the Company and its subsidiaries in
               Israel, Hong Kong and U.S. have an estimated total amount of
               available carryforward tax losses of $ 15,151, $ 261 and $ 503,
               respectively to offset against future taxable profits. The
               operating tax loss carryforwards in Israel and in Hong Kong may
               be offset indefinitely against operating income.

               MTS IntegraTrak and MTS TelSoft are subject to U.S. income taxes
               and have a net operating loss carryforward amounting to
               approximately $ 503 as of December 31, 2007, which expires in the
               years 2015 to 2022. Utilization of the U.S. net operating losses
               may be subject to substantial annual limitation due to the
               "change in ownership" provisions of the Internal Revenue Code of
               1986 and similar state provisions. The annual limitation may
               result in the expiration of net operating losses before
               utilization.

                                      F-33

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 13:- TAXES ON INCOME (CONT.)

          d.   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,
                                                                -------------------------
                                                                   2006            2007
                                                                ----------      ---------
<S>                                                             <C>             <C>
Tax loss carryforward of the Company                            $    2,416      $   3,292
Allowances for doubtful accounts and accruals for
   employee benefits                                                    69            205
In respect of marketable securities                                     47             47
Goodwill and other intangible assets-liability                        (253)          (227)
Capitalized software and other intangible assets                       304            869
Other                                                                  442            249
                                                                ----------      ---------

Net deferred tax asset before valuation allowance                    3,025          4,435
Valuation allowance                                                 (2,899)        (4,291)
                                                                ----------      ---------

Net deferred income taxes                                       $      126      $     144
                                                                ==========      =========

Presented as follows:
   Current assets - foreign                                     $       14      $      21
                                                                ==========      =========

   Other assets - foreign                                       $      112      $     123
                                                                ==========      =========
</TABLE>

               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.

                                      F-34

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 13:- TAXES ON INCOME (CONT.)

          e.   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,
                                                 --------------------------------------------------
                                                      2005              2006              2007
                                                 --------------    --------------    --------------
<S>                                              <C>               <C>               <C>
Loss before taxes as reported in the
   statements of operations                      $       (4,208)   $       (2,287)   $       (5,694)
                                                 ==============    ==============    ==============

Tax rates                                                    34%               31%               29%
                                                 ==============    ==============    ==============

Theoretical tax benefit                          $       (1,431)   $         (709)   $       (1,651)
Increase in taxes resulting from:
Effect of different tax rates                                38               (17)              (15)
Tax adjustment in respect of inflation in
   Israel and others                                        (17)               (9)              268
Utilization of carryforward tax losses for
   which valuation allowance was provided                     -               (22)              (22)
Non-deductible expenses and tax exempt income                10                13                28
Taxes and deferred taxes in respect of
   previous years                                           (21)              112               (68)
Deferred taxes for which valuation allowance
   was provided                                           1,431               750             1,392
                                                 --------------    --------------    --------------

Taxes on income (benefit), net, as reported in
   the statements of operations                  $           10    $          118    $          (68)
                                                 ==============    ==============    ==============
</TABLE>

          f.   Loss before income taxes is comprised as follows:

<TABLE>
<CAPTION>
<S>                                              <C>               <C>               <C>
Domestic                                         $       (4,042)   $       (1,511)   $       (5,498)
Foreign                                                    (166)             (776)             (196)
                                                 --------------    --------------    --------------

                                                 $       (4,208)   $       (2,287)   $       (5,694)
                                                 ==============    ==============    ==============
</TABLE>

                                      F-35

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 13:- TAXES ON INCOME (CONT.)

          g.   Taxes on income are comprised as follows:

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                 --------------------------------------------------
                                                      2005              2006              2007
                                                 --------------    --------------    --------------
<S>                                              <C>               <C>               <C>
Current taxes                                    $            -    $            5    $            -
Deferred taxes                                               10                 3                 -
Taxes and deferred taxes in respect of
   previous years                                             -               110               (68)
                                                 --------------    --------------    --------------

                                                 $           10    $          118    $          (68)
                                                 ==============    ==============    ==============

Domestic                                         $            -    $            -    $            -
Foreign                                                      10               118               (68)
                                                 --------------    --------------    --------------

                                                 $           10    $          118    $          (68)
                                                 ==============    ==============    ==============
</TABLE>

          h.   The Company adopted the provisions of FIN 48 on January 1, 2007.
               As of January 1, 2007 there was no difference between the
               provisions of SFAS 109 and FIN 48 therefore no adjustment was
               recorded to the retained earnings.

