---

---

SECURITIES AND EXCHANGE
COMMISSION  Washington D.C. 20549  FORM
20-F


|o | REGISTRATION
 STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
 1934
|- | ------------------------------------------------------------------------------------------------
|  |                                                                                                 
|  | OR                                                                                              
|x | ANNUAL
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934           
|  | For the fiscal year ended December
 31, 2008                                                    
|  |                                                                                                 
|  | OR                                                                                              
|o | TRANSITION
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934       
|  | For
 the transition period from __________ to __________                                        
|  |                                                                                                 
|o | 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)

14 Hatidhar Street, Raanana 43665, Israel
(Address of principal executive offices)

Alon
Mualem, +972-9-7777-555 (phone), +972-9-7777-566 (fax)14
Hatidhar Street, Raanana 43665, Israel

(Name, Telephone, E-mail and/or
Facsimile number and Address of Company Contact Person


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 |  | 8,917,950
|(as of December 31, 2008)                     |  |          

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

Yes o     No
x

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

Yes o     No
x

---

---



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

Yes x     No
o

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

|                           |                     |                        
|-------------------------- | ------------------- | -----------------------
|Large accelerated filer
 o | Accelerated filer o | Non-accelerated filer x

Indicate by check mark which basis of accounting the
registrant has used to prepare the financial statements included in this
filing:

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

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

Item 17 o     Item
18 o

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

Yes o     No
x

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.

---

---



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® 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 trademark in connection with the products we acquired from
Teleknowledge Group Ltd. in December 2004. In addition, in connection with the
assets we acquired from TelSoft Solutions, Inc. in July 2006, we acquired the
rights in the CALLTRAC® registered trademark and the common law trademarks and
service marks TELSOFT SOLUTIONS, TELSOFT, MEGACALL, CALLTRAC LITE, MEGAPOLL,
MEGABILL, MEGABILL-BACK and MEGASYNC. We also acquired the rights in the
ANCHORPOINT®, TMXPRESS® and MAP-TO-WIN® registered trademarks in connection
with the assets we acquired from AnchorPoint, Inc. in December 2008. 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, or the Exchange Act,
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

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TABLE
OF CONTENTS

|         |                                                                 |     
|-------- | --------------------------------------------------------------- | ----
|         |                                                                 | Page
|         |                                                                 |     
|         |                                                                 |     
|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                                | 23  
|         | D.     Property,
 Plants and Equipment                          | 23  
|ITEM 4A. | UNRESOLVED STAFF COMMENTS                                       | 23  
|ITEM 5.  | OPERATING AND FINANCIAL REVIEW AND
 PROSPECTS                   | 23  
|         | A.     Operating
 Results                                       | 23  
|         | B.     Liquidity
 and Capital Resources                         | 35  
|         | C.     Research
 and Development                                | 36  
|         | D.     Trend
 Information                                       | 37  
|         | E.     Off-Balance
 Sheet Arrangements                          | 37  
|         | F.     Tabular
 Disclosure of Contractual Obligations           | 37  
|ITEM 6.  | DIRECTORS, SENIOR MANAGEMENT AND
 EMPLOYEES                     | 38  
|         | A.     Directors
 and Senior Management                         | 38  
|         | B.     Compensation                                             | 40  
|         | C.     Board
 Practices                                         | 41  
|         | D.     Employees                                                | 47  
|         | E.     Share
 Ownership                                         | 48  
|ITEM 7.  | MAJOR SHAREHOLDERS AND RELATED PARTY
 TRANSACTIONS              | 52  
|         | A.     Major
 Shareholders                                      | 52  
|         | B.     Related
 Party Transactions                              | 53  
|         | C.     Interests
 of Experts and Counsel                        | 54  
|ITEM 8.  | FINANCIAL INFORMATION                                           | 54  
|         | A.     Consolidated
 Statements and Other Financial Information | 54  
|         | B.     Significant
 Changes                                     | 56  
|ITEM 9.  | THE OFFER AND LISTING                                           | 56  
|         | A.     Offer
 and Listing Details                               | 56  
|         | B.     Plan
 of Distribution                                    | 57  
|         | C.     Markets                                                  | 57  
|         | D.     Selling
 Shareholders                                    | 57  
|         | E.     Dilution                                                 | 57  
|         | F.     Expense
 of the Issue                                    | 57  
|ITEM 10. | ADDITIONAL INFORMATION                                          | 57  
|         | A.     Share Capital                                            | 57  
|         | B.     Memorandum
 and Articles of Association                  | 57  
|         | C.     Material
 Contracts                                      | 61  
|         | D.     Exchange
 Controls                                       | 62  
|         | E.     Taxation                                                 | 62  
|         | F.     Dividend
 and Paying Agents                              | 73  
|         | G.     Statement
 by Experts                                    | 73  
|         | H.     Documents
 on Display                                    | 73  
|         | I.       Subsidiary
 Information                                | 74  

ii

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|                    |                                                                               |   
|------------------- | ----------------------------------------------------------------------------- | --
|ITEM 11.            | QUANTITATIVE AND QUALITATIVE
 DISCLOSURES ABOUT MARKET RISKS                  | 74
|ITEM 12.            | DESCRIPTION OF SECURITIES OTHER THAN
 EQUITY SECURITIES                       | 74
|                    |                                                                               |   
|PART II             | 74                                                                           
|                    |                                                                               |   
|ITEM 13.            | DEFAULTS, DIVIDEND ARREARAGES AND
 DELINQUENCIES                              | 74
|ITEM 14.            | MATERIAL MODIFICATIONS TO THE RIGHTS
 OF SECURITY HOLDERS AND USE OF PROCEEDS | 74
|ITEM 15.            | CONTROLS AND PROCEDURES                                                       | 74
|ITEM 16.            | [RESERVED]                                                                    | 75
|ITEM 16A.           | AUDIT COMMITTEE FINANCIAL EXPERT                                              | 75
|ITEM 16B.           | CODE OF ETHICS                                                                | 76
|ITEM 16C.           | PRINCIPAL ACCOUNTANT FEES AND
 SERVICES                                       | 76
|ITEM 16D.           | EXEMPTIONS FROM THE LISTING
 STANDARDS FOR AUDIT COMMITTEES                   | 76
|ITEM 16E.           | PURCHASES OF EQUITY SECURITIES BY
 THE ISSUER AND AFFILIATED PURCHASERS       | 76
|ITEM 16F.           | CHANGES IN REGISTRANTS CERTIFYING
 ACCOUNTANT                                | 77
|ITEM 16G.           | CORPORATE GOVERNANCE                                                          | 77
|                    |                                                                               |   
|PART III            | 77                                                                           
|                    |                                                                               |   
|ITEM 17.            | FINANCIAL STATEMENTS                                                          | 77
|ITEM 18.            | FINANCIAL STATEMENTS                                                          | 78
|ITEM 19.            | EXHIBITS                                                                      | 78
|                    |                                                                               |   
|S I G N A T U R E S | 81                                                                           

iii

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---



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, 2008 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, 2008 and as of December 31, 2007 and 2008
appear elsewhere in this Annual Report. Our selected consolidated financial
data as of December 31, 2004, 2005 and 2006 and for the years ended December
31, 2004 and 2005 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:

|                                                                                         |  |                                                 |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|---------------------------------------------------------------------------------------- |  | ----------------------------------------------- | --------- | ---- | - | --------- | - | ---- | --------- | ---- | - | --------- | - | - | --------- | -
|                                                                                         |  | Year Ended December 31,                         |          
|                                                                                         |  |                                                 |          
|                                                                                         |  | 2004                                            |           | 2005 |   | 2006      |   | 2007 |           | 2008 |  
|                                                                                         |  |                                                 |           |      |   |           |   |      |           |      |  
|                                                                                         |  | (in thousands, except share and per share data) |          
|                                                                                         |  |                                                 |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Revenues                                                                                 |  | $                                               | 9,413     |      | $ | 11,563    |   | $    | 10,484    |      | $ | 9,338     |   | $ | 8,751     |  
|Cost of revenues                                                                         |  |                                                 | 2,814     |      |   | 3,802     |   |      | 3,355     |      |   | 2,736     |   |   | 2,321     |  
|                                                                                         |  |                                                 |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Gross profit                                                                             |  |                                                 | 6,599     |      |   | 7,761     |   |      | 7,129     |      |   | 6,602     |   |   | 6,430     |  
|Selling and
 marketing                                                                   |  |                                                 | 6,300     |      |   | 4,797     |   |      | 3,078     |      |   | 3,481     |   |   | 1,927     |  
|Research and
 development, net                                                           |  |                                                 | 2,362     |      |   | 4,395     |   |      | 3,633     |      |   | 2,640     |   |   | 2,688     |  
|General and
 administrative                                                              |  |                                                 | 2,101     |      |   | 2,830     |   |      | 2,651     |      |   | 3,695     |   |   | 3,065     |  
|Impairment of
 goodwill and other intangible assets                                      |  |                                                 |          |      |   |          |   |      |          |      |   | 2,312     |   |   |          |  
|                                                                                         |  |                                                 |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Operating loss                                                                           |  |                                                 | (4,164    | )    |   | (4,261    | ) |      | (2,233    | )    |   | (5,526    | ) |   | (1,250    | )
|Financial
 (expenses) income, net                                                        |  |                                                 | 78        |      |   | 53        |   |      | (54       | )    |   | (105      | ) |   |          |  
|Capital gain
 (loss) on sale of long-term investment                                     |  |                                                 |          |      |   |          |   |      |          |      |   | (63       | ) |   | 398       |  
|                                                                                         |  |                                                 |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Loss before
 taxes on income                                                             |  |                                                 | (4,086    | )    |   | (4,208    | ) |      | (2,287    | )    |   | (5,694    | ) |   | (852      | )
|Taxes on income
 (benefit), net                                                          |  |                                                 | 266       |      |   | 10        |   |      | 118       |      |   | (68       | ) |   | 108       |  
|                                                                                         |  |                                                 |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Net loss before
 equity in earnings (losses) of affiliate                                |  |                                                 | (4,352    | )    |   | (4,218    | ) |      | (2,405    | )    |   | (5,626    | ) |   | (960      | )
|Equity in
 earnings (losses) of affiliate                                                |  |                                                 | 225       |      |   | 2         |   |      | 159       |      |   | (197      | ) |   |          |  
|                                                                                         |  |                                                 |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Net loss                                                                                 |  | $                                               | (4,127    | )    | $ | (4,216    | ) | $    | (2,246    | )    | $ | (5,823    | ) | $ | (960      | )
|                                                                                         |  |                                                 |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Basic and
 diluted net loss per share                                                    |  | $                                               | (0.89     | )    | $ | (0.83     | ) | $    | (0.39     | )    | $ | (1.01     | ) | $ | (0.15     | )
|                                                                                         |  |                                                 |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Weighted average
 number of ordinary shares used in computing basic net loss per share   |  |                                                 | 4,634,413 |      |   | 5,092,117 |   |      | 5,762,311 |      |   | 5,773,845 |   |   | 6,529,837 |  
|                                                                                         |  |                                                 |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Weighted average
 number of ordinary shares used in computing diluted net loss per share |  |                                                 | 4,634,413 |      |   | 5,092,117 |   |      | 5,762,311 |      |   | 5,773,845 |   |   | 6,529,837 |  
|                                                                                         |  |                                                 |           |      |   |           |   |      |           |      |   |           |   |   |           |  

4

---

---



Balance
Sheet Data:

|                             |  |                    |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|---------------------------- |  | ------------------ | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ | - | - | ------ | -
|                             |  | As of December 31, |       
|                             |  |                    |       
|                             |  | 2004               |        | 2005 |   | 2006   |  | 2007 |        | 2008 |  
|                             |  |                    |        |      |   |        |  |      |        |      |  
|                             |  | (in thousands)     |       
|                             |  |                    |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|Working capital (deficiency) |  | $                  | 2,773  |      | $ | 2,065  |  | $    | 186    |      | $ | (2,014 | ) | $ | (1,727 | )
|Total assets                 |  |                    | 15,323 |      |   | 13,816 |  |      | 14,054 |      |   | 8,478  |   |   | 10,622 |  
|Long-term loans              |  |                    |       |      |   |       |  |      | 583    |      |   |       |   |   |       |  
|Shareholders equity         |  |                    | 10,657 |      |   | 9,174  |  |      | 7,542  |      |   | 1,569  |   |   | 3,799  |  

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

Continuing unfavorable
national and global economic conditions could have a material adverse effect on
our business, operating results and financial condition.

The
recent crisis in the financial and credit markets in the United States, Europe
and Asia has led to a global economic slowdown, with the economies of the
United States and Europe showing significant signs of weakness. If the
economies in any part of the world continue to be weak or weaken further, the
demand for our products and technology may decrease as a result of continued
constraints on capital spending by our customers. In addition, this could
result in longer sales cycles and increased price competition for our products.
Any of these events would likely harm our business, operating results and
financial condition. If global economic and market conditions, or economic
conditions in the United States, Europe or Asia or other key markets, remain
uncertain, persist, or deteriorate further, our business, operating results and
financial condition may be materially adversely affected.

5

---

---



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:

| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| | · | demand for our products;                                                                                    
| |   |                                                                                                             
| | · | changes in our pricing policies or those of our
 competitors;                                               
| |   |                                                                                                             
| | · | new product announcements by us and our competitors;                                                        
| |   |                                                                                                             
| | · | the number, timing and significance of product
 enhancements;                                               
| |   |                                                                                                             
| | · | product life cycles;                                                                                        
| |   |                                                                                                             
| | · | our ability to develop, introduce and market new and
 enhanced products on a timely basis;                  
| |   |                                                                                                             
| | · | changes in the level of our operating expenses;                                                             
| |   |                                                                                                             
| | · | budgeting cycles of our customers;                                                                          
| |   |                                                                                                             
| | · | customer order deferrals in anticipation of
 enhancements or new products that we or our competitors offer; 
| |   |                                                                                                             
| | · | changes in our strategy;                                                                                    
| |   |                                                                                                             
| | · | seasonal trends and general domestic and
 international economic and political conditions, among others; and
| |   |                                                                                                             
| | · | 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 the last three fiscal years and we may
not be able to achieve or sustain revenue growth in the future.

6

---

---



On December30, 2008,
we acquired certain assets and liabilities of AnchorPoint, Inc. and we may not
be able to successfully exploit the acquired products.

On
December 30, 2008, we completed
the acquisition of certain assets and liabilities of AnchorPoint, Inc., or AnchorPoint, a Massachusetts corporation, a provider of TEM solutions. We
believe that the acquisition of AnchorPoints expense management solutions will
enable us to expand our TEM products offerings, will reduce our customers
telecom costs and improve their information technology and telecom activities,
and will assist us to expand our business in the United States. We may not be
able to successfully integrate the operations of AnchorPoint into our business
or successfully exploit the solutions that we acquired from it.

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 in accordance with U.S. GAAP. If we are unsuccessful in such
claim 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 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.

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. In December 2008, we acquired certain assets
and liabilities of AnchorPoint, a Massachusetts-based provider of TEM solutions. Despite
the foregoing, our revenues from our TEM solutions declined each year from 1999
until 2003 and again from 2006 until 2008 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.

7

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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 2006, 2007 and 2008, sales
attributable to our largest OEM customer, Siemens Gmbh, represented
approximately 29.0%, 26.4%
and 24.4% of our total revenues, respectively.

As
Siemens Gmbh 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 a partnership agreement with NEC Unified Solutions, 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.

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.

8

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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 51.1%, 52.7% and
53.7% of our total revenues for the years ended December 31, 2006, 2007 and
2008, 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:

| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| | · | the impact of recessionary environments in multiple
 foreign markets;                           
| |   |                                                                                                 
| | · | costs of localizing products for foreign markets;                                               
| |   |                                                                                                 
| | · | longer receivables collection periods and greater
 difficulty in accounts receivable collection;
| |   |                                                                                                 
| | · | unexpected changes in regulatory requirements;                                                  
| |   |                                                                                                 
| | · | difficulties and costs of staffing and managing
 foreign operations;                            
| |   |                                                                                                 
| | · | reduced protection for intellectual property rights
 in some countries;                         
| |   |                                                                                                 
| | · | potentially adverse tax consequences; and                                                       
| |   |                                                                                                 
| | · | political and economic instability.                                                             

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.

9

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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:

| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | result in costly litigation;                                                                                                                                             
| |   |                                                                                                                                                                          
| | · | divert managements attention and resources;                                                                                                                             
| |   |                                                                                                                                                                          
| | · | cause product shipment delays; or                                                                                                                                        
| |   |                                                                                                                                                                          
| | · | 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
adversely affect our business, operating results and financial condition.

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.

10

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Five of our
shareholders are in a position to control matters requiring a shareholder vote.

The
Info Group, Inc. (formerly AnchorPoint, Inc.) currently controls the vote of
24.4% of our outstanding shares, Mr. Chaim Mer, the Chairman of our Board of
Directors, and his wife, Mrs. Dora Mer, our Israeli legal counsel, currently
control the vote of approximately 22.7% of our outstanding ordinary shares, Mr.
Lior Salansky, our President, is the owner of 12.7% of our outstanding ordinary
shares, and Mr. Isaac Ben-Bassat, one of our directors, is the owner of 8.7% of
our outstanding ordinary shares. As a result, such entity and persons control
and will continue to control the election of our entire Board of Directors
other than our two 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 for up to three months for end-users and up to 12 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 may fail to
maintain effective internal control over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act of 2002, which could have an adverse effect on our financial results and the
market price of our ordinary shares.

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(a) of the
Sarbanes-Oxley Act of 2002 governing internal control and procedures for
financial reporting, which started in connection with our 2007 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 control over financial reporting. Failure to maintain effective
internal control 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.

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.

11

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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s 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. We complied with
such initial conditions, following which the Panel imposed 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.

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 2008. 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:

| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| | · | quarterly variations in our operating results;                                                              
| |   |                                                                                                             
| | · | operating results that vary from the expectations of
 securities analysts and investors;                    
| |   |                                                                                                             
| | · | changes in expectations as to our future financial
 performance, including financial estimates by investors;

12

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| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| | · | announcements of technological innovations or new
 products by us or our competitors;                                                          
| |   |                                                                                                                                                
| | · | announcements by us or our competitors of
 significant contracts, acquisitions, strategic partnerships, joint ventures
 or capital commitments;
| |   |                                                                                                                                                
| | · | announcements by third parties of significant claims
 or proceedings against us;                                                               
| |   |                                                                                                                                                
| | · | changes in the status of our intellectual property
 rights;                                                                                    
| |   |                                                                                                                                                
| | · | additions or departures of key personnel;                                                                                                      
| |   |                                                                                                                                                
| | · | future sales of our ordinary shares; and                                                                                                       
| |   |                                                                                                                                                
| | · | 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.

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

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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 continued
with varying levels of severity through 2008. The future effect of this
deterioration and violence on the Israeli economy and our operations is
unclear. Since January 2006, there has been 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. Recently, there was an escalation in violence
among Israel, Hamas, the Palestinian Authority and other groups. Hamas
launched hundreds of missiles from the Gaza Strip against Israeli population
centers, which led to an armed conflict between Israel and Hamas during
December 2008 and January 2009. 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 and 2008, the NIS appreciated
against the U.S. dollar, which resulted in a significant increase in the U.S.
dollar cost of our NIS expenses. 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.

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 each of the last four fiscal years 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

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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 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. We follow Israeli law and practice instead of NASDAQ rules
regarding the requirement to maintain a majority of independents directors, the
director nomination process and the requirement to obtain shareholder approval
for certain dilutive events.

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. We follow
Israeli law and practice instead of The NASDAQ Marketplace Rules regarding the requirement to
maintain a majority of independents directors, the director nomination
process and the requirement to 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 the
company, certain transactions other than a public offering involving issuances
of a 20% or more interest in the company and certain acquisitions of the stock
or assets of another company). As a foreign private issuer listed on the NASDAQ
Capital Market, we may also follow home country practice with regard to, among
other things, compensation of officers and quorum at shareholders meetings. A
foreign private issuer that elects to follow a home country practice instead of
NASDAQ requirements 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. In addition,
a foreign private issuer must disclose in its annual reports filed with the
Securities and Exchange Commission each such requirement that it does not
follow and describe the home country practice followed by the issuer instead of
any such requirement. Accordingly, our shareholders may not be afforded the
same protection as provided under NASDAQs corporate governance rules.

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|        |                           
|------- | --------------------------
|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 14 Hatidhar Street,
Ra ́anana 43665, Israel, and our telephone number is +972-9-7777-555. 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.

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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.

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, a 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. We did not receive any additional consideration in connection with
the sale of Jusan S. A. during 2008.

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. During 2008, we received
additional earn out proceeds of approximately $16,000 from the sale and as a
result, we recorded a capital gain of $16,000.

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 recorded a capital gain of approximately $382,000 as a result of the
transaction.

On
December 30, 2008, we completed the acquisition of certain assets and
liabilities of AnchorPoint, a Massachusetts-based provider of TEM solutions. We
believe that the acquisition of AnchorPoints TEM solutions will enable us to
expand our product offerings and will reduce our customers telecom costs and
improve their information technology and telecom activities. The aggregate
consideration paid for the acquisition was the issuance of 24.4% of our
outstanding shares on a post-transaction basis.

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

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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.

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.

TEM
is a market that has seen continuous evolution. The origins of TEM can be
traced back to the call accounting market, which addressed the need to audit
usage for telecom services. TEM has emerged as the business process conducted
by IT, telecom and finance departments to determine which corporate telecommunications
assets an enterprise should acquire, for provisioning communications assets and
to support such assets. At the heart of any TEM solution is an automated
software platform used by the business for managing a companys telecom
invoices and assets. This platform ties into relevant business applications and
software to facilitate the management and payment of carrier invoices. TEM
solutions can be delivered via licensed software, hosted or fully outsourced
managed service engagement.

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.

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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.

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.

AnchorPoint.

·     AnchorPoint TEM Solution. AnchorPoint
is a TEM software solution that enables enterprise management of voice, data,
and wireless assets and the related costs associated with them. AnchorPoint facilitates
a streamlined and automated Order-to-Pay lifecycle process for provisioning
communications services and communications assets, as well as for auditing,
approving and disputing invoices. AnchorPoint is offered as a perpetual
software license or via outsourced managed services. AnchorPoint includes a
single integrated database supported by the following application modules:
invoice management; asset management (voice, data, wireless and IT assets)
including service orders; usage management and call accounting; business
analytics (utilizing business objects), dashboards, alarms, and alerts;
Microsoft SQL Server Reporting Services, or SSRS, and over 200 standard
reports. AnchorPoint fully leverages the application database to save time and
increase accuracy through Enhanced 9-1-1, database update utilities, enterprise
interfaces and switch and vendor imports.

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AnchorPoint
addresses enterprise business requirements and includes a centralized database
and a series of integrated processes for managing inventory and loading,
processing and auditing telecom invoices. It provides contract management
information, extensive chargeback reporting to business units, cost centers and
individuals, and executive dashboards for telecom and financial management
personnel. AnchorPoint has the capability to provide detailed and summary
reporting options. With these services, customers have insight into the full
spectrum of their voice, data and wireless information. AnchorPoint offers a
series of fully integrated modules, including usage, asset and invoice
management and business analytics and reporting, enabling staff to be more
effective in their daily activities and decision-making. The integrated modular
design makes it easy to add functionalities as needed. All modules share the
same SQL database.

In
a managed services engagement some or all aspects of installation, management
and maintenance activities will be outsourced by the customer to us. The
functionality is accessed by the customer via the Internet using a browser. The
business management activities, such as invoice loading, auditing and dispute
management, may be outsourced or performed by the customer. Our managed
services for AnchorPoint handle the enterprises time-consuming, critical
processes involved in the managing the telecom lifecycle, allowing internal
enterprise resources to focus on areas that will provide the greatest positive
impact on its business models. For an organization that does not have strong
expertise in TEM, outsourcing may provide the best overall return on its
investment.

·     Map-to-WinSM. Customer
engagements with respect to AnchorPoint begin with Map-to-WinSM,
which is a strategic consulting approach for our AnchorPoint TEM solution.
Map-to-WinSM enables organizations to effectively align their
business goals with their people, processes and technology investments to
assure that their expense management initiatives will be successful. Our
proprietary Map-to-WinSM approach ensures that proven business
processes are used to define both the customers and our responsibilities
during setup and implementation. This enables our customers to maximize any
process improvement opportunities and ensures that nothing is overlooked during
this process.

·     Consulting Services. Our
consulting services for our AnchorPoint TEM solution are designed to assist
companies to develop a strategic telecom plan that is right for their needs and
to address their tactical requirements as they arise. Our consulting services
work closely with internal IT/telecom and finance teams to ensure a successful
TEM solution from start to finish. Our TEM consultants support every stage of
the TEM lifecycle, using best-practices-based analysis and processes to help
leverage the customers internal processes and technology. The end result is a
long-term, measurable TEM strategy. Our consulting services for AnchorPoint
include:

| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| | o | invoice and inventory audit and recovery;                                                 
| |   |                                                                                           
| | o | contract review and strategic sourcing;                                                   
| |   |                                                                                           
| | o | discovery and road mapping services;                                                      
| |   |                                                                                           
| | o | process diagnosis and solution design; and                                                
| |   |                                                                                           
| | o | wireless optimization and implementation of an IT
 governance, risk and compliance system.

Billing Solutions

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

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

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | 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.                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                
| | · | 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.

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 OEMs,
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 11 persons in sales and marketing and 52 persons in support as of
December 31, 2008, as compared to 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. Our managed services for call accounting is offered
in the United States where our New Jersey office acts as a service bureau. Our
managed services for our AnchorPoint TEM solution are offered by our offices in
Georgia and Massachusetts, utilizing a hosting facility operated by SunGard in
Massachusetts. Managed services for our AnchorPoint TEM solution include the
outsourcing of activities of database management, invoice loading (electronic
or paper), invoice auditing and payment services, service order and
procurement, chargeback and usage management, dispute management, report
generation and enterprise application interfaces. Managed services are
attractive to enterprises that have made the strategic decision to outsource
non-core, back-office functions and focus on a core set of competencies.

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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
Damovo, ECI/Tadiran, NEC, 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 29.0%, 26.4% and 24.4% of our total revenues for
the years ended December 31, 2006, 2007 and 2008, 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.

Competition

The
market for telemanagement and TEM products and billing solutions is fragmented
and intensely competitive. Competition in the industry is generally based on
product performance, depth of product line and services, 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, TEM 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. or its wholly owned subsidiary
MTS IntegraTRAK, Inc.

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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 and AnchorPoint in December 2008. 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 Asia Ltd. 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 14
Hatidhar Street, Ra ́anana, Israel, where we occupy approximately 9,192
square feet. The lease, which expires in February2011, has an annual rental
charge of approximately $187,000.

Our
U.S. subsidiary MTS IntegraTRAK Inc. occupies approximately 3,772 square feet of
space in New Jersey. The lease, which expires in January 2014, has an annual
rental charge of approximately $80,000. We have an office in Glendale,
California, where we occupy approximately 2,340 square feet of space, under a
month-to-month lease for a monthly rental fee of approximately $4,500. In
addition, we have an office in Framingham, Massachusetts, where we occupy
approximately 3,334 square feet of space under a lease that expires in December
2009, with a monthly rental fee of approximately $4,100. We also have an office
in Powder Springs, Georgia, where we occupy approximately 4,800 square feet of
space under a lease that expires in November2010, with a monthly rental fee of
approximately $5,700.

We also lease offices in Hong Kong and Sao Paulo, Brazil.
The lease agreements for the Hong Kong and Sao Paulo offices will expire in
October 2009 and August 2009, respectively and have a combined remaining
obligation of approximately $37,000. We do not currently intend to renew the
lease for these properties.

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

23

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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 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.

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 recorded a capital gain of $382,000 as a result of the transaction.

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

On
September 29, 2008, we completed a private placement of 219,490 of our ordinary
shares at a price of $1.139 per share, or aggregate proceeds of $250,000, with
our President, who is also a principal shareholder and a director, one of our
directors and our chief executive officer. The price per share is equal to the
average closing price of an ordinary share on the NASDAQ Capital Market during
the 30 trading days prior to the closing date.

On
December 30, 2008, we completed the acquisition of substantially all of the
assets and certain liabilities of AnchorPoint, Inc., a Massachusetts-based
provider of TEM solutions. The AnchorPoint TEM solution offers a complementary
solution to our products. The aggregate consideration paid for the acquisition
was 24.4% of our outstanding share capital on a post-transaction basis. We
believe that the acquisition of AnchorPoints expense management solutions will
enable us to expand our TEM products offerings, will reduce our customers
telecom costs and improve their information technology and telecom activities,
and will assist us in expanding our international business.

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).

24

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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:

| |   |                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | 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;
| |   |                                                                                                                                                                                                                                                                             
| | · | 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;                               
| |   |                                                                                                                                                                                                                                                                             
| | · | 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                                                                          
| |   |                                                                                                                                                                                                                                                                             
| | · | 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.                                                                                            

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, analysis 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.

25

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Many of our software
arrangements involve multiple elements. Such elements typically include any or
all of the following: software licenses, warranty, 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.

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.

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.

26

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Valuation of Investments. We account 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, or SFAS,
No. 115, Accounting for Certain Investments in Debt and Equity
Securities, or SFAS No. 115. Our 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. We classify all
of our securities as available for sale carried at fair market value. Fair
value is determined based on observable market value quotes. 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.

In accordance with our
policy and the FASB Staff Position, or FSP, No. FAS 115-1, or FSP No. 115-1, and SFAS No.
124-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, we recognize an impairment charge when a
decline in the fair value of our investments below the cost basis is judged to
be other than temporary. We consider various factors in determining whether to
recognize an impairment charge, including our intent and ability to hold the
investment for a period of time sufficient to allow for any anticipated
recovery in market value, the length of time and extent to which the fair value
has been less than the cost basis, the credit ratings of the securities and the
financial condition and near-term prospects of the issuers. During 2008 and
2007, no other than temporary net impairment on marketable securities was
recorded.

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.

Effective January 1,
2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an
interpretation of FASB statement No. 109,or FIN 48. FIN 48 clarifies the accounting for uncertainties in income
taxes by establishing minimum standards for the recognition and measurement of
tax positions taken or expected to be taken in a tax return. Under the
requirements of FIN 48, we must review all of our tax positions and make a
determination as to whether our position is more-likely-than-not to be
sustained upon examination by regulatory authorities. If a tax position meets
the more-likelythan-not standard, then the related tax benefit is measured
based on a cumulative probability analysis of the amount that is
more-likely-than-not to be realized upon ultimate settlement or disposition of
the underlying issue. Prior to the effective date of FIN 48, we applied the
guidelines of SFAS No. 5, Accounting for Contingencies to
Account for Uncertain Tax Positions. As of January 1, 2007, there was no
difference between the provisions of SFAS No. 5 and FIN 48, therefore no
adjustment was recorded to the accumulated deficit.

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.

Based on estimates of
future taxable profits and losses in certain foreign tax jurisdictions we
determined that a tax asset of $40,000 is expected to be utilized in the
foreseeable future.

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, 2008. If these
estimates prove inaccurate, a change in the valuation allowance could be
required in the future.

27

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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. As of December 31, 2008, we had recorded goodwill of approximately
$683,000 attributable to the acquisition of the TEM solutions of AnchorPoint on
December 30, 2008. 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. During 2006 and 2008, no impairment losses relating to goodwill
were identified. 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. During 2006 and 2008, no impairment losses relating
to intangible assets were identified.