               A reconciliation of the beginning and ending amount of
               unrecognized tax benefits is as follows:

               Gross unrecognized tax benefits as of January 1, 2007      $  583

               Gross unrecognized tax benefits as of December 31, 2007    $  583
                                                                          ======

               The Company conducts business globally and, as a result, MTS or
               one or more of its subsidiaries file income tax returns in the
               U.S. federal jurisdiction and various state and foreign
               jurisdictions. In the normal course of business, the Company is
               subject to examination by taxing authorities throughout the
               world, including such major jurisdictions as Israel and the
               United States. With few exceptions, the Company is no longer
               subject to Israeli income tax examinations for years 2002 and
               2001.

               The Company has not accrued any penalties or interest payments
               related to its uncertain tax positions as the Company believes
               that it is more likely than not that there will not be any
               assessment of penalties or interest.

NOTE 14:- RELATED PARTIES TRANSACTIONS AND BALANCES

          a.   On November 8, 1999, the Board of Directors and the audit
               committee approved, subject to the shareholders' approval, an
               increase in the monthly salary of the Chairman of the Board of
               Directors from $ 5 to $ 7 per month.

               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.

                                      F-36

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 14:- RELATED PARTIES TRANSACTIONS AND BALANCES (CONT.)

               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%.

          b.   In 2006 and 2007, the balance with C. Mer reflects other
               receivables and other payables. Due to the short-term nature, no
               interest was charged by or paid to C. Mer through December 31,
               2006 and 2007.

          c.   Transactions with related parties were as follows:

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                 --------------------------------------------------
                                                      2005              2006              2007
                                                 --------------    --------------    --------------
<S>                                              <C>               <C>               <C>
Sales through related parties                    $            -    $            -    $            -
                                                 ==============    ==============    ==============

Amounts charged by related parties:

Cost of revenues                                 $            8    $           10    $            4
Operating expenses                                           42                60                31
                                                 --------------    --------------    --------------

                                                 $           50    $           70    $           35
                                                 ==============    ==============    ==============

Amounts charged by MTS IntegraTRAK
   and MTS Asia to related parties:

Selling and marketing                            $            -    $          246    $            -
                                                 ==============    ==============    ==============

Payments from (repayments to) the related
   parties, net                                  $          (80)   $          (38)   $          150
                                                 ==============    ==============    ==============
</TABLE>

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.   Private placement agreements:

               On August 10, 2005, the Company has entered into definitive
               agreements with institutional and private investors for a private
               placement of Ordinary shares and warrants to purchase Ordinary
               shares that has raised $ 2,625 (net of issuance costs of
               approximately $ 200).

                                      F-37

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 15:- SHAREHOLDERS' EQUITY (CONT.)

               Pursuant to the agreements, MTS has issued an aggregate 937,500
               Ordinary shares at $ 3.00 per share. In addition, the Company
               provided the investors with warrants to purchase an aggregate
               375,000 additional Ordinary shares of MTS at an exercise price of
               $ 4.00 per share. Each investor received warrants to purchase two
               Ordinary shares for each five Ordinary shares purchased. The
               warrants became exercisable six months after their issuance and
               will expire within three and a half years after they become
               exercisable.

               On January 24, 2008, the Company and a private investor entered
               into a definitive agreement for a private placement of 750,000
               ordinary shares at a price per share of $ 1 for the aggregate
               purchase price of $ 750.

          c.   Stock options:

               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.