28

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Results
of Operations

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

|                                                          |  |                         |       |      |  |       |   |  |       |  
|--------------------------------------------------------- |  | ----------------------- | ----- | ---- |  | ----- | - |  | ----- | -
|                                                          |  | Year Ended December 31, |      
|                                                          |  |                         |      
|                                                          |  | 2006                    |       | 2007 |  | 2008  |  
|                                                          |  |                         |       |      |  |       |  
|                                                          |  |                         |       |      |  |       |   |  |       |  
|Revenues:                                                 |  |                         |       |      |  |       |   |  |       |  
|Product sales                                             |  |                         | 71.7  | %    |  | 61.7  | % |  | 58.4  | %
|Services                                                  |  |                         | 28.3  |      |  | 38.3  |   |  | 41.6  |  
|Total revenues                                            |  |                         | 100.0 | %    |  | 100.0 | % |  | 100.0 | %
|                                                          |  |                         |       |      |  |       |   |  |       |  
|Cost of
 revenues:                                        |  |                         |       |      |  |       |   |  |       |  
|Product sales                                             |  |                         | 25.1  |      |  | 20.0  |   |  | 17.0  |  
|Services                                                  |  |                         | 6.9   |      |  | 9.3   |   |  | 9.5   |  
|                                                          |  |                         |       |      |  |       |   |  |       |  
|Total cost of
 revenues                                   |  |                         | 32.0  |      |  | 29.3  |   |  | 26.5  |  
|Gross profit                                              |  |                         | 68.0  |      |  | 70.7  |   |  | 73.5  |  
|Selling and
 marketing                                    |  |                         | 29.4  |      |  | 37.3  |   |  | 22.0  |  
|Research and
 development, net                            |  |                         | 34.7  |      |  | 28.3  |   |  | 30.7  |  
|General and
 administrative                               |  |                         | 25.3  |      |  | 39.6  |   |  | 35.0  |  
|Impairment of
 goodwill and other intangible assets       |  |                         |      |      |  | 24.8  |   |  |      |  
|                                                          |  |                         |       |      |  |       |   |  |       |  
|Operating loss                                            |  |                         | (21.4 | )    |  | (59.3 | ) |  | (14.2 | )
|Financial
 expenses (income), net                         |  |                         | (0.5  | )    |  | (1.1  | ) |  |      |  
|Capital gain
 (loss) on sale of long-term investment      |  |                         |      |      |  | (0.7  | ) |  | 4.5   |  
|                                                          |  |                         |       |      |  |       |   |  |       |  
|Loss before
 taxes on income                              |  |                         | (21.9 | )    |  | (61.1 | ) |  | (9.7  | )
|Taxes on income
 (benefit), net                           |  |                         | 1.1   |      |  | (0.7  | ) |  | 1.2   |  
|                                                          |  |                         |       |      |  |       |   |  |       |  
|Net loss before
 equity in earnings (losses) of affiliate |  |                         | (23.0 | )    |  | (60.4 | ) |  | (10.9 | )
|Equity in
 earnings (losses) of affiliate                 |  |                         | 1.5   |      |  | (2.1  | ) |  |      |  
|                                                          |  |                         |       |      |  |       |   |  |       |  
|Net loss                                                  |  |                         | (21.5 | )    |  | (62.5 | ) |  | (10.9 | )
|                                                          |  |                         |       |      |  |       |   |  |       |  

Years
Ended December 31, 2008 and 2007

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 6.3% to $8.8 million for the year ended
December 31, 2008 from $9.3 million for the year ended December 31, 2007.
Revenues from products and services from our wholly-owned U.S. subsidiary, MTS
IntegraTRAK, decreased by 4.4% to $4.7 million, or 53.7% of our total revenues,
for the year ended December 31, 2008 from $4.9 million, or 52.7% of our total
revenues, for the year ended December 31, 2007. The decrease in revenues from products and services in 2008 is primarily attributable to the
increasing competition in the U.S. market and a slowdown in the European call
accounting market. We anticipate a substantial increase in revenues in
2009 as a result of our acquisition of AnchorPoint in December 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 costs for up to three months for
end-users and up to 12 months for our OEM distributors. Cost of revenues from
products and services decreased by 15.2% to $2.3 million for the year ended
December 31, 2008 from $2.7 million for the year ended December 31, 2007. The
decrease in cost of revenues from products and services is primarily a result of our on-going efforts to monitor and
reduce expenses in order to achieve profitability.

29

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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 decreased by 44.6% to $2.0
million for the year ended December 31, 2008 from $3.5 million for the year
ended December 31, 2007. The decrease in selling and marketing expenses is
primarily attributable to our on-going efforts to monitor and reduce expenses
in order to achieve profitability.

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 increased by 1.8%
to $2.7 million for the year ended December 31, 2008 (net of a $5,000 grant
from the Office of the Chief Scientist) from $2.6 million for the year ended
December 31, 2007 (net of a grant of $469,000 from the Office of the Chief
Scientist). The increase in research and development, net expenses is primarily attributable to the
decrease in grants from the Office of Chief Scientist.

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 decreased by 17.0% to $3.1 million for the year ended December 31,
2008 from $3.7 million for the year ended December 31, 2007. The decrease in
general and administrative expenses is primarily attributable to the decrease
in the provision for bad debt expenses.

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, 2008.

Financial expenses (income), net.
Financial expenses (income), net consists primarily of gains on marketable
securities, interest income on bank deposits, bank interest and foreign
currency translation adjustments. Financial expenses (income), net for the year
ended December 31, 2008 were $0, compared to financial expenses of $105,000 for
the year ended December 31, 2007. The decrease in our financial expenses for
the year ended December 31, 2008 is attributable to the decrease in interest
paid to a bank in relation to a long-term loan, which was repaid in full in
July 2008.

Capital gain (loss) on sale of long-term investment. We recorded a capital gain on sale of
long-term investment of $382,000 for the year ended December 31, 2008 as a
result of the sale of our ownership interest in cVidya Networks Inc. in
February 2008, for total proceeds of approximately $603,000. 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. During 2008, we received additional earn out
proceeds related to the transaction in the amount of $16,000 and recorded a
capital gain of $ 16,000.

Taxes on Income (benefit), net. We
recorded tax on income of $108,000 for the year ended December 31, 2008,
compared to a tax benefit of $68,000 for the year ended December 31, 2007. The
tax benefit for the year ended December 31, 2007 is attributable to the recognition
of a deferred tax asset related to carryforward 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, 2008 is primarily attributable to
the write-off of a deferred tax asset recorded by our subsidiary in the United
States, offset in part by the utilization of a deferred tax asset recorded by
our subsidiary in Hong Kong.

Equity in Earnings (Losses) of Affiliate.
Prior to the sale of our 50% ownership interest in Jusan S. A., our former
Spanish affiliate, in November 2007, we recognized income and loss 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.

30

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Years
Ended December 31, 2007 and 2006

Revenues from Products and Services. 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.

Cost of Revenues from Products and Services. 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.

Selling and Marketing. 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 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 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 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 gain (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.

31

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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 carryforward 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.

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.

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:

|                         |  |                           |   |                                        |      |                                                             |  |      |  
|------------------------ |  | ------------------------- | - | -------------------------------------- | ---- | ----------------------------------------------------------- |  | ---- | -
|Year ended
 December 31, |  | Israeli inflation
 rate % |   | NIS devaluation (appreciation)
 rate % |      | Israeli inflation adjusted for devaluation (appreciation) %
|                         |  |                           |   |                                        |      |                                                            
|                         |  |                           |   |                                        |      |                                                             |  |      |  
|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 |  
|2008                     |  | 3.8                       |   |                                        | (1.1 | )                                                           |  | 4.9  |  

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 and 2008, the NIS appreciated against the U.S. dollar, which resulted in a
significant increase in the U.S. dollar cost of our NIS expenses.

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.

32

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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 2008 was 27%, which was reduced to 26% in 2009 and will be
further reduced to 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.

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.

33

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Recently
Issued Accounting Standards

In
December 2007, the FASB issued SFAS 160, Non-controlling
Interests in Consolidated Financial Statements, or SFAS 160. SFAS
160 amends ARB 51, Consolidated Financial Statements, to establish accounting
and reporting standards for the non-controlling interest in a subsidiary and
for the deconsolidation of a subsidiary. It also clarifies that a
non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS 160 also changes the way the consolidated income
statement is presented by requiring consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the
non-controlling interest. It also requires disclosure, on the face of the
consolidated statement of income, of the amounts of consolidated net income
attributable to the parent and to the non-controlling interest. SFAS 160
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated and requires expanded disclosures in the consolidated
financial statements that clearly identify and distinguish between the
interests of the parent owners and the interests of the non-controlling owners
of a subsidiary. SFAS 160 is effective for fiscal periods, and interim periods
within those fiscal years, beginning on or after December 15, 2008. The
adoption of SFAS 160 is not expected to have a material effect on accounting
for current subsidiaries.

In
December 2007, the FASB issued SFAS 141(R), Business
Combinations, or SFAS 141(R). This Statement replaces SFAS No. 141,
Business Combinations, and
requires an acquirer to recognize the assets acquired, the liabilities assumed,
including those arising from contractual contingencies, any contingent
consideration and any non-controlling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions specified in the statement. SFAS 141(R) also requires the
acquirer in a business combination achieved in stages (sometimes referred to as
a step acquisition) to recognize the identifiable assets and liabilities, as
well as the non-controlling interest in the acquiree, at the full amounts of
their fair values (or other amounts determined in accordance with SFAS 141(R)).
In addition, SFAS 141(R)s requirement to measure the non-controlling interest
in the acquiree at fair value will result in recognizing the goodwill
attributable to the non-controlling interest in addition to that attributable
to the acquirer. SFAS 141(R) applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. As such,
the adoption of SFAS 141(R) is not expected to have a material effect on
accounting for our current subsidiaries.

In
February 2008, the FASB issued FSP FAS No. 157-2, Effective Date of FASB Statement No. 157, or FSP 157-2, to
delay the effective date of FASB SFAS 157 for one year for certain nonfinancial
assets and nonfinancial liabilities, excluding those that are recognized or
disclosed in financial statements at fair value on a recurring basis (that is,
at least annually). For purposes of applying FSP No. 157-2, nonfinancial assets
and nonfinancial liabilities include all assets and liabilities other than
those meeting the definition of a financial asset or a financial liability in
FASB SFAS 157. FSP No. 157-2 defers the effective date of SFAS 157 to fiscal
years beginning after November 15, 2008, and interim periods within those
fiscal years for items within the scope of this FSP No. 157-2. We do not expect
the adoption of FSP No. 157-2 for the items within the scope of FSP No. 157-2
to have a material impact on our financial position, results of operations or
cash flows.

In
2008, the FASBs Emerging Issues Task Force issued EITF Issue No. 08-6,
Equity-Method Investment Accounting, or EITF 08-6, which concludes that the
cost basis of a new equity-method investment would be determined using a
cost-accumulation model, which would continue the practice of including
transaction costs in the cost of investment and would exclude the value of
contingent consideration. Equity-method investment should be subject to
other-than-temporary impairment analysis. It also requires that a gain or loss
be recognized on the portion of the investors ownership sold. EITF 08-6 will
be effective for the reporting period beginning after December 15, 2008. We do
not expect the adoption of EITF 08-6 to have a material impact on our
consolidated financial statements.

In
April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets, or
FSP 142-3. FSP 142-3 amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective
for fiscal years beginning after December 15, 2008. We do not expect the
adoption of FSP 142-3 to have a material impact on our consolidated financial
position, results of operations and cash flows.

34

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|   |                                
|-- | -------------------------------
|B. | Liquidity and Capital Resources

On
December 31, 2008, we had $2.0 million in cash and cash equivalents, $196,000
in restricted marketable securities and a working capital deficit of $1.7
million, compared to $1.4 million in cash and cash equivalents, $169,000 in
restricted marketable securities and a working capital deficit of $2.0 million
on December 31, 2007. The increase in working capital at December 31, 2008 was
primarily attributable to the increase in cash and cash equivalents and
reduction of current maturities of a long-term loan that was repaid in full on
July 31, 2008.

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 was
payable in 12 equal monthly installments commencing August 31, 2007 and bearing
annual interest at the monthly London Inter Bank Offered Rate (LIBOR) plus 2%,
payable on a monthly basis commencing August 31, 2006. As of December 31, 2008,
the loan was fully repaid.

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. We did not
receive any additional consideration in connection with the sale of Jusan S. A.
during 2008.

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 recorded a capital gain of approximately $382,000 as a result of the
transaction.

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

On
September 29, 2008, we completed a private placement of 219,490 of our ordinary
shares at a price of $1.139 per share, or aggregate proceeds of $250,000, with
our President, one of our directors and our chief executive officer.

One
of the principal factors affecting our working capital is our revenue cycle.
Any material change in the implementation period of our products could have an
adverse effect on our working capital.

Cash Flows

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

|                                                     |  |                         |   |      |       | 
|---------------------------------------------------- |  | ----------------------- | - | ---- | ----- | 
|                                                     |  | Year ended December 31,
|                                                     |  |                        
|                                                     |  | 2007                    |   | 2008
|                                                     |  |                         |   |     
|                                                     |  | ($ in thousands)       
|                                                     |  |                         |   |      |       | 
|Net cash provided by (used in) operating activities  |  | (615                    | ) |      | 31    | 
|Net cash provided by investing activities            |  | 976                     |   |      | 165   | 
|Net cash provided by (used in) financing activities  |  | (398                    | ) |      | 376   | 
|Net increase (decrease) in cash and cash equivalents |  | (37                     | ) |      | 572   | 
|Cash and cash equivalents at beginning of period     |  | 1,474                   |   |      | 1,437 | 
|Cash and cash equivalents at end of period           |  | 1,437                   |   |      | 2,009 | 

35

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Net
cash provided by operating activities was approximately $31,000 for the year
ended December 31, 2008. The use of our funds in 2008 was primarily
attributable to our continuing investment in product development. 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. The decrease in the use of our
funds in the 2008 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 $165,000 for the year
ended December 31, 2008, primarily attributable to the proceeds from the sale
of cVidya Networks Inc., off-set by payments related to the acquisition
of certain assets and liabilities of TelSoft. 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 provided by financing activities was approximately $376,000 for the year
ended December 31, 2008, compared to approximately $398,000 used in financing
activities for the year ended December 31, 2007. Of the
cash provided by financing activities in 2008, approximately
$937,000 was attributable to the proceeds from the private placements
consummated in February and September 2008. Of the cash used in
financing activities in 2008 and 2007, approximately $583,000 and
$417,000, respectively, was attributable to the repayment of a
long-term loan received from Bank Hapoalim to finance the acquisition of TelSoft.

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.

|   |                         
|-- | ------------------------
|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 25 persons in
research and development as of December 31, 2008, as compared to 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.

We
have committed substantial financial resources to research and development for
our TEM and billing solution activities. During 2006, 2007 and 2008, our net
research and development expenditures were $3.6 million, $2.6 million and $2.7
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. In each of the last four fiscal
years, 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.

36

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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.

As
of December 31, 2008, we had a contingent obligation to pay royalties to the
Office of the Chief Scientist in the amount of approximately $9.6 million
(including a contingent obligation of approximately $1.8 million relating to
royalties from revenues derived from products that we acquired from
Teleknowledge). The $4.6 million of grants we 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, 2008 and the effect we expect them to have on
our liquidity and cash flow in future periods.

|                            |  |                                               |       |                 |  |           |  |           |     |                  |  |     |  |  |       | 
|--------------------------- |  | --------------------------------------------- | ----- | --------------- |  | --------- |  | --------- | --- | ---------------- |  | --- |  |  | ----- | 
|                            |  | Payments due by period Payments due by period |      
|                            |  |                                               |      
|Contractual
 Obligations    |  | Total                                         |       | Less than1 year |  | 1-3 years |  | 3-5 years |     | More than5 years | 
|                            |  |                                               |       |                 |  |           |  |           |     |                  | 
|                            |  | (U.S. dollars in thousands)                   |      
|                            |  |                                               |       |                 |  |           |  |           |     |                  |  |     |  |  |       | 
|Operating lease obligations |  |                                               | 1,635 |                 |  | 659       |  |           | 809 |                  |  | 160 |  |  | 7     | 
|Uncertain tax positions*    |  |                                               | 583   |                 |  |           |  |           |     |                  |  |     |  |  |       | 
|Accrued severance pay**     |  |                                               | 1,105 |                 |  |          |  |           |    |                  |  |    |  |  | 1,105 | 
|                            |  |                                               |       |                 |  |           |  |           |     |                  |  |     |  |  |       | 
|Total                       |  |                                               | 3,323 |                 |  | 638       |  |           | 809 |                  |  | 160 |  |  | 1,112 | 

---

*Uncertain income tax position under FIN 48 are due upon settlement and
we are unable to reasonably estimate the ultimate amount or timing of
settlement. See Note 12h to our consolidated financial statements for further
information regarding our liability under FIN 48.


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

37

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|        |                                            
|------- | -------------------------------------------
|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          |  | 61  |  | Chairman of the Board of Directors
|Eytan Bar          |  | 43  |  | Chief Executive Officer           
|Lior Salanksy      |  | 44  |  | President and Director            
|Alon Mualem        |  | 41  |  | Corporate Chief Financial Officer 
|Isaac Ben-Bassat   |  | 55  |  | Director                          
|Eytan Barak (1)    |  | 64  |  | Outside Director                  
|Roger Challen      |  | 63  |  | Director                          
|Steven J. Glusband |  | 62  |  | Director                          
|Yaacov Goldman (1) |  | 54  |  | Director                          
|Varda Trivaks (1)  |  | 52  |  | Outside Director                  

(1) Member of our Audit Committee


Messrs.
Mer, Ben-Bassat, Challen, Glusband, Goldman and Salansky will serve as
directors until our 2009 Annual General Meeting of Shareholders. All of such
persons were elected to serve as directors by our shareholders at our 2008
Annual General Meeting of Shareholders, other than Mr. Roger Challen who was
elected to serve as a director by our board of directors effective as of April
1, 2009. Mr. Barak and Ms. Trivaks will serve as outside directors pursuant to
the provisions of the Israeli Companies Law for three-year terms until August
2010 and August 2011, respectively, following which the service of Mr. Barak
and Ms. Trivaks as outside directors may be renewed for one additional
three-year term.

Chaim
Mer has served as the Chairman of our Board of Directors
and a director since our inception in December 1995. Mr. Mer has served as 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 of
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 customer experience management 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 as a director since April 2, 2008. In 1991, Mr. Salansky founded MIND C.
T.I. Ltd., a 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 Research and
Development Manager and also served as a director from its inception until
2004. Mr. Salansky holds a B.Sc. degree in Computer Science from the Technion -
Israel Institute of Technology and an MBA degree from Tel Aviv University.

38

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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).

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 of 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.

Roger Challen was elected
to serve as a director by our board of directors effective as of April 1, 2009.
Mr. Challen co-founded The Info Group, Inc., which subsequently changed its
named to AnchorPoint, Inc., a company that developed and provided licensed
software and managed services of TEM solutions. Mr. Challen is an accomplished
entrepreneur with a proven track record of founding, managing and developing
companies in the software, telecommunications and information services fields.
Mr. Challen has founded or co-founded and been an active executive of several
privately held companies in the software and IT services market. Mr. Challen is
currently a director of Image Data, Inc and Data Distributors, Inc. From 1981
to 1983, Mr. Challen served as Vice President of M&SD Corp., of Lyndhurst,
New Jersey. Mr. Challen began his career with IBM Corporation, in Waltham,
Massachusetts, where he served as a systems engineer and then as a marketing
representative. During his tenure with IBM, Mr. Challen won several awards for
outstanding technical and sales achievements. Mr. Challen holds a B.A. in
Economics and Mathematics from Yale University.

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 also serves as a director of Bank Leumi LeIsrael B.M.,
Golden House Ltd., Tagor Capital Ltd., Isrotel Ltd., Negev Ceramics Ltd.,
I.T.G.I Medical Ltd. (as Chairman) and Renewable Resources Ltd. and its
affiliated companies. Mr. Goldman served as the Professional Secretary of the
Peer Review Institute of the Certified Public Accountants Institute in Israel
from October 2004 until September 2008. Commencing in 1981, Mr. Goldman worked
for Kesselman & Kesselman (member firm of PricewaterhouseCoopers) for 19
years, and from 1991 until 2000, as a partner and then senior partner of such
firm. From September 2000 until November 2001, Mr. Goldman served as managing
director of Argoquest Holdings, LLC. From March 2002 until October 2002, Mr.
Goldman acted as a consultant to a private equity initiative with Poalim
Capital Markets & Investments Ltd. Mr. Goldman is a Certified Public
Accountant (Israel) and holds a B.A. degree in Economics and Accounting from
Tel Aviv University.

39

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Varda Trivakshas served
as an outside director since August 2008 and is a member of our audit
committee. Ms. Trivaks serves as the Managing Director and is one of the two
founding partners of Mimtar Business Consulting, established in 2001. In that
position, Ms. Trivaks acts as an advisor to companies on investments, mergers,
spin-offs, valuation, control, budgeting, with a special focus on advising
global companies and management of companies during times of restructuring and
recovery. Ms. Trivaks serves as a member of the audit committee, board of
directors and/or financial committee of Ginegar Plastic Products Ltd. and E.
Schnapp & Co. Works Ltd. From 1998 to 2004, Ms. Trivaks was a member of the
Israel Accounting Institutes communications committee for Capital Markets and
Insurance. Between 1998 to 2001, Ms. Trivaks was a partner with the accounting
and consulting firm, Shlomo Ziv and Co. - BDO, and served as the managing
director of one of its subsidiaries. Ms. Trivaks is a Certified Public
Accountant (Israel) since 1987 and holds a B.A. degree in Economics and
Accounting from Tel Aviv University and a Master of Science in Management from
Boston University.

|   |             
|-- | ------------
|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,
2008.

|                                                              |  |                                         |         |                                          |   |        | 
|------------------------------------------------------------- |  | --------------------------------------- | ------- | ---------------------------------------- | - | ------ | 
|                                                              |  | Salaries, fees, commissions and bonuses |         | Pension, retirement and similar benefits |  
|                                                              |  |                                         |         |                                          |  
|                                                              |  |                                         |         |                                          |   |        | 
|All directors and executive officers as a group (10
 persons) |  | $                                       | 762,585 |                                          | $ | 68,236 | 

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). Mr. Chaim Mer voluntarily and temporarily reduced his
monthly salary by 15% starting December 1, 2008. We provide automobiles to our
executive officers at our expense.

During
the year ended December 31, 2008, we paid to our directors (including our
outside directors under Israeli law) an annual fee of approximately $8,400 and
a per meeting attendance fee of $300, other than to Mr. Chaim Mer, the Chairman
of our Board of Directors, whose compensation is described above, and Mr.
Yaacov Goldman, an independent director and our audit committee financial
expert. During the year ended December 31, 2008, we paid Mr. Goldman an annual
fee of approximately $16,800 and a per meeting attendance fee of $400.

As
of December 31, 2008, our directors and executive officers as a group,
consisting of ten persons, held options to purchase an aggregate 265,000
ordinary shares, having exercise prices ranging from $1.08 to $3.87, all of
which were granted under our 2003 Israeli Share Option Plan. The options vest
over a two to four-year period. Of such options, options to purchase 20,000
ordinary shares will expire in September 2010, options to purchase 30,000
ordinary shares will expire in September 2012 and options to purchase 215,000
ordinary shares will expire in February 2013. See Item 6.E., Directors, Senior
Management and Employees - Share Ownership  Stock Option Plans.

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Employment
Agreement with President

On
January 24, 2008, we entered into an employment agreement with Mr. Salansky in
connection with his appointment as our President, effective as of February 10,
2008. Mr. Salanksy has served as a director of our company since April 2008.
The employment agreement was approved by our shareholders at our 2008 annual
general meeting, pursuant to the approval of our audit committee and board of
directors. Under the employment agreement, Mr. Salansky has agreed to devote
60% of his working time to our business and affairs in his capacity as our
President. Under the terms of the employment agreement, we agreed to provide
Mr. Salansky with the following payment and benefits:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | A gross monthly salary
 of NIS 31,800 (approximately $9,400).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | · | An annual bonus equal
 to: (i) 10% of up to the first $2.0 million of our net profit (excluding
 capital gains); and (ii) 5% of $2.0 million to $4.0 million of our net profit
 (excluding capital gains).                                                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | · | Options to purchase
 200,000 of our ordinary shares, at an exercise price equal to $1.08, the
 closing price of our ordinary shares on the NASDAQ Capital Market on the date
 of grant. The options are subject to the terms of our 2003 Israeli Share
 Option Plan. The options will vest in four equal installments, each
 representing 25% of the options, and will become exercisable on each of the
 four six month anniversaries following the date of grant.                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | · | Company contributions
 for the benefit of Mr. Salansky to our: (i) Managers Insurance Policy (Bituach Minhaalim) in the amount of
 13.3% of Mr. Salanskys gross salary (8.3% for severance and 5% for
 remuneration); (ii) Education Fund (Keren
 Hishtalmut) in the amount of 7.5% of Mr. Salanskys gross salary;
 and (iii) 2.5% to insurance for loss of working capacity. If we terminate Mr.
 Salanskys employment without cause or Mr. Salansky terminates his
 employment, he will be entitled to the severance contributions that we have
 made to the Managers Insurance Policy.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | · | A company car, and all
 related expenses will be covered by our company. Alternatively, Mr. Salansky
 may elect to receive payment equal to the cost of the car to our company.                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | · | A company mobile phone.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | · | Up to 14 days of paid
 vacation per each employment year and recuperation payments in accordance
 with applicable law.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

The
employment agreement contains customary confidentiality and non-solicitation
provisions as well as an undertaking of Mr. Salansky not to compete with us for
12 months following termination of his employment.

At
our 2008 annual general meeting, our shareholders resolved, pursuant to the
approval of our Audit Committee and Board of Directors, to authorize the
Chairman of our Board of Directors to change Mr. Salanskys employment terms,
so that he will serve as our President in a full time role, under the same
terms and conditions as the original employment agreement, except that in such
case we will pay him a gross monthly salary of NIS 53,000 (approximately
$15,600) and he will be entitled to 24 days of paid vacation per each
employment year. On December 1, 2008 Mr. Lior Salansky voluntarily and
temporarily reduced his monthly salary by 15%. Effective as of January 2009,
the Chairman of our Board of Directors changed Mr. Salanskys employment terms,
so that he will serve as our President, devoting 90% of his time, and his
employment terms were updated accordingly.

|   |                
|-- | ---------------
|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 eight 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 2008.

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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.

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:

| |   |                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | · | an employment relationship;                                                                                                                        
| |   |                                                                                                                                                    
| | · | a business or professional relationship maintained
 on a regular basis;                                                                            
| |   |                                                                                                                                                    
| | · | control; and                                                                                                                                       
| |   |                                                                                                                                                    
| | · | 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.

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Independent
Directors.In general, NASDAQ
Marketplace Rules require that the board of directors of a NASDAQ-listed
company have a majority of 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. However, foreign private issuers, such as our company,
may follow certain home country corporate governance practices instead of
certain requirements of the NASDAQ Marketplace Rules. A foreign private issuer
that elects to follow a home country practice instead of such requirements 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 March, 31, 2009, we provided NASDAQ
with a notice of non-compliance with respect to the requirement to maintain a
majority of independent directors, within the meaning of the NASDAQ Marketplace
Rules. Instead, under Israeli law and practice, we are required to appoint at
least two outside directors, within the meaning of the Israeli Companies Law,
to our Board of Directors. In addition, in accordance with the rules of the
Securities and Exchange Commission and NASDAQ, we have the mandated three
independent directors, as defined by the rules of the Securities and Exchange
Commission and NASDAQ, on our audit committee.

Pursuant
to a recent amendment to the Israeli Companies Law, an Israeli company whose
shares are publicly traded, may elect to adopt a provision in its articles of
association pursuant to which a majority of its board of directors will
constitute individuals complying with certain independence criteria prescribed
by the Israeli Companies Law. We have not included such a provision in our
articles of association since our board of directors complies with the
independent director requirements of the NASDAQ Marketplace Rules described
above.

Our
Board of Directors has determined that Mr. Eytan Barak and Ms. Varda Trivaks
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 each of 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 Exchange Act, 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 Messrs. Eytan Barak and Yaacov Goldman and
Ms. Varda Trivaks. Our Board of Directors has determined that Mr. Goldman
qualifies as an audit committee financial expert. The audit committee meets at
least once each quarter.

43

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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. According to the approval of our
audit committee and board of directors, effective March 25, 2009, Fahn Kanne
& Co., the Israeli member firm of Grant Thornton. International Ltd.,
serves as our internal auditor. Until that date Mr. Shaul Sofer, Certified
Public Accountant (Israel), served as our internal auditor.

Directors
Service Contracts

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.

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.

44

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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 that apply to an office holder also apply to a transaction
in which a controlling shareholder of the company has a personal interest. 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.

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 or if the directors compensation does not exceed the maximum amount of
compensation for outside directors determined by applicable regulations. 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.

45

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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.

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.

46

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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.

|   |          
|-- | ---------
|D. | Employees

On
December 31, 2008, we and our consolidated subsidiaries employed 108 persons,
of which 25 persons were employed in research and development, 52 in training
and technical support, 11 in sales and marketing and 20 in operations and
administration. As of December 31, 2008, 39 of our employees were located in
Israel, 55 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, 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.

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 2008,
payments to the National Insurance Institute amounted to approximately 16.1% of
wages, of which approximately two-thirds was contributed by employees with the
balance contributed by the employer.

47

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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. Pursuant to an order issued in
December 2007 by the Israeli Minister of Industry, Trade and Labor, new
provisions relating to pension arrangements in the collective bargaining
agreements between the Histadrut (General Federation of Labor in Israel) and
the Coordination Bureau of Economic Organizations (the Israeli federation of
employers organizations) apply to all employees in Israel, including our
Israeli employees. According to such provisions, all employees employed for at
least six months are entitled to pension benefits to be funded by preset
monthly contributions of the employee and the employer. 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.

|   |                
|-- | ---------------
|E. | Share Ownership

The
following table sets forth certain information as of April 1, 2009 regarding
the beneficial ownership of our ordinary shares by each of our directors and
executive officers.

|                   |  |                                                 |     |                                              |      |   | 
|------------------ |  | ----------------------------------------------- | --- | -------------------------------------------- | ---- | - | 
|Name               |  | Number of Ordinary Shares Beneficially Owned(1) |     | Percentage of Outstanding Ordinary Shares(2) |     
|                   |  |                                                 |     |                                              |     
|                   |  |                                                 |     |                                              |      |   | 
|Chaim Mer          |  | 2,027,908                                       | (3) |                                              | 22.7 | % | 
|Eytan Bar          |  | 117,707                                         | (4) |                                              | 1.3  | % | 
|Roger Challen      |  | 2,174,615                                       | (5) |                                              | 24.4 | % | 
|Lior Salansky      |  | 1,240,280                                       | (6) |                                              | 13.7 | % | 
|Alon Mualem        |  | 11,250                                          |     |                                              | *    |   | 
|Isaac Ben-Bassat   |  | 777,010                                         | (7) |                                              | 8.7  | % | 
|Eytan Barak        |  |                                                |     |                                              |     |   | 
|Steven J. Glusband |  | 1,000                                           |     |                                              | *    |   | 
|Yaacov Goldman     |  |                                                |     |                                              |     |   | 
|Ms. Varda Trivaks  |  |                                                |     |                                              |     |   | 

|                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               
|* 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 8,917,950 ordinary shares (excluding 10,800
 ordinary shares held as treasury stock) issued and outstanding as of April 1,
 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

48

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Mr. Chaim Mer and his wife, Mrs. Dora Mer, are the
 holders of 271,821 ordinary shares, and are the beneficial owners of
 1,744,453 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 October 10, 2008 and other
 information available to the company. Includes (i) 97,107 ordinary shares
 owned of record by Mr. Bar; (ii) 15,000 ordinary shares subject to currently
 exercisable stock options granted to Mr. Bar, with an exercise price of $3.87
 per share that expire on September 2010; and (iii) 5,600 ordinary shares
 subject to currently exercisable warrants granted to Mr. Bar that have an
 exercise price of $4.00 per share and expire on August 10, 2009.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(5) | The Info Group, Inc. is a Massachusetts corporation
 controlled by Mr. Roger Challen. Accordingly,
 Mr. Roger Challen may be
 deemed to have the sole voting and dispositive power as to the ordinary
 shares of the Issuer held of record by The Info Group, Inc.                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(6) | Based upon a Schedule 13D/A filed with the
 Securities and Exchange Commission on October 7, 2008. Includes 1,129,856
 ordinary shares owned of record by Mr. Salanksy, 100,000 ordinary shares
 subject to currently exercisable stock options granted to Mr. Salansky with
 an exercise price of $1.08 per share that expire on February 2013, and 10,424
 ordinary shares subject to currently exercisable warrants granted to Mr.
 Salansky that have an exercise price of $4.00 per share and expire on August
 10, 2009.                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(7) | Based upon a Schedule 13D/A filed with the
 Securities and Exchange Commission on October 30, 2008. Includes 146,965
 ordinary shares owned of record by Mr. Ben-Bassat and 630,045 ordinary shares
 owned of record by Ron Dan Investments Ltd., a corporation controlled by Mr.
 Ben-Bassat.                                                                                                                                                                                                                                                                           

Stock
Option Plans

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 of the Israeli Income
Tax Ordinance [New Version] - 1961, or Section 102, as amended as of January 1,
2003. Section 102 as amended affords certain tax advantages with respect to
option grants to employees and directors. 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.