               Each option granted under the Plan is exercisable until the
               earlier of five 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 to be
               granted under 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.

               In June 2006, MTS has authorized, through its 2006 Stock Option
               plan ("2006 Plan"), the grant of options to officers, management,
               employees and directors of MTS or any subsidiary of up to 400,000
               of MTS's Ordinary shares. Each option granted under the 2006 Plan
               will be either an option intended to be treated as an "incentive
               stock option," within the meaning of Section 422 of the Internal
               Revenue Code of 1986, as amended, or an option that will be
               treated as a "non-qualified stock option."

               Each option granted under the Plan is exercisable until the
               earlier of five 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 fair
               market value of an ordinary share determined as of the date of
               grant of the option.

               As of December 31, 2007, 659,374 options are available for future
               grant.

                                      F-38

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 15:- SHAREHOLDERS' EQUITY (CONT.)

          d.   A summary of option activity under the Company's Stock Option as
               of December 31, 2007 and changes during the twelve months ended
               December 31, 2007 are as follows:

<TABLE>
<CAPTION>
                                                                     WEIGHTED-
                                                    WEIGHTED-         AVERAGE
                                                     AVERAGE         REMAINING        AGGREGATE
                                    NUMBER OF       EXERCISE        CONTRACTUAL       INTRINSIC
                                     OPTIONS          PRICE        TERM (IN YEARS)      VALUE
                                   -----------     -----------     ---------------    ----------
                                                              AUDITED
                                   -------------------------------------------------------------
<S>                                <C>             <C>             <C>                <C>
Outstanding at December 31, 2006       600,400     $      2.67                2.79    $        -
Granted                                110,000     $      1.23                   -             -
Exercised                                    -               -                   -             -
Forfeited                              (33,800)    $      3.15                   -             -
                                   -----------

Outstanding at December 31, 2007       676,600     $      2.41                2.27    $        -
                                   ===========     ===========     ===============    ==========

Exercisable at December 31, 2007       415,725     $      2.36                1.45    $        -
                                   ===========     ===========     ===============    ==========

Vested and expected to vest            616,768     $      2.39                2.23    $        -
                                   ===========     ===========     ===============    ==========
</TABLE>

               The weighted average grant-date fair value of options granted
               during 2005, 2006 and 2007, was $ 1.70, $ 1.94 and $ 0.50 per
               option, respectively.

               The total compensation cost related to options granted to
               employees under the Company's share-based compensation plans
               recognized for the year ended December 31, 2006 and 2007 amounted
               at $ 210 and $ 92 respectively, net of estimated forfeitures.

               The aggregate intrinsic value in the table above represents the
               total intrinsic value (the difference between the Company's
               closing stock price on the last trading day of the fiscal year
               2007 and the exercise price, multiplied by the number of
               in-the-money options) that would have been received by the option
               holders had all option holders exercised their options on
               December 31, 2007. This amount changes based on the fair market
               value of the Company's stock. The total intrinsic value of
               options exercised during the years ended December 31, 2007, 2006,
               and 2005, was $ 0, $ 55 and $ 188, respectively. As of December
               31, 2007, there was $ 131 of total unrecognized compensation cost
               related to non-vested share-based compensation arrangements
               granted under the Company's stock option plans. That cost is
               expected to be recognized over a weighted-average period of 3
               years.

          e.   Options and warrants to non-employees:

<TABLE>
<CAPTION>
                                    NUMBER OF                              OPTIONS     EXERCISE
                 IN CONNECTION       OPTIONS     OPTIONS      OPTIONS     FORFEITED    PRICE PER   EXERCISABLE
ISSUANCE DATE        WITH            GRANTED    EXERCISED   EXERCISABLE   OR EXPIRED     SHARE       THROUGH
-------------   ----------------    ---------   ---------   -----------   ----------   ---------   ------------
<S>             <C>                 <C>         <C>         <C>           <C>          <C>         <C>
January 2005    Service provider       70,000           -        70,000            -   $   3.250   January 2008
August 2005     Service provider       37,000           -        37,000            -   $   4.000   August 2009
                                    ---------   ---------   -----------   ----------
                                      107,000           -       107,000            -
                                    =========   =========   ===========   ==========
</TABLE>

                                      F-39

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 15:- SHAREHOLDERS' EQUITY (CONT.)