49

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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
2008, options to purchase an aggregate of 289,000 ordinary shares were granted
under the 2003 Plan at an average exercise price of $1.08 per share, and no
options were exercised. At December 31, 2008, options to purchase 529,500
ordinary shares were outstanding under the 2003 Plan, exercisable at an average
exercise price of $1.85 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.

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.

50

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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, within the meaning of such
term under NASDAQ rules, may be effective unless approved by our shareholders
in the manner required by such rules and by applicable law.

During
2008, no options were granted under the 2006 Plan and no options were
exercised. At December 31, 2008, options to purchase 20,000 ordinary shares
were outstanding under the 2006 Plan, exercisable at an average exercise price
of $1.23 per share.

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.

51

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

|   |                   
|-- | ------------------
|A. | Major Shareholders

The
following table sets forth certain information as of April 1, 2009 regarding
the beneficial ownership by all shareholders known to us to own beneficially
5.0% or more of our ordinary shares:

|                                   |  |                                                  |     |                                                |      |   | 
|---------------------------------- |  | ------------------------------------------------ | --- | ---------------------------------------------- | ---- | - | 
|Name                               |  | Number of
 Ordinary Shares Beneficially Owned(1) |     | Percentage of
 Outstanding
 Ordinary Shares(2) |     
|                                   |  |                                                  |     |                                                |     
|                                   |  |                                                  |     |                                                |      |   | 
|The Info Group, Inc.               |  | 2,174,615                                        | (3) |                                                | 24.4 | % | 
|Chaim Mer and Dora Mer             |  | 2,027,908                                        | (3) |                                                | 22.7 | % | 
|Roni Ben David and Aliza Ben-David |  | 1,276,806                                        | (4) |                                                | 14.3 | % | 
|Lior Salanksy                      |  | 1,240,280                                        | (5) |                                                | 13.7 | % | 
|Isaac Ben-Bassat                   |  | 777,010                                          | (6) |                                                | 8.7  | % | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(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 8,917,950 ordinary shares (excluding 10,800
 ordinary shares held as treasury stock) issued and outstanding as of April 1,
 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(3) | The Info Group, Inc. is a Massachusetts corporation
 controlled by Mr. Roger Challen. Accordingly,
 Mr. Roger Challen may be
 deemed to have the sole voting and dispositive power as to the ordinary
 shares of the Issuer held of record by The Info Group, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(4) | Mr. Chaim Mer and his wife, Mrs. Dora Mer, are the
 record holders of 271,821 ordinary shares, and are the beneficial owners of
 1,744,453 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.                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(5) | Based solely upon, and
 qualified in its entirety with reference to, a Schedule 13G/A filed with the
 Securities and Exchange Commission on January 29, 2009. Based on the Schedule 13G/A, 1,276,806 ordinary shares are owned of record by Dana Optimum
 Investments Ltd., an Israeli company jointly owned by Mr. Roni Ben-David and
 his wife Mrs. Aliza Ben-David. Accordingly, Mr. Roni Ben-David and Mrs. Aliza
 Ben-David may be deemed to have the shared voting and dispositive power as to
 the ordinary shares of the Issuer held of record by Dana Optimum Investments
 Ltd.                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(6) | Based upon a Schedule 13D/A filed with the
 Securities and Exchange Commission on October 7, 2008. Includes 1,129,856
 ordinary shares owned of record by Mr. Salanksy, 100,000 ordinary shares
 subject to currently exercisable stock options granted to Mr. Salansky with
 an exercise price of $1.08 per share that expire on February 2013, and 10,424
 ordinary shares subject to currently exercisable warrants granted to Mr.
 Salansky that have an exercise price of $4.00 per share and expire on August
 10, 2009.                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(7) | Based upon a Schedule 13D/A filed with the
 Securities and Exchange Commission on October 30, 2008. Includes 146,965
 ordinary shares owned of record by Mr. Ben-Bassat and 630,045 ordinary shares
 owned of record by Ron Dan Investments Ltd., a company controlled by Mr.
 Ben-Bassat.                                                                                                                                                                                                                                                                                                                                                                                                                                         

52

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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. On October 7, 2008, Mr. Lior Salanksy filed a Schedule 13D/A with the Securities and
Exchange Commission reflecting ownership of 1,190,280, or 17.7%, of our
ordinary shares.

On
September 29, 2008, we completed a private placement of 219,490 of our ordinary
shares at a price of $1.139 per share, or aggregate proceeds of $250,000, with
Mr. Lior Salansky, our President, who is also a director and a principal
shareholder, Mr. Isaac Ben-Bassat a director, and Mr. Eytan Bar, our chief
executive officer. On October 10, 2008, Mr. Eytan Bar filed a Schedule 13D with the Securities and
Exchange Commission reflecting ownership of 367,707, or 5.3%, of our
ordinary shares. On October 30, 2008, Mr. Ben-Bassat filed a Schedule 13D/A with the Securities and
Exchange Commission reflecting ownership of 777,010, or 11.6%, of our
ordinary shares. See paragraph above for Schedule
13D/A filed by Mr. Lior Salanksy on October 7, 2008.

On
December 30, 2008, we completed the acquisition of certain assets and
liabilities of AnchorPoint, a Massachusetts-based provider of TEM solutions.
The aggregate consideration paid for the acquisition was the issuance of
2,174,615 of our ordinary shares, or 24.4% of our outstanding shares on a
post-transaction basis. AnchorPoint changed its name to The Info Group, Inc.
following the completion of the transaction.

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
March 23, 2008, there were 33 holders of record of our ordinary shares, of
which eight record holders holding approximately 57.83% 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 33.42% of our
outstanding ordinary shares as of such date).

|   |                           
|-- | --------------------------
|B. | Related Party Transactions

Prior
to May 2008, Mrs. Dora Mer, the wife of Chaim Mer, provided legal services to
us, and we paid her a monthly retainer of $5,000 for such services. The
conditions of retaining the services of Mrs. Mer were approved by our Audit Committee
and Board of Directors. In May 2008, Mrs. Mer joined the Israeli law firm of M.
Firon & Co., Advocates and Notaries, and provides legal services to us
through that firm since such date for a monthly retainer of $5,000, to be paid
in NIS. We may cancel the agreement with M. Firon & Co. upon thirty (30)
days prior notice. The conditions of retaining the services of M. Firon &
Co. were approved by our Audit Committee and Board of Directors on April 2,
2008.

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.

53

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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
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.

On
February 11, 2008, we issued in a private placement 750,000 ordinary shares to
Mr. Lior Salanksy, our President and a director, at a price per share of $1.0
and for a total consideration of $750,000.

On
September 29, 2008, we completed a private placement of 219,490 of our ordinary
shares at a price of $1.139 per share, or aggregate proceeds of $250,000, with
Mr. Lior Salansky, our President, who is also a director and a principal
shareholder, Mr. Isaac Ben-Bassat, a director, and Mr. Eytan Bar, our chief
executive officer.

On
March 25, 2009, our Audit Committee and Board of Directors approved a
transaction with Mer & Co. (1982) Ltd., or Mer & Co. According to the
terms of the transaction, we will sell our products to Mer & Co, which has
an Israel Defense Forces approved supplier number, and it will represent us and
sell our products to the Israel Defense Forces. For its services, Mer & Co.
will be entitled to 5% of the amounts to be received from the Israel Defense
Forces for our software products. We may cease the arrangement by giving ten
days prior notice, and the arrangement will terminate upon our company
receiving an Israel Defense Forces approved supplier number. Mer & Co. is a
subsidiary of C. Mer Industries Ltd., an Israeli publicly traded company
controlled by Mr. Chaim Mer. Mr. Chaim Mer has served as the Chairman of its
Board of Directors since 1988. Mr. Chaim Mer is a major shareholder of our
company and has served as the Chairman of our Board of Directors and a director
since our inception in December 1995.

|   |                                 
|-- | --------------------------------
|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 included in
Item 18.

Export Sales

See
Note 11 of our consolidated financial statements.

Legal Proceedings

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 to 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.

54

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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 $111,000, plus interest and indemnification for damages
that he claims to have suffered as a result of our alleged breach. 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 was seeking the payment of NIS
179,000 (approximately $47,000) for electronic components that were ordered by
us for a third party (the customer referred to in the foregoing paragraph). On
December 10, 2008, the Kfar-Saba Magistrate Court ruled that we are required to
pay approximately $42,000 plus interest of Libor+1% and expenses of $14,000. As
of December 31, 2008, we had fully paid the amounts under this ruling.

On
July 24, 2006, a claim was filed in the Tel-Aviv Superior 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 ($82,000), of which NIS 112,000 ($30,000) is demanded from our
company and NIS 200,000 ($53,000) 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 we and TIM participated and in which the
plaintiff was involved. On June 1, 2008, the plaintiff submitted an
amended statement of claim to the court in which our company was added as a
formal defendant without requesting any relief or articulating any claim against
us. Although the litigation is in a preliminary stage, our legal advisors
believe that the likelihood of the plaintiff being awarded any monetary relief
from our company is low.

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 approximately $141,000 that
was paid by him under the agreement, plus liquidated damages. We believe that
the customers cancellation of the contract 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
of the litigation or its 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 of the 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.

55

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|   |                    
|-- | -------------------
|B. | Significant Changes

Except
as otherwise disclosed in this annual report, no significant change has
occurred since December 31, 2008.

|        |                      
|------- | ---------------------
|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 |  
|     |  |      |      |     |  
|     |  |      |      |     |   |      | 
|2008 |  | $    | 1.69 |     | $ | 0.75 | 
|2007 |  | $    | 3.26 |     | $ | 0.02 | 
|2006 |  | $    | 3.50 |     | $ | 1.50 | 
|2005 |  | $    | 4.23 |     | $ | 3.01 | 
|2004 |  | $    | 4.00 |     | $ | 1.90 | 

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 |  
|               |  |      |        |     |  
|               |  |      |        |     |   |      | 
|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  |  | $    | 1.33   |     | $ | 0.75 | 
|Second Quarter |  | $    | 1.69   |     | $ | 1.07 | 
|Third Quarter  |  | $    | 1.1501 |     | $ | 1.09 | 
|Fourth Quarter |  | $    | 1.37   |     | $ | 0.90 | 
|               |  |      |        |     |   |      | 
|2009           |  |      |        |     |   |      | 
|First Quarter  |  | $    | 1.45   |     | $ | 0.90 | 

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 2008  |  | $    | 1.37 |     | $ | 0.95 | 
|November 2008 |  | $    | 1.05 |     | $ | 0.90 | 
|December 2008 |  | $    | 1.05 |     | $ | 0.94 | 
|January 2009  |  | $    | 1.16 |     | $ | 0.95 | 
|February 2009 |  | $    | 1.45 |     | $ | 0.95 | 
|March 2009    |  | $    | 1.04 |     | $ | 0.90 | 

56

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|   |                     
|-- | --------------------
|B. | Plan of Distribution

Not
applicable.

|   |        
|-- | -------
|C. | Markets

Our
ordinary shares were listed on the NASDAQ Global Market (formerly 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.

|   |                     
|-- | --------------------
|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.

57

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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.

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 75% 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 - Outside and Independent Directors - Outside 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.

58

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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.

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 15 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

Tender Offer. A
person wishing to acquire shares, or any class of shares, of a publicly traded
Israeli company and who would as a result hold over 90% of the companys issued
and outstanding share capital, or a class of shares, is required by the Israeli
Companies Law to make a tender offer to all of the companys shareholders for
the purchase of all of the remaining issued and outstanding shares of the
company, or the class of shares, as the case may be. If the shareholders who do
not respond to the offer hold less than 5% of the issued share capital of the
company, or of the relevant class of shares, all of the shares that the
acquirer offered to purchase will be transferred to the acquirer by operation of law. However, the shareholders may petition the court
to determine that the consideration for the acquired shares is less than the
shares fair value and that the acquiring party should pay the shares fair
value. If the dissenting shareholders hold more than 5% of the issued and
outstanding share capital of the company, or of the relevant class of shares,
as the case may be, the acquirer may not acquire additional shares of the
company from shareholders who accepted the tender offer if following such
acquisition the acquirer would own over 90% of the companys issued and
outstanding share capital, or of the relevant class of shares.

59

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The
Israeli Companies Law provides that an acquisition of shares of a public
company be made by means of a tender offer if as a result of the acquisition
the purchaser would become the holder of a control block. Under the Israeli
Companies Law shares conferring 25% or more of the voting rights in the company
constitute a control block. The requirement for
a tender offer does not apply if there is already another holder of a control
block. 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 acquirer would hold more than 45% of the voting rights in
the company, unless there is another person holding more than 45% of the voting
rights in the company. These requirements do not apply if:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | the acquisition was made in a private placement the
 object of which was to confer to the acquiring party a control block
 where there is no holder of a control block, or to confer to the acquiring
 party 45% of the voting rights in the company where there is no holder of 45%
 of the voting rights in the company, and the private placement received the
 general meetings approval; or
| |   |                                                                                                                                                                                                                                                                                                                                                                                                      
| | · | the acquisition was from the holder of a control
 block and resulted in a person becoming the holder of a control block;
 or                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                      
| | · | the acquisition was from a shareholder holding more
 than 45% of the voting rights in the company and resulted in a person
 becoming a holder of more than 45% of the voting rights in the company.                                                                                                                                                                                                  

Merger. The Israeli Companies
Law permits merger transactions if approved by each partys board of directors
and, except under certain circumstances specified below, by the majority of
each partys shares voted on the proposed merger at a shareholders meeting
convened upon prior notice of at least 35 days (which may be shortened to 14 days in certain
circumstances). A merger is defined as the transfer of all assets and
liabilities, including conditional, future, known and unknown debts of the
target company to the surviving company, as a result of which the target
company is liquidated, and stricken out of the Companies Register.

Under
the Israeli Companies Law, if the approval of a general meeting of the
shareholders is required, merger transactions may be approved by holders of a
simple majority of the shares present and voting, in person or by proxy or by written ballot, at
the general meeting convened to approve the transaction. If one of the merging
companies, or a shareholder that holds 25% or more of the means of control of
one of the merging companies, or a 25% shareholder, holds shares of the other
merging company, then a dissenting vote of holders of the majority of the
shares of the other merging company present and voting, excluding shares held
by the merging company or a 25% shareholder thereof, or by anyone acting on
behalf of either of them, their relatives and corporations controlled thereby,
is sufficient to reject the merger transaction. Means of control are defined as
any of the following: (i) the right to vote at a general meeting of a company;
and (ii) the right to appoint a director of a company. If the transaction would
have been approved but for the exclusion of the votes as previously indicated, a
court may still approve the merger upon the request of holders of at least 25%
of the voting rights of the company. The court will not approve a merger unless
it is convinced that the merger is fair and reasonable, taking into account the
values of the merging companies and the consideration offered to the
shareholders. Upon the request of a creditor of either party to the proposed
merger, the court may delay or prevent the merger if it concludes that there
exists a reasonable concern that, as a result of the merger, the surviving
company will be unable to satisfy the obligations of the merged company. In
addition, a merger may not be completed unless at least 50 days have passed
from the date that a proposal for approval of the merger was filed with the Israeli
Registrar of Companies and 30 days from the date that shareholder approval of
both merging companies was obtained.