               During 2007, no options to consultants were granted by the
               Company. The Company had accounted for its outstanding options to
               non-employees under the fair value method of SFAS No. 123 and
               EITF 96-18. The fair value for these options was estimated at the
               measurement date using the Black-Scholes option-pricing model
               with the following weighted-average assumptions for 2005:
               risk-free interest rates of 4.06%, dividend yields of 0%,
               volatility factors of the expected market price of the Company's
               Ordinary shares of 52.37%, and a contractual life of 3.3 years.

               Compensation expenses related to the granting of stock options to
               consultants amounted to $ 156, $ 10 and $ 0 for the years ended
               December 31, 2005, 2006 and 2007, respectively.

          f.   Treasury shares:

               During 2005, 2006 and 2007, the Company purchased 3,800, 0 and 0
               treasury shares in consideration of $ 9 $ 0 and $ 0,
               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.

          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 MAJOR CUSTOMERS AND 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:

                                                  YEAR ENDED DECEMBER 31,
                                         --------------------------------------
                                            2005          2006          2007
                                         ---------     ---------     ----------
          Revenues from sales:

          United States                  $   6,043     $   5,353     $    4,919
          Germany                            2,059         1,881          1,402
          Asia                                 359           624            565
          Holland                              747           561            488
          Others                             2,355         2,065          1,964
                                         ---------     ---------     ----------

                                         $  11,563     $  10,484     $    9,338
                                         =========     =========     ==========

                                      F-40

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 16:- GEOGAPHIC INFORMATION AND MAJOR CUSTOMERS AND PRODUCTS (CONT.)

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

                                                      DECEMBER 31,
                                         --------------------------------------
                                           2005          2006           2007
                                         ---------     ---------     ----------
          TABS                           $   7,454     $   5,329     $    5,650
          Application suits                  2,603         4,044          3,102
          Billing products                   1,506         1,111            586
                                         ---------     ---------     ----------

                                         $  11,563     $  10,484     $    9,338
                                         =========     =========     ==========
          Long-lived assets:

          Israel                         $   3,013     $   3,177     $      481
          United States                      2,194         2,913          3,368
          Others                                57            46             35
                                         ---------     ---------     ----------

                                         $   5,264     $   6,136     $    3,884
                                         =========     =========     ==========

NOTE 17:- SUBSIDIARIES AND AFFILIATES

<TABLE>
<CAPTION>
                                                                        PERCENTAGE     JURISDICTION OF
                                                                       OF OWNERSHIP     INCORPORATION
                                                                       ------------    ---------------
<S>                                                                    <C>             <C>
SUBSIDIARIES:

MTS IntegraTRAK Inc.                                                       100%            Delaware
MTS TelSoft Inc. (a subsidiary of 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%          Netherlands
Verdura B.V. (a subsidiary of Jaraga B.V.) (*)                             100%          Netherlands
Voltera Technologies V.O.F. (a partnership held 99% by Jaraga B.V.
   and 1% by Verdura B.V.) (*)                                             100%          Netherlands
Bohera B.V. (a subsidiary of Jaraga B.V.) (*)                              100%          Netherlands
Tabs Brazil Ltd. (a subsidiary of Bohera B.V.)                             100%             Brazil
</TABLE>

(*) Inactive, or having immaterial activity.

                                      F-41

<PAGE>

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 18:- SUBSEQUENT EVENTS

          a.   On January 24, 2008, the Company and a private investor entered
               into a definitive agreement for a private placement of 750,000
               ordinary shares at a price per share of $ 1 for the aggregate
               purchase price of $ 750.

          b.   On February 4, 2008 the company consummated the sale of its
               ownership interest in Cvidya to a third party, in consideration
               of approximately $ 603. This consideration reflects a capital
               gain of $ 382.

                                      F-42
<PAGE>


                                   JUSAN, S.A.

                              FINANCIAL STATEMENTS

                        AS OF DECEMBER 31, 2006 AND 2005

                                      INDEX

                                                                      PAGE
                                                                  -----------

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                   F-1

BALANCE SHEETS                                                            F-2

STATEMENTS OF INCOME                                                      F-3

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY                             F-4

STATEMENTS OF CASH FLOWS                                                  F-5

NOTES TO FINANCIAL STATEMENTS                                        F-6-F-17

                                       F-0
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of JUSAN, S.A.

1.   We have audited the accompanying balance sheets of JUSAN, S.A. ("the
     Company") as of December 31, 2006 and the related statements of income,
     shareholders' equity and cash flows for each of the two years in the
     period ended December 31, 2006. 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.

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. The
     Company is not required to have, nor were we engaged to perform, an audit
     of its 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, as well as evaluating the overall financial
     statement presentation. We believe that our audits 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, 2006 and the results of its operations and its cash flows for
     each of the two years in the period ended December 31, 2006 in conformity
     with accounting principles generally accepted in the United States of
     America.

BDO AUDIBERIA AUDITORES, S.L.

/s/ BDO Audiberia
-----------------

Madrid, Spain, January, 19, 2007

                                       F-1
<PAGE>


                                   JUSAN, S.A.
                     BALANCE SHEETS AS OF DECEMBER 31, 2006
                               EUROS IN THOUSANDS
<TABLE>
<CAPTION>

                                                                                  DECEMBER 31,
                                                                                      2006
                                                                                     -----

<S>                                                                                  <C>
 ASSETS

 CURRENT ASSETS:
 Cash and cash equivalents                                                             236
 Short-term bank deposits                                                              867
 Trade receivables (net of allowance for doubtful accounts of - thousand euros
 as of December 31, 2006 and 57 thousand euros as of December 31, 2005 and net
 of provision for returns of 4 thousand euros as of December 31, 2006 and 4
 thousand euros as of December 31, 2005) (Note 5)                                    1,098
 Other accounts receivable and prepaid expenses (Note 3)                               138
 Inventories (Note 4)                                                                  503
                                                                                     -----

 Total current assets                                                                2,842
                                                                                     -----

 PROPERTY AND EQUIPMENT, NET (Note 6)                                                   67
                                                                                     -----

 Total assets                                                                        2,909
                                                                                     =====

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term bank debt (Note 7)                                                           17
Trade payables                                                                         324
Accrued expenses and other liabilities (Note 8)                                        176
Deferred revenues                                                                       10
                                                                                     -----

Total current liabilities                                                              527
                                                                                     -----

COMMITMENTS (Note 9)

SHAREHOLDERS' EQUITY (Note 12):
Share capital -
15,052 Ordinary shares of (euro) 0.0042 par value
- Authorized, issued and outstanding as of
December 31, 2006 and 2005                                                              63
Retained earnings                                                                    2,319
                                                                                     -----

Total shareholders' equity                                                           2,382
                                                                                     -----

Total liabilities and shareholders' equity                                           2,909
                                                                                     =====
</TABLE>

     The accompanying notes are an integral part of the financial statements

                                       F-2
<PAGE>

                                   JUSAN, S.A.