Notwithstanding
the foregoing, a merger is not subject to the approval of the shareholders of
the target company if the target company is a wholly-owned subsidiary of the
surviving company. A merger is not subject to the approval of the shareholders
of the surviving company if:

| |   |                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | the merger does not require the alteration of the
 memorandum or articles of association of the surviving company;                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                              
| | · | the acquiring company would not issue more than 20%
 of the voting rights thereof to the shareholders of the target company in the
 course of the merger and no person will become, as a result of the merger, a
 controlling shareholder of the surviving company, on a fully diluted basis;

60

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| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | neither the target company, nor any shareholder that
 holds 25% of the means of control of the target company is a shareholder of
 the surviving company; and
| |   |                                                                                                                                                              
| | · | there is no person that holds 25% or more of the
 means of control in both companies.                                                                        

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 75% 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.

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.

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

On
September 29, 2008, we completed a private placement of 219,490 of our ordinary
shares at a price of $1.139 per share, or aggregate proceeds of $250,000, with
our President, who is also a principal shareholder and a director, one of our
directors and our chief executive officer. The price per share is equal to the
average closing price of an ordinary share on the NASDAQ Capital Market during
the 30 trading days prior to the closing date.

On
December 30, 2008, we completed the acquisition of certain assets and
liabilities of AnchorPoint, a Massachusetts-based provider of TEM solutions. We
believe that the acquisition of AnchorPoints TEM solutions will enable us to
expand our products offerings and will reduce our customers telecom costs and
improve their information technology and telecom activities. The aggregate
consideration for the acquisition was 24.4 % of our outstanding shares on a
post-transaction basis.

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|   |                  
|-- | -----------------
|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 2008 is 27%, which was reduced to 26% in 2009 and will be
further reduced to 25% in 2010 and thereafter. However, the effective tax rate
payable by a company that derives income from an approved enterprise may be
considerably less (as further discussed below).

Following
an additional amendment to the tax ordinance, which came into effect on January
1. 2009, for a period of one year, an Israeli corporation may elect a 5% rate
of corporate tax (instead of 25%) for dividend distributions received from a
foreign subsidiary which is used in Israel in 2009, or within one year after
actual receipt of the dividend, whichever is later. The 5% tax rate is subject
to various conditions, which include conditions with regard to the identity of
the corporation that distributes the dividends, the source of the dividend, the
nature of use of the dividend income and the period during which the dividend
income will be used in Israel.

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 10 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 12 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:

|                                         |  |                         |  
|---------------------------------------- |  | ----------------------- | -
|For a company with foreign investment of |  | The company 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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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.

An
amendment to the Investments Law, which came into effect on April 1, 2005,
changed certain provisions of such law, including the criteria for investments
qualified to receive tax benefits under the Investments 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.

Under
the Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of
the Tax Ordinance, generally all cross-border transactions carried out between
related parties are required to be conducted on an arms length basis and will be taxed accordingly.

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:

| |   |                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | deduction, under certain conditions, of purchases of
 know-how and patents over an eight-year period for tax purposes;                                                                                             
| |   |                                                                                                                                                                                                                    
| | · | right to elect, under specified conditions, to file
 a consolidated tax return with additional related Israeli Industrial Companies;                                                                               
| |   |                                                                                                                                                                                                                    
| | · | accelerated depreciation rates on equipment and
 buildings; and                                                                                                                                                    
| |   |                                                                                                                                                                                                                    
| | · | 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 to 100% 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 and that the
know-how developed under an approved research and development program may not
be transferred to any third parties outside Israel. However, the Office of the
Chief Scientist may approve the transfer of manufacturing rights outside Israel
in exchange for an import of different manufacturing into Israel as a
substitute. In addition, under certain circumstances and subject to the Office
of the Chief Scientists prior approval, know-how that has been funded by the
Office of the Chief Scientist may be transferred outside of Israel, 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 a 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.. No approval is required for the sale or
export of any products resulting from such research and development.

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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. In 2005, 2006, 2007 and 2008, 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, $469,000 and
$158,000, 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:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | 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.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | · | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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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 Dividends Paid on our
Ordinary Shares

Taxation of Non-Israeli Shareholders

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).

Taxation of Israeli Shareholders

Israeli
resident individuals are generally subject to Israeli income tax on the receipt
of dividends paid on our ordinary shares, other than bonus shares (share
dividends) or stock dividends, at the rate of 20%, or 25% for a shareholder
that is considered a material shareholder (within the meaning of the Israeli
Income Tax Ordinance) at any time during the 12-month period preceding such
distribution. Dividends paid on our ordinary shares to Israeli companies are
exempt from such tax, except for dividends distributed from income derived
outside of Israel, which are subject to the 25% tax rate.

Dividends
paid from income derived from attributable to an Approved Enterprise and
Privileged Enterprise are subject to tax, which is withheld at the source, at
the rate of 15%. We cannot assure you that we will designate the profits that
are being distributed in a way that will reduce shareholders tax liability to
this tax rate.

Taxation
of Capital Gains

Taxation
of Israeli Shareholders

Until
the end of 2002, provided we maintained our status as an industrial
corporation, capital gains from the sale of our securities were generally
exempt from Israeli capital gains tax. This exemption did not apply to a
shareholder whose taxable income was determined pursuant to the Israeli Income
Tax Law (Inflationary Adjustments), 1985, or to a person whose gains from
selling or otherwise disposing of our securities were deemed to be business
income.

From
January 1, 2003, capital gains from the sale of our securities were generally
subject to tax. On January 1, 2006, an amendment to the Israeli tax regime
became effective, which significantly changed the tax rates applicable to
income derived from securities. Under the new tax regime, an individual is
subject to a 20% tax rate on real capital gains derived from the sale of
shares, as long as the individual is not a substantial shareholder (generally
a shareholder with 10% or more of the right to profits, right to nominate a
director and voting rights) in the company issuing the shares. A substantial
shareholder will be subject to tax at a rate of 25% in respect of real capital
gains derived from the sale of shares issued by the company in which he or she
is a substantial shareholder. The determination of whether the individual is a
substantial shareholder will be made on the date that the securities are sold.
In addition, the individual will be deemed to be a substantial shareholder if
at any time during the 12 months preceding this date he had been a substantial
shareholder.

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Taxation of 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.

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.

Israeli
Transfer Pricing Regulations

The
Income Tax Regulations (Determination of Market Terms), 2006, promulgated under
Section 85A of the Tax Ordinance, generally require that all cross-border
transactions carried out between related parties be conducted on an arms length
basis and be taxed accordingly.

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:

| |   |                                               
| | - | ----------------------------------------------
| | · | broker-dealers,                               
| |   |                                               
| | · | financial institutions,                       
| |   |                                               
| | · | certain insurance companies,                  
| |   |                                               
| | · | regulated investment companies,               
| |   |                                               
| | · | investors liable for
 alternative minimum tax,

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| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | tax-exempt organizations,                                                                                                                             
| |   |                                                                                                                                                       
| | · | non-resident aliens of the U.S.
 or taxpayers whose functional currency is not the U.S. dollar,                                                       
| |   |                                                                                                                                                       
| | · | persons who hold the ordinary
 shares through partnerships or other pass-through entities,                                                            
| |   |                                                                                                                                                       
| | · | persons who acquired their ordinary
 shares through the exercise or cancellation of employee stock options or
 otherwise as compensation for services,
| |   |                                                                                                                                                       
| | · | certain expatriates or former
 long-term residents of the United States,                                                                              
| |   |                                                                                                                                                       
| | · | investors that own or have
 owned, directly, indirectly or by attribution, 10 percent or more of our
 voting shares, and                              
| |   |                                                                                                                                                       
| | · | 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.

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:

| |   |                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | an individual who is a citizen
 or, for U.S. federal income tax purposes, a resident of the United States;                                                                                                                                                
| |   |                                                                                                                                                                                                                                                           
| | · | a corporation or other entity
 created or organized in or under the laws of the United States or any
 political subdivision thereof;                                                                                                                      
| |   |                                                                                                                                                                                                                                                           
| | · | an estate whose income is
 subject to U.S. federal income tax regardless of its source; or                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                           
| | · | 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.

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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. 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.

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.

70

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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.

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 2008. Certain U.S. holders may have been eligible to elect to be treated as
if they had sold their ordinary shares when we ceased to be a PFIC. Any holders
who validly made such an election will not be treated as holding shares in a
PFIC unless we again become a PFIC at a future time. U.S. Holders who held our
ordinary shares during any period when we were a PFIC will generally be subject
to the tax treatment described below, even in years when we are not classified
as a PFIC.

If
we are a PFIC, dividends will not qualify for the reduced maximum tax rate,
applicable to qualified dividend income, discussed above, and, subject to the
discussion of the consequences of a mark-to-market election, described below:

| |  |   |                                                                                                                                                                                                                                                                                                                                                                              
| |  | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | · | 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,                                                                                                                                                                  
| |  |   |                                                                                                                                                                                                                                                                                                                                                                              
| |  | · | 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,

71

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| |  |   |                                                                                                                                                                                 
| |  | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | · | 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                    
| |  |   |                                                                                                                                                                                 
| |  | · | 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:

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

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, or if a U.S. Holder
held our ordinary shares during a year in which we were a PFIC, 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.

72

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Because
the PFIC rules are highly complex and will depend on each investors particular
circumstances, U.S. holders are urged to consult their tax advisors regarding
the application of such rules.

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.

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.

|   |                           
|-- | --------------------------
|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 Exchange Act, 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 file with the Securities and Exchange Commission an annual report
containing financial statements that have been examined and reported on, with
an opinion expressed by, an independent public accounting firm. We also file
reports on Form 6-K with the Securities and Exchange Commission containing
unaudited financial information for the first three quarters of each fiscal
year. We post our annual report on Form 20-F on our website (www.mtsint.com)
promptly following the filing of our annual report with the Securities and
Exchange Commission. The information on our website is not incorporated by
reference into this annual report.

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 are also
available on the Securities and Exchange Commissions website
(http://www.sec.gov). 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.

73

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---



The
documents concerning our company referred to in this annual report may also be
inspected at our offices located at 14 Hatidhar Street, Raanana 43665, 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 interest received on short-term deposits and foreign
currency fluctuations. We do not use derivative financial instruments to hedge
against such exposure.

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 2009 sales revenues of
approximately $200,000.

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

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.

74

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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 Exchange Act 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:

| |   |                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | pertain to the maintenance of records that in
 reasonable detail accurately and fairly reflect the transaction and
 dispositions of the assets of the company;                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                
| | · | 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
| |   |                                                                                                                                                                                                                                                                                                                                                
| | · | provide reasonable assurance regarding prevention or
 timely detection of unauthorized acquisition, use or 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, 2008. 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, 2008, our
internal control over financial reporting was 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 control 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.

75

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

|          |                                        
|--------- | ---------------------------------------
|ITEM 16C. | PRINCIPAL ACCOUNTANT 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 |  | 2007                    |         | 2008 |  
|                  |  |                         |         |      |  
|                  |  |                         |         |      |   |         | 
|Audit (1)         |  | $                       | 93,000  |      | $ | 111,000 | 
|Audit-related(2)  |  |                         | 15,000  |      |   |        | 
|Tax (3)           |  |                         | 7,000   |      |   |        | 
|                  |  |                         |         |      |   |         | 
|Total             |  | $                       | 115,000 |      | $ | 111,000 | 




| |     |                                                                                                                                                                                                                                                                                                                          
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Audit fees relate to audit
 services provided for each of the years shown in the table, including fees
 associated with the annual audit and reviews of our interim financial
 results, consultations on various accounting issues and audit services
 provided in connection with other statutory or regulatory filings.
| |     |                                                                                                                                                                                                                                                                                                                          
| | (2) | Audit-related fees for 2007
 relate to services provided in connection with the filing of Reports on Form
 6-K for the nine months period ended September 30, 2007.                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                          
| | (3) | Tax fees relate to services
 performed by the tax division for tax compliance, planning and service.                                                                                                                                                                                                                     

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
 STANDARDS FOR AUDIT COMMITTEES

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 ordinary shares during
2008.

76

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|          |                                               
|--------- | ----------------------------------------------
|ITEM 16F. | CHANGES IN REGISTRANTS CERTIFYING
 ACCOUNTANT

Not
applicable.

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

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. We have provided
NASDAQ with notices of non-compliance with respect to the following NASDAQ
rules:

| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | · | The requirement to maintain a majority of independent
 directors, as defined under the NASDAQ Marketplace Rules. Instead, under
 Israeli law and practice, we are required to appoint at least two outside
 directors, within the meaning of the Israeli Companies Law, to our board of
 directors. In addition, in accordance with the rules of the Securities and
 Exchange Commission and NASDAQ, we have the mandated three independent
 directors, as defined by the rules of the Securities and Exchange Commission
 and NASDAQ, on our audit committee. See Item 6C. Directors, Senior
 Management and Employees - Board Practices - Outside and Independent
 Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | · | 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 Item 6C. Directors, Senior
 Management and Employees - Board Practices - Election of Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | · | The
 requirement to obtain shareholder approval for the establishment or amendment
 of certain equity based compensation plans, an issuance that will result in a
 change of control of the company, certain transactions other than a public
 offering involving issuances of a 20% or more interest in the company and
 certain acquisitions of the stock or assets of another company. Under Israeli
 law and practice, the approval of the board of directors is required for the
 establishment or amendment of equity based compensation plans and private placements. Under Israeli
regulations, Israeli companies whose shares have been publicly offered only outside of
Israel or are listed for trade only on an exchange outside of Israel, such as our company,
are exempt from the Israeli law requirement to obtain shareholder approval for private
placements of a 20% or more interest in the company.  For the
 approvals and procedures required under Israeli law and practice for an
 issuance that will result in a change of control of the company and acquisitions of the stock or assets of another company, see
 Item 6.C. Directors, Senior Management and Employee - Board Practices -
 Approval of Related Party Transactions Under Israeli Law-Disclosure of
 Personal Interests of a Controlling Shareholder; Approval of Transactions
 with Controlling Shareholders and Item 10.B. Additional Information --
 Memorandum and Articles of Association - Provisions Restricting Change in
 Control of Our Company.

PART III

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

No
applicable.

77

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

|                                                                                    |                                                             |  |               
|----------------------------------------------------------------------------------- | ----------------------------------------------------------- |  | --------------
|Consolidated Financial Statements                                                   |                                                             | 
|                                                                                    |                                                             |  |               
|                                                                                    | 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 - 38
|                                                                                    |                                                             | 
|Financial Statements of Jusan, S.A.
 as of and for the year ended December 31, 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

| |         |  |                                                                                                        
| | ------- |  | -------------------------------------------------------------------------------------------------------
| | 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)                                                                    
| |         |  |                                                                                                        
| | 4.2     |  | 2003 Israeli Share Option Plan (2)                                                                     
| |         |  |                                                                                                        
| | 4.3     |  | 2006 Stock Option Plan (3)                                                                             
| |         |  |                                                                                                        
| | 4.4     |  | Asset Purchase Agreement dated December 30, 2004
 among the Registrant and Teleknowledge Group Ltd. (4)
| |         |  |                                                                                                        
| | 4.5     |  | Securities Purchase Agreement dated August 10, 2005
 among the Registrant and the Investors therein (5)
| |         |  |                                                                                                        
| | 4.6     |  | Form of Warrant (6)                                                                                    
| |         |  |                                                                                                        
| | 4.7     |  | Registration Rights Agreement dated August 10, 2005
 (7)                                               
| |         |  |                                                                                                        
| | 4.8     |  | Form of Warrant issued to Mr. Avi Ziv (8)                                                              

78

---

---



| |      |  |                                                                                                                                                             
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.9  |  | Purchase Agreement dated January 24, 2008, by and
 between the Registrant and Lior Salansky (9)                                                             
| |      |  |                                                                                                                                                             
| | 4.10 |  | Purchase Agreement dated September 28, 2008, by and
 among the Registrant, Lior Salansky, Isaac Ben-Bassat and Eytan Bar (10)                               
| |      |  |                                                                                                                                                             
| | 4.11 |  | Asset Purchase Agreement dated December 23, 2008, by
 and among MTS IntegraTRAK Inc., the Registrant and AnchorPoint, Inc. (now
 named The Info Group, Inc.)
| |      |  |                                                                                                                                                             
| | 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) under the Securities Exchange Act of 1934, as amended.                                 
| |      |  |                                                                                                                                                             
| | 12.2 |  | Certification of Chief Financial Officer pursuant to
 Rule 13a-14(a) under the Securities Exchange Act of 1934, 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. (relating
 to Jusan, S.A.)                                                                                         
| |      |  |                                                                                                                                                             
| | 15.3 |  | Consent of BDO Trevisan Auditores Independentes
 (relating to TABS Brazil Ltda.)                                                                            
| |      |  |                                                                                                                                                             
| | 15.4 |  | Consent of BDO McCabe Lo Limited (relating to MTS
 Asia Limited)                                                                                            
| |      |  |                                                                                                                                                             
| | 15.5 |  | Consent of Greenberg, Rozenblatt, Kull &
 Bitsoli, PC (relating to The Info Group, Inc. (formerly AnchorPoint, Inc.))                                       




| |     |                                                                                                                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.                                                   
| |     |                                                                                                                                                                                                       
| | (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.                                             

79

---

---



| |      |                                                                                                                                                            
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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 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.
| |      |                                                                                                                                                            
| | (10) | Filed as Item 2 to the
 Registrants Report on Form 6-K for the month of October 2008 submitted on
 October 2, 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.         