              STATEMENTS OF INCOME AS OF DECEMBER 31, 2006 AND 2005
              EUROS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>

                                                                        YEAR ENDED DECEMBER 31,
                                                                          2006          2005
                                                                         ------        ------
<S>                                                                      <C>           <C>
Revenues (Note 13):
Product sales                                                             3,833         3,935
Services                                                                    520           632
                                                                         ------        ------

Total revenues                                                            4,353         4,567
                                                                         ------        ------

Cost of revenues:
Product sales                                                             1,812         2,098
Services                                                                    423           435
                                                                         ------        ------

Total cost of revenues                                                    2,235         2,533
                                                                         ------        ------

Gross profit                                                              2,118         2,034
                                                                         ------        ------

Operating expenses:
Research and development                                                    456           449
Selling and marketing                                                       746           849
General and administrative                                                  667           831
                                                                         ------        ------

Total operating expenses                                                  1,869         2,129
                                                                         ------        ------

Operating income / (loss)                                                   249           (95)
Financial income, net (Note 14)                                               6            20
                                                                         ------        ------

Income before taxes on income                                               255           (75)
Income taxes (Note 10)                                                       59           (55)
                                                                         ------        ------

Net income / (loss)                                                         196           (20)
                                                                         ======        ======

Basic and diluted net earnings per share                                  13.02         (1.33)

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

     The accompanying notes are an integral part of the financial statements

                                       F-3
<PAGE>


                                   JUSAN, S.A.

                  STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                        AS OF DECEMBER 31, 2006 AND 2005
                               EUROS IN THOUSANDS

                                                                TOTAL
                                                  RETAINED   SHAREHOLDERS'
                                   SHARE CAPITAL  EARNINGS      EQUITY
                                       -----        -----       -----

Balance as of December 31, 2004           63        3,083       3,146
                                       -----        -----       -----

Dividend paid                              -         (300)       (300)
Net income                                 -          (20)        (20)


Balance as of December 31, 2005           63        2,763       2,826
                                       -----        -----       -----

Dividend paid                              -         (640)       (640)
Net income                                 -          196         196


Balance as of December 31, 2006           63        2,319       2,382
                                       =====        =====       =====

     The accompanying notes are an integral part of the financial statements

                                       F-4
<PAGE>


                                   JUSAN, S.A.
            STATEMENTS OF CASH FLOWS AS OF DECEMBER 31, 2006 AND 2005
                               EUROS IN THOUSANDS

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                                           2006        2005
                                                                          ------      ------

<S>                                                                         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                                   196         (20)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation                                                                  29          38
Deferred taxes                                                                 2         (30)
Decrease (increase) in trade receivables                                     600         367
Decrease (increase) in other accounts receivable and prepaid expenses         22          12
Decrease (increase) in inventories                                           168         241
Increase (decrease) in trade payables                                       (158)       (177)
Increase (decrease) in accrued expenses and other liabilities               (165)         14
Increase (decrease) in deferred revenues                                     (39)        (11)
                                                                          ------      ------
Net cash (provided by) operating activities                                  655         434
                                                                          ------      ------

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in short-term bank deposits                                      (467)         50
Purchase of property and equipment                                           (58)        (26)
                                                                          ------      ------
Net cash provided by (used in) investing activities                         (525)         24
                                                                          ------      ------

CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend paid                                                               (640)       (300)
Short-term bank debt                                                           9         (10)
                                                                          ------      ------
Net cash used in financing activities                                       (631)       (310)
                                                                          ------      ------

Increase (decrease) in cash and cash equivalents                            (501)        148
Cash and cash equivalents at the beginning of the year                       737         589
                                                                          ------      ------
Cash and cash equivalents at the end of the year                             236         737
                                                                          ======      ======

NON-CASH FINANCING INFORMATION:
Accrued dividend                                                               -           -

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS ACTIVITIES:
Cash paid during the year for:
Interest                                                                       6          20
                                                                          ------      ------

Income taxes                                                                   -           -
                                                                          ------      ------
</TABLE>

     The accompanying notes are an integral part of the financial statements

                                       F-5
<PAGE>


                                   JUSAN, S.A.

         NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 2006 AND 2005

NOTE 1: ORGANIZATION AND OPERATIONS

a.   JUSAN, S.A. ("the Company") was incorporated in Spain on June 19, 1959. The
     Company is engaged on 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 five major customers (see also Note 13a).

c.   In accordance with Spanish Companies' Law the directors present, for
     comparative purposes, each of the balance sheet and profit and loss
     account, the figures for the previous financial years, in addition to those
     for the financial year 2006.