80

---

---

MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008

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-38
|                                                           |           

F - 1

---

---

|                            |                    
|--------------------------- | -------------------
|                            |                    
|Kost Forer Gabby & Kasierer
|3 Aminadav St.             
|Tel-Aviv 67067, Israel     
|                           
|Tel: 972 (3)6232525        
|                            | Fax: 972 (3)5622555
|                            | www.ey.com/il      
|                            |                    

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, 2007 and 2008, and the related consolidated statements of operations,
changes in shareholders equity and cash flows for each of the three years in the period ended
December 31, 2008. These financial statements are the responsibility of 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 MTS Asia Ltd., a wholly-owned subsidiary, which statements
reflect total assets of 2.6% and 1.6% as of December 31, 2008 and 2007, respectively, and total revenues
of 6.5% and 6.1% for the years ended December 31, 2008 and 2007, respectively of the related consolidated
total. We also did not audit the total assets that were purchased from AnchorPoint Inc. representing
6.8% of the related consolidated assets for the year ended December 31, 2008. 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 MTS Asia Ltd. and AnchorPoint Inc,
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, 2007 and 2008, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December 31, 2008, in conformity
with accounting principles generally accepted in the United States.

|                 |                                                                
|---------------- | ---------------------------------------------------------------
|Tel-Aviv, Israel | /s/ Kost, Forer, Gabbay & Kasierer KOST FORER GABBAY & KASIERER
|April 2, 2008    | A Member of Ernst & Young Global                               

F - 2

---

---

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

|                                                                                                                              | December 31, |      
|----------------------------------------------------------------------------------------------------------------------------- | ------------ | -----
|
|
|
|
|ASSETS                                                                                                                        |              |      
|CURRENT ASSETS:                                                                                                               |              |      
|Cash and cash equivalents                                                                                                     | $            | 1,437
|Restricted marketable securities (Note 3)                                                                                     |              | 169  
|Trade receivables (net of allowance for doubtful accounts of $ 882 and $ 731 at
    December 31, 2007 and 2008, respectively) |              | 1,172
|Unbilled receivables                                                                                                          |              | 129  
|Other accounts receivable and prepaid expenses (Note 4)                                                                       |              | 544  
|Investment in other companies (Note 5b)                                                                                       |              | 221  
|Inventories                                                                                                                   |              | 66   
|                                                                                                                              |              |      
|                                                                                                                              |              |      
|Total current assets                                                                                                          |              | 3,738
|                                                                                                                              |              |      
|                                                                                                                             
|LONG-TERM ASSETS:                                                                                                             |              |      
|Severance pay fund                                                                                                            |              | 730  
|Other assets                                                                                                                  |              | 3    
|Deferred income taxes (Note 12)                                                                                               |              | 123  
|                                                                                                                              |              |      
|                                                                                                                              |              |      
|Total long-term assets                                                                                                        |              | 856  
|                                                                                                                              |              |      
|                                                                                                                              |              |      
|PROPERTY AND EQUIPMENT, NET (Note 7)                                                                                          |              | 283  
|                                                                                                                              |              |      
|                                                                                                                             
|OTHER ASSETS:                                                                                                                 |              |      
|Goodwill (Note 8a)                                                                                                            |              | 2,796
|Other intangible assets, net (Note 8b)                                                                                        |              | 805  
|                                                                                                                              |              |      
|                                                                                                                              |              |      
|Total other assets                                                                                                            |              | 3,601
|                                                                                                                              |              |      
|                                                                                                                              |              |      
|Total assets                                                                                                                  | $            | 8,478
|                                                                                                                              |              |      

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

F - 3

---

---

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

|                                                                                                                                                                                                                                                                                                               | December 31, |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | -------
|
|
|
|
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                                                                                                           |              |        
|                                                                                                                                                                                                                                                                                                               |              |        
|CURRENT LIABILITIES:                                                                                                                                                                                                                                                                                           |              |        
|Short-term bank credit and current maturities on bank loan                                                                                                                                                                                                                                                     | $            | 606    
|Trade payables                                                                                                                                                                                                                                                                                                 |              | 447    
|Accrued expenses and other liabilities (Note 9)                                                                                                                                                                                                                                                                |              | 3,309  
|Deferred revenues                                                                                                                                                                                                                                                                                              |              | 1,390  
|                                                                                                                                                                                                                                                                                                               |              |        
|                                                                                                                                                                                                                                                                                                               |              |        
|Total current liabilities                                                                                                                                                                                                                                                                                      |              | 5,752  
|                                                                                                                                                                                                                                                                                                               |              |        
|                                                                                                                                                                                                                                                                                                              
|LONG-TERM LIABILITIES                                                                                                                                                                                                                                                                                          |              |        
|Accrued severance pay                                                                                                                                                                                                                                                                                          |              | 1,157  
|                                                                                                                                                                                                                                                                                                               |              |        
|                                                                                                                                                                                                                                                                                                               |              |        
|COMMITMENTS AND CONTINGENT LIABILITIES (Note 11)                                                                                                                                                                                                                                                               |              |        
|                                                                                                                                                                                                                                                                                                              
|SHAREHOLDERS EQUITY (Note 14):                                                                                                                                                                                                                                                                                |              |        
|Share capital -
    Ordinary shares of NIS 0.01 par value - Authorized: 12,000,000 shares at
      December 31, 2007 and 2008; Issued: 5,784,645 shares at December 31, 2007
      and 8,928,750 at December 31, 2008; Outstanding: 5,773,845 shares at
      December 31, 2007 and 8,917,950 at December 2008 |              | 17     
|Additional paid-in capital                                                                                                                                                                                                                                                                                     |              | 16,201 
|Treasury shares (10,800 Ordinary shares at December 31, 2007 and 2008)                                                                                                                                                                                                                                         |              | (29    
|Accumulated other comprehensive income (loss)                                                                                                                                                                                                                                                                  |              | 12     
|Accumulated deficit                                                                                                                                                                                                                                                                                            |              | (14,632
|                                                                                                                                                                                                                                                                                                               |              |        
|                                                                                                                                                                                                                                                                                                               |              |        
|Total shareholders equity                                                                                                                                                                                                                                                                                     |              | 1,569  
|                                                                                                                                                                                                                                                                                                               |              |        
|                                                                                                                                                                                                                                                                                                               |              |        
|Total liabilities and shareholders equity                                                                                                                                                                                                                                                                     | $            | 8,478  
|                                                                                                                                                                                                                                                                                                               |              |        

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

F - 4

---

---

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

|                                                                                                     | Year ended December 31, |          
|---------------------------------------------------------------------------------------------------- | ----------------------- | ---------
|
|
|
|
|Revenues (Note 15):                                                                                  |                         |          
|Product sales                                                                                        | $                       | 7,518    
|Services                                                                                             |                         | 2,966    
|                                                                                                     |                         |          
|                                                                                                     |                         |          
|Total revenues                                                                                       |                         | 10,484   
|                                                                                                     |                         |          
|                                                                                                     |                         |          
|Cost of revenues:                                                                                    |                         |          
|Product sales                                                                                        |                         | 2,631    
|Services                                                                                             |                         | 724      
|                                                                                                     |                         |          
|                                                                                                     |                         |          
|Total cost of revenues                                                                               |                         | 3,355    
|                                                                                                     |                         |          
|                                                                                                     |                         |          
|Gross profit                                                                                         |                         | 7,129    
|                                                                                                     |                         |          
|Operating expenses:                                                                                 
|Research and development, net                                                                        |                         | 3,633    
|Selling and marketing                                                                                |                         | 3,078    
|General and administrative                                                                           |                         | 2,651    
|Impairment of goodwill and other intangible assets                                                   |                         |         
|                                                                                                     |                         |          
|                                                                                                     |                         |          
|Total operating expenses                                                                             |                         | 9,362    
|                                                                                                     |                         |          
|                                                                                                     |                         |          
|Operating loss                                                                                       |                         | (2,233   
|Financial expenses, net                                                                              |                         | (54      
|Capital gain (loss) on sale of an investment in affiliate                                            |                         |         
|                                                                                                     |                         |          
|                                                                                                     |                         |          
|Loss before taxes on income                                                                          |                         | (2,287   
|Taxes on income (benefit), net (Note 12)                                                             |                         | 118      
|                                                                                                     |                         |          
|                                                                                                     |                         |          
|Loss before equity in earnings (loss) of affiliate                                                   |                         | (2,405   
|Equity in earnings (loss) of affiliate                                                               |                         | 159      
|                                                                                                     |                         |          
|                                                                                                     |                         |          
|Net loss                                                                                             | $                       | (2,246   
|                                                                                                     |                         |          
|                                                                                                    
|Net loss per share:                                                                                 
|                                                                                                     |                         |          
|Basic and diluted net loss per Ordinary share                                                        | $                       | (0.39    
|                                                                                                     |                         |          
|                                                                                                    
|Weighted average number of Ordinary shares used in computing basic
   and diluted net loss per share |                         | 5,762,311
|                                                                                                     |                         |          

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

F - 5

---

---

|                                                          
|----------------------------------------------------------
|MER TELEMANAGEMENT SOLUTIONS LTD.
    AND ITS SUBSIDIARIES
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
|                                                          
|U.S. dollars in thousands                                 
|                                                          

|                                                                                                 | **Share capital** |  | Additional
      paid-in 
      capital |       | Treasury
      shares |   | Deferred 
      stock 
      compensation |   | Accumulated 
      other 
      comprehensive
      income (loss) |     | Accumulated
      deficit |   | Total 
      comprehensive
      income (loss) |   | Total 
      shareholders
      equity |     
|------------------------------------------------------------------------------------------------ | ----------------- |  | --------------------------------------- | ----- | --------------------- | - | ----------------------------------------- | - | ----------------------------------------------------------------- | --- | ------------------------- | - | ---------------------------------------------- | - | --------------------------------------- | ----
|
|
|
|                                                                                                 |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                           |   |                                                |   |                                         |     
|Balance as of January
   1, 2006                                                                 | 5,733,504         |  | $                                       | 17    |                       | $ | 15,966                                    |   | $                                                                 | (29 | )                         | $ | (142                                           | ) | $                                       | (75 
|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      |                  |  |                                         |      |                       |   |                                          |   |                                                                   |    |                           |   |                                               |   |                                         | 1   
|Foreign currency 
        translation adjustments                                                |                  |  |                                         |      |                       |   |                                          |   |                                                                   |    |                           |   |                                               |   |                                         | 328 
|                                                                                                 |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                          
|Total other comprehensive 
      income                                                          |                  |  |                                         |      |                       |   |                                          |   |                                                                   |    |                           |   |                                               |   |                                         |    
|Net loss                                                                                         |                  |  |                                         |      |                       |   |                                          |   |                                                                   |    |                           |   |                                               |   |                                         |    
|                                                                                                 |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                           |   |                                                |   |                                         |     
|Total comprehensive loss                                                                         |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                           |   |                                                |   |                                         |     
|                                                                                                 |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                           |   |                                                |   |                                         |     
|Balance as of December 31, 
   2006                                                              | 5,773,845         |  |                                         | 17    |                       |   | 16,109                                    |   |                                                                   | (29 | )                         |   |                                               |   |                                         | 254 
|Stock based 
    compensation related 
    to options issued to
    employees                    |                  |  |                                         |      |                       |   | 92                                        |   |                                                                   |    |                           |   |                                               |   |                                         |    
|Other comprehensive loss:                                                                        |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                           |   |                                                |   |                                         |     
|Unrealized gains on 
     available-for-sale
     marketable securities, 
     net               |                  |  |                                         |      |                       |   |                                          |   |                                                                   |    |                           |   |                                               |   |                                         | 1   
|Foreign currency 
      translation adjustments                                                  |                  |  |                                         |      |                       |   |                                          |   |                                                                   |    |                           |   |                                               |   |                                         | (243
|                                                                                                 |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                          
|Total other comprehensive 
     loss                                                             |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                           |   |                                                |   |                                         |     
|Net loss                                                                                         |                  |  |                                         |      |                       |   |                                          |   |                                                                   |    |                           |   |                                               |   |                                         |    
|                                                                                                 |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                           |   |                                                |   |                                         |     
|Total comprehensive loss                                                                         |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                           |   |                                                |   |                                         |     
|                                                                                                 |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                           |   |                                                |   |                                         |     
|Balance as of December 31, 
   2007                                                              | 5,773,845         |  |                                         | 17    |                       |   | 16,201                                    |   |                                                                   | (29 | )                         |   |                                               |   |                                         | 12  
|Issuance of shares, net of 
    issuance cost in the
    amount of $ 13                          | 969,490           |  |                                         | 3     |                       |   | 984                                       |   |                                                                   |     |                           |   |                                                |   |                                         |     
|Issuance of shares for 
    AnchorPoint acquisition                                              | 2,174,615         |  |                                         | 6     |                       |   | 2,121                                     |   |                                                                   |     |                           |   |                                                |   |                                         |     
|Stock based compensation 
    related to options
    issued to employees                         |                  |  |                                         |      |                       |   | 104                                       |   |                                                                   |    |                           |   |                                               |   |                                         |    
|Other comprehensive loss:                                                                        |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                           |   |                                                |   |                                         |     
|Unrealized losses on 
    available-for-sale
    marketable securities, net                      |                  |  |                                         |      |                       |   |                                          |   |                                                                   |    |                           |   |                                               |   |                                         | (11 
|Foreign currency translation 
      adjustments                                                  |                  |  |                                         |      |                       |   |                                          |   |                                                                   |    |                           |   |                                               |   |                                         | (17 
|                                                                                                 |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                          
|Total other comprehensive 
    loss                                                              |                  |  |                                         |      |                       |   |                                          |   |                                                                   |    |                           |   |                                               |   |                                         |    
|Net loss                                                                                         |                  |  |                                         |      |                       |   |                                          |   |                                                                   |    |                           |   |                                               |   |                                         |    
|                                                                                                 |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                           |   |                                                |   |                                         |     
|Total comprehensive loss                                                                         |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                           |   |                                                |   |                                         |     
|                                                                                                 |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                          
|Balance as of December 31, 
   2008                                                              | 8,917,950         |  | $                                       | 26    |                       | $ | 19,410                                    |   | $                                                                 | (29 | )                         | $ |                                               |   | $                                       | (16 
|                                                                                                 |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                           |   |                                                |   |                                         |     
|Accumulated foreign currency 
    translation adjustment
    as of December 31, 2008             |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                           |   |                                                |   |                                         | (17 
|Accumulated unrealized gains 
    from available-for-sale 
    marketable securities             |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                           |   |                                                |   |                                         | 1   
|                                                                                                 |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                          
|Accumulated unrealized losses                                                                    |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                           |   |                                                |   | $                                       | (16 
|                                                                                                 |                   |  |                                         |       |                       |   |                                           |   |                                                                   |     |                          
|                                                                                                 |                   |  |                                         |       |                       |   |                                           |   |                                                                  

*)         Represents an amount lower than $ 1.