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.

                                       F-6
<PAGE>


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 3%. The short-term deposits are presented at their cost, including
accrued interest.

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-7
<PAGE>


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 an amount whose realization is considered more likely
than not.

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 thousand (euro) 3 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.

                                       F-8
<PAGE>


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

j.   Warranty costs:

The Company provides free warranty for up to one year. A provision in the amount
of thousand (euro) 10 (thousand (euro) 20 in 2005) 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 thousand (euro) 867.

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 13b). 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 (when 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-9
<PAGE>


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

                                                         DECEMBER 31,
                                                            2006
                                                           -----

                  Tax authorities                             99
                  Deferred taxes                              17
                  Employee advances                            6
                  Deposits                                    16
                                                           -----

                                                             138
                                                           -----

NOTE 4: INVENTORIES

                                                         DECEMBER 31,
                                                            2006
                                                           -----

                  Materials                                  479
                  Work in progress                            31
                  Provision for obsolescence                  (7)
                                                           -----

                                                             503
                                                           -----

                                      F-10
<PAGE>


NOTE 5: TRADE RECEIVABLES

                                                    DECEMBER 31,
                                                       2006
                                                      -----

Trade receivables                                       840
Bills receivable                                        258
Allowance for doubtful accounts                           -
                                                      -----

                                                      1,098
                                                      -----

NOTE 6: PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                       DECEMBER 31,
                                         2005     ADDITIONS   DISPOSALS     2006
                                        -----       -----       -----       -----
<S>                                      <C>          <C>         <C>        <C>
COST:
Computers and peripheral equipment        122          21           -         143
Office furniture and equipment            307          14          (3)        318
Motor vehicles                             98          23         (21)        100
Leasehold improvements                      -           -
                                        -----       -----       -----       -----

                                          527          58         (24)        561
                                        -----       -----       -----       -----
ACCUMULATED DEPRECIATION:
Computers and peripheral equipment       (113)        (10)          -        (123)
Office furniture and equipment           (278)         (8)          3        (283)
Motor vehicles                            (98)        (11)         21         (88)
Leasehold improvements                      -           -           -           -
                                        -----       -----       -----       -----

                                         (489)        (29)         24        (494)
                                        -----       -----       -----       -----

DEPRECIATED COST                           38          29           -          67
                                        =====       =====       =====       =====
</TABLE>

Depreciation expenses for the years ended December 31, 2006 and 2005 were
thousand (euro) 29 and 38, respectively.

                                      F-11
<PAGE>


NOTE 7: SHORT-TERM BANK DEBT

The Company has a short-term bank debt in the amount of thousand (euro) 17,
bearing interest of 5%.

NOTE 8: ACCRUED EXPENSES AND OTHER LIABILITIES

                                  DECEMBER 31,
                                     2006
                                    -----

Employees and payroll accruals         52
Income tax payable                     59
Deferred tax                            -
Tax authorities                       135
Current Accounts                      (80)
Warranty costs                         10
                                    -----

                                      176
                                    =====

NOTE 9: 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, are as follows:

                     2007                          8
                     2008                          8
                     2009                          5
                                               -----

                                                  21
                                               =====

Rent expenses for years ended December 31, 2006 and 2005, were approximately
thousand (euro) 172 and 157, respectively. Rent expenses will be reviewed every
year with the variation of the Consumer Price Index.

                                      F-12
<PAGE>


NOTE 10: 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:

                                                       YEAR ENDED DECEMBER 31,
                                                         2006          2005
                                                         -----        -----

Income before taxes as reported in the statements
of operations                                              255          (75)
Non-deductible bad debt allowance and others 2004            -          (82)
Non-deductible bad debt allowance 2005                     (20)          20
Tax depreciation                                            37          (37)
Increase (decrease) in the taxable base - Forward
sales                                                       33           29
Increase (decrease)  in the taxable base -
Unrealized  severance allowance                            (75)          75
                                                         -----        -----
Taxable income                                             230          (70)
                                                         -----        -----

Tax rates                                                   35%          35%
                                                         -----        -----

Tax expense (benefit)                                       80          (25)
Decrease in taxes resulting from:
Tax deduction for development                              (21)           -
Deferred tax liability (asset)                               -          (30)
                                                         -----        -----

TAXES ON INCOME, TAX EXPENSE (BENEFIT), AS REPORTED
IN THE STATEMENTS OF OPERATIONS                             59          (55)
                                                         =====        =====

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 charge. All
the income before income taxes is domestic.

                                      F-13
<PAGE>


NOTE 11: RELATED PARTIES TRANSACTIONS

The balances with and the revenues derived from related parties (related parties
are shareholders, directors and family of both) were as follows:

a.   Payments to related parties:

                      YEAR ENDED DECEMBER 31,
                       2006          2005
                      -----         -----

Wages                   332           299
                      -----         -----

In 2006 the payments of wages to related parties are based on the payments to
the directors (thousand (euro) 290), the social security paid to the directors
(thousand (euro) 18) and 20% from the leases (thousand (euro) 24).

b.   Transactions with related parties were as follows:

                                                YEAR ENDED DECEMBER 31,
                                                  2006          2005
                                                 -----          -----

Sales to related parties                            29             39
                                                 -----          -----

AMOUNTS CHARGED BY RELATED PARTIES:
Cost of revenues                                    41             18
                                                 -----          -----

                                      F-14
<PAGE>


c.   Amounts receivable from and payables to related parties:

                                                              DECEMBER 31,
                                                                 2006
                                                                 ----

RECEIVABLES:
Mer Telemagement Solutions                                          5
MTS Asia                                                            -
MTS IntegraTRAK                                                     1
Jaraga BV.                                                        100

PAYABLES:
Mer Telemagement Solutions                                          -

NOTE 12: 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, 2006.

The shareholders at December 31, 2006 are:

                                                       %
                                                      ---

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

                                      F-15
<PAGE>


d.   Distribution of dividends.

The distribution of dividends amounting thousand (euro) 640 as a result of
reserves distribution, has been paid to the shareholders in direct proportion of
their shares.

       Jaraga, B.V.                                   320
       Jose Lasry Nahon                               160
       Mauricio Toledano Marques                      160

NOTE 13:- SEGMENTS, CUSTOMERS AND GEOGRAPHIC INFORMATION

a.   Major customers as a percentage of total revenues:

                              YEAR ENDED DECEMBER 31,
                                 2006       2005
                                 ----       ----
                                        %

Adictis                           10%       13%
Liberty Voz, S.L.                  6%        -
Cableuropa, S.A.                   6%        8%
Siemens, S.A.                      -         -
Telefonica de Espana               5%        5%
Eurotelefonia del Sur, S.L.        4%        -
Siemens Chile                      -         2%
Accentic                           -         2%

                                      F-16
<PAGE>


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

                       YEAR ENDED DECEMBER 31,
                          2006        2005
                         -----       -----

Spain                    2,586       2,275
European Community       1,280       1,437
Other                      487         855
                         -----       -----

                         4,353       4,567
                         =====       =====

NOTE 14: SELECTED STATEMENTS OF OPERATIONS DATA

Financial income, net

                          YEAR ENDED DECEMBER 31,
                              2006     2005
                             -----    -----

Financial expenses:

Interest expenses                6        3
Other expenses                  27        6
                             -----    -----
                                33        9
                             -----    -----

Financial income:

Interest income                 39       29
                             -----    -----

FINANCIAL INCOME, NET            6       20
                             =====    =====

                                      F-17



<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 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/ Alon Mualem
                                            -------------------
                                            Alon Mualem
                                            Chief Financial Officer


Dated: April 8, 2008


                                       76