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

F - 6

---

---

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

|                                                                                         | Year ended December 31, |       
|---------------------------------------------------------------------------------------- | ----------------------- | ------
|
|
|
|                                                                                         |                         |       
|Cash flows from operating activities:                                                    |                         |       
|                                                                                         |                         |       
|Net loss                                                                                 | $                       | (2,246
|Adjustments required to reconcile net loss to net cash used in
    operating activities: |                         |       
|Gains on sale of available-for-sale marketable securities                                |                         | (13   
|Loss (gain) on sale of an investment in affiliate                                        |                         |      
|Impairment of goodwill and intangible assets                                             |                         |      
|Equity in loss (earnings) of affiliate                                                   |                         | (159  
|Depreciation and amortization                                                            |                         | 675   
|Deferred income taxes, net                                                               |                         | 3     
|Employee stock-based compensation                                                        |                         | 210   
|Stock-based compensation related to warrants issued to non employees                     |                         | 10    
|Accrued severance pay, net                                                               |                         | 38    
|Decrease (increase) in trade receivables and unbilled receivables                        |                         | (549  
|Decrease (increase) in other accounts receivable and prepaid
      expenses              |                         | (321  
|Decrease (increase) in inventories                                                       |                         | 43    
|Decrease in trade payables                                                               |                         | (218  
|Increase (decrease) in accrued expenses and other liabilities                            |                         | 168   
|Increase (decrease) in deferred revenues                                                 |                         | 610   
|Decrease in lease deposits                                                               |                         |      
|Increase (decrease) in related parties, net                                              |                         | 140   
|                                                                                         |                         |       
|                                                                                         |                         |       
|                                                                                         |                         |       
|Net cash provided by (used in) operating activities                                      |                         | (1,609
|                                                                                         |                         |       
|                                                                                         |                         |       
|                                                                                        
|Cash flows from investing activities:                                                    |                         |       
|                                                                                         |                         |       
|                                                                                         |                         |       
|Proceeds from sale of property and equipment                                             |                         | 1     
|Proceeds from sale of an affiliate and other investments                                 |                         |      
|Purchase of property and equipment                                                       |                         | (107  
|Investment in short-term bank deposit                                                    |                         | (100  
|Investment in lease deposits                                                             |                         | (6    
|Investment in available-for-sale marketable securities                                   |                         | (221  
|Proceeds from sale of available-for-sale marketable securities                           |                         | 208   
|Additional investment in goodwill in consideration of TeleKnowledge
    acquisition      |                         | (204  
|Acquisition of certain assets and liabilities of TelSoft                                 |                         | (1,202
|Acquisition of certain assets and liabilities of AnchorPoint (a)                         |                         |      
|Dividend from an affiliate                                                               |                         | 409   
|Loans granted to employees                                                               |                         |      
|Others                                                                                   |                         | 16    
|                                                                                         |                         |       
|                                                                                         |                         |       
|                                                                                         |                         |       
|Net cash provided by (used in) investing activities                                      |                         | (1,206
|                                                                                         |                         |       
|                                                                                         |                         |       

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

F - 7

---

---

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

|                                                       | Year ended December 31, |       
|------------------------------------------------------ | ----------------------- | ------
|
|
|
|
|Cash flows from financing activities:                  |                         |       
|                                                       |                         |       
|Proceeds from long-term loan                           | $                       | 1,000 
|Proceeds from short-term bank credit                   |                         | 4     
|Repayment of long-term loans                           |                         |      
|Proceeds from issuance of shares, net                  |                         |      
|Proceeds from exercise of options and warrants         |                         | 94    
|                                                       |                         |       
|                                                       |                         |       
|Net cash provided by (used in) financing activities    |                         | 1,098 
|                                                       |                         |       
|                                                       |                         |       
|Increase (decrease) in cash and cash equivalents       |                         | (1,717
|Cash and cash equivalents at the beginning of the year |                         | 3,191 
|                                                       |                         |       
|                                                       |                         |       
|Cash and cash equivalents at the end of the year       | $                       | 1,474 
|                                                       |                         |       
|                                                       |                         |       
|Supplemental disclosure of cash flows activities:      |                         |       
|                                                       |                         |       
|Cash provided by (paid) during the year for:           |                         |       
|                                                       |                         |       
|Interest                                               | $                       | 38    
|                                                       |                         |       
|                                                       |                         |       
|Income taxes                                           | $                       | 118   
|                                                       |                         |       

|    |                                                                                                                                                                    |   |       |   |   |     |  |   |        |  
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | ----- | - | - | --- |  | - | ------ | -
|(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 1(c)(d): |   |       |   |   |     |  |   |        |  
|    |                                                                                                                                                                    |   |       |   |   |     |  |   |        |  
|    | Working capital (excluding cash and cash equivalents)                                                                                                              | $ | (47   | ) | $ |    |  | $ | (239   | )
|    | Property and equipment                                                                                                                                             |   | 5     |   |   |    |  |   | 71     |  
|    | Issuance of shares                                                                                                                                                 |   |      |   |   |    |  |   | (2,127 | )
|    | Goodwill                                                                                                                                                           |   | 166   |   |   | 200 |  |   | 683    |  
|    | Developed technology                                                                                                                                               |   | 433   |   |   |    |  |   | 987    |  
|    | Brand name                                                                                                                                                         |   |      |   |   |    |  |   | 229    |  
|    | Customer relationship                                                                                                                                              |   | 645   |   |   |    |  |   | 370    |  
|    |                                                                                                                                                                    |   |       |   |   |     | 
|    |                                                                                                                                                                    |   |       |  
|    |                                                                                                                                                                    |   |       |   |   |     |  |   |        |  
|    | Total cash paid (provided) during the year                                                                                                                         | $ | 1,202 |   | $ | 200 |  | $ | (26    | )
|    |                                                                                                                                                                    |   |       |   |   |     | 
|    |                                                                                                                                                                    |   |       |  
|    |                                                                                                                                                                    |   |       |   |   |     |  |   |        |  
|(b) | Supplemental disclosure of non-cash activities :                                                                                                                   |   |       |   |   |     |  |   |        |  
|    |                                                                                                                                                                    |   |       |  
|    |                                                                                                                                                                    |   |       |   |   |     |  |   |        |  
|    | Issuance of shares                                                                                                                                                 | $ |      |   | $ |    |  | $ | 50     |  
|    |                                                                                                                                                                    |   |       |   |   |     | 
|    | Issuance of shares for AnchorPoint acquisition                                                                                                                     |   |       |   |   |     |  | $ | 2,127  |  
|    |                                                                                                                                                                    |   |       |   |   |     | 
|    | Sale of other investments                                                                                                                                          | $ |      |   | $ | 36  |  | $ |       |  
|    |                                                                                                                                                                    |   |       |   |   |     | 
|    | Earn out in respect of TelSoft acquisition                                                                                                                         | $ |      |   | $ | 406 |  | $ |       |  
|    |                                                                                                                                                                    |   |       |   |   |     | 
|    | Earn out in respect of Teleknowledge acquisition                                                                                                                   | $ | 123   |   | $ | 10  |  | $ |       |  
|    |                                                                                                                                                                    |   |       |   |   |     | 
|    |                                                                                                                                                                    |   |       |  

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

F - 8

---

---

|                                                           
|-----------------------------------------------------------
|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 and billing (CC&B)
solutions that enable business organizations and other enterprises to improve the efficiency and
performance of all intellectual property (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.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

| | The Companys wholly-owned subsidiaries in the United States, Hong Kong and Brazil, namely, MTS
IntegralTRAK Inc., MTS Asia Ltd. and TABS Brazil Ltda., respectively, act as marketing and customer
service organizations in those countries.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                              

| | 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 OEMs. If the Group is unable to effectively manage
and maintain a relationship with its OEMs, or if any event negatively affects an OEMs financial
condition, the Groups results of operations and financial position could be materially adversely
effected.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | In 2006, 2007 and 2008, one major customer generated 29%, 27% and 24% of the Groups revenues,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | MTSs shares are listed on the NASDAQ Capital Market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| | c. | On July 25, 2006, the Company and TelSoft Solutions, Inc. (TelSoft) entered into an asset
purchase agreement (APA). TelSoft is a provider of call accounting and telecom expense
management (TEM) solutions to organizations and the acquisition enabled the Company to
increase its customer base. Under the terms of the TelSoft 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 in the total amount of $ 606 were recorded as additional goodwill during 2007, when
actual revenue performance was evaluated (see Note 8a).
| |    |                                                                                                                                                                                                                                                                       

| | 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 10).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 9

---

---

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

| | 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 the 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                

| | d. | On December 23, 2008, the Company and AnchorPoint, Inc. (AnchorPoint) entered into an asset
purchase agreement (APA). AnchorPoint is a provider of TEM solutions to enterprises and
the acquisition will enable the Company to enhance its product offering as well as to increase its
customer base. Under the terms of the AnchorPoint APA, the Company acquired certain assets and assumed
certain liabilities of AnchorPoint for a consideration of 2,174,615 Ordinary shares, par value NIS
0.01 per share, of MTS. The transaction related expenses amounted to $ 219. The consideration
was paid as follows:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| | 1. | 1,848,423 Ordinary shares were issued and delivered at closing.                                                                                                                                                                  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                  
| | 2. | 326,192 Ordinary shares were issued at closing and delivered to an escrow agent to be held in trust
for a period of 15 months following the closing, to satisfy general representations and warranties
included in the agreement.
| |    |                                                                                                                                                                                                                                  

| | The acquisition was completed on December 30, 2008.
| | ---------------------------------------------------
| |                                                    

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

F - 10

---

---

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

| | 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 Anchorpoints net assets at the
date of acquisition, as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                   

| | Tangible assets:                               |  |  |   |       | 
| | ---------------------------------------------- |  |  | - | ----- | 
| | Net assets                                     |  |  | $ | 77    | 
| |                                                |  |  |   |       | 
| | Intangible assets:                             |  | 
| | Developed technology (eight-year useful life)  |  |  |   | 987   | 
| | Brand name (eleven-year useful life)           |  |  |   | 229   | 
| | Customer relationship (eight-year useful life) |  |  |   | 370   | 
| | Goodwill                                       |  |  |   | 683   | 
| |                                                | 
| |                                                |  |  |   |       | 
| | Net assets acquired                            |  |  |   | 2,346 | 
| |                                                | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The valuation of the developed technology was based on the income approach which reflects the future
economic benefits from AnchorPoints 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 AnchorPoints customers retained
by MTS. The value assigned to brand name was based on the income approach. The fair value of the
brand name was estimated by capitalizing the royalties saved due to the Companys ownership
of the intellectual property.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Goodwill in the amount of $ 683, resulting from the AnchorPoint acquisition was assigned to the Companys
integration of AnchorPoints activity as of December 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

| | Pro forma results (Unaudited):
| | ------------------------------
| |                               

| |  | The following unaudited pro-forma information does not purport to represent what the Companys
results of operations would have been had the AnchorPoint acquisition occurred on January 1, 2008
and 2007 (two full years in which AnchorPoint was not included in MTS operations), nor does
it purport to represent the results of operations of the Company for any future period.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                                      

| |                                                                                                        |  |  | **Year ended December 31,** |          
| | ------------------------------------------------------------------------------------------------------ |  |  | --------------------------- | ---------
| |                                                                                                        |  |  |                             |          
| |                                                                                                        |  |  | **2007**                    |          
| |                                                                                                        |  |  |                             |          
| |                                                                                                        |  |  |                             |          
| | Revenues                                                                                               |  |  | $                           | 13,693   
| |                                                                                                        |  |  |                            
| |                                                                                                        |  | 
| | Net loss                                                                                               |  |  | $                           | (5,666   
| |                                                                                                        |  |  |                            
| | Basic and diluted net loss per share from continuing
    operations                                    |  |  | $                           | (0.71    
| |                                                                                                        |  |  |                            
| | Weighted average number of ordinary shares in computation of
   basic and diluted net income per share |  |  |                             | 7,948,460
| |                                                                                                        |  |  |                            

F - 11

---

---

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

| | 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 are 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 re-measured into
dollars in accordance with SFAS No. 52, Foreign Currency Translation. All transaction
gains and losses of the re-measurement of monetary balance sheet items are reflected in the consolidated
statements of operations as financial income or expenses, as appropriate.                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 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 SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS No. 115).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

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

| | 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 carried at fair market value. Fair value is
determined based on observable market value quotes. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| |    | In accordance with the Companys policy and the Financial Accounting Standards Board (the FASB)
Staff Position (FSP) No. FAS 115-1 (FSP No. 115-1) and SFAS No. 124-1, The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments, the Company
recognizes an impairment charge when a decline in the fair value of its investments below the cost
basis is judged to be other than temporary. The Company considers various factors in determining
whether to recognize an impairment charge, including the Companys intent and ability to hold
the investment for a period of time sufficient to allow for any anticipated recovery in market value,
the length of time and extent to which the fair value has been less than the cost basis, the credit
ratings of the securities and the financial condition and near-term prospects of the issuers. During
2008 and 2007, no other than temporary net impairment on marketable securities was recorded.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | f. | Inventories:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

| | Inventories are stated at the lower of cost or market value. Inventory write-offs 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.
| |                                                                                                                                                                                                                                                                                                 
| | As of December 31, 2007 and 2008, the inventory is only composed of finished products. 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 in which the Company
previously held at a 50% ownership interest (which is not a subsidiary), where the Company could
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.

F - 13

---

---

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

| | 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 because 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. During 2008, the Company recorded $ 398 gain from the sale of investments in other
companies (see also Note 5).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| | 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 (mainly 7%)                   | 
| | 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 SFAS 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, 2006, 2007 and 2008, no impairment losses were recorded.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

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

| | 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, an impairment loss in the amount
of $1,878 was identified and recorded (see also Note 8a). During 2006 and 2008, no impairment losses
were identified.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| | 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-to-eight
years customer relationship is amortized over a period of six-to-eight years and brand name is amortized
over a period of 11 years. During 2007, an impairment loss of intangible assets in the amount of
$ 434 was recorded (see also Note 8d). During 2006 and 2008, no impairment losses were identified.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| | 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 as amended (SOP No. 97-2)
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 collectability 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.

F - 15

---

---

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

| | 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 of 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 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, 2008, 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| | n. | Research and development costs:
| | -- | -------------------------------
| |    |                                

| | SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,
requires capitalization of certain software development costs subsequent to the establishment of
technological feasibility.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

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

| | Based on the Companys product development process, technological feasibility is established upon
the completion of a working model. The Company does not incur material costs between the completion
of a working model and the point at which the products are ready for general release. Therefore,
research and development costs are charged to the statement of operations as incurred.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                              

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

| | 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). The statement prescribes
the use of the liability method, according to which 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 clarifies the accounting for uncertainties in income taxes by establishing minimum standards
for the recognition and measurement of tax positions taken or expected to be taken in a tax return.
Under the requirements of FIN 48, the Company must review all of its tax positions and make a determination
as to whether its position is more-likely-than-not to be sustained upon examination by regulatory
authorities. If a tax position meets the more-likelythan-not standard, then the related tax
benefit is measured based on a cumulative probability analysis of the amount that is more-likely-than-not
to be realized upon ultimate settlement or disposition of the underlying issue. Prior to the effective
date of FIN 48, the Company applied the guidelines of SFAS No. 5, Accounting for Contingencies to
Account for Uncertain Tax Positions. As of January 1, 2007 there was no difference between the
provisions of SFAS No. 5 and FIN 48 therefore no adjustment was recorded to the accumulated deficit.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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

F - 17

---

---

|                                                           
|-----------------------------------------------------------
|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 Company recognizes compensation expenses for the value of its awards granted 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The fair value for options granted in 2006, 2007 and 2008 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** |  |  |  | **2006**                    |  
| |                            |  |  |  |                             |  
| |                            |  |  |  |                             |  
| | Expected volatility        |  |  |  | 74.5                        | %
| | Risk-free interest         |  |  |  | 4.6                         | %
| | Dividend yield             |  |  |  | 0.0                         | %
| | Expected life (years)      |  |  |  | 4                           |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Expected volatility was calculated based upon actual historical stock price movements. The expected
term of options granted represents the period of time that options granted are expected to be outstanding
and is determined based on the simplified method in accordance with SAB No. 110. 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

| | 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).                                                                                                                                                               
| |                                                                                                                                                                                                                                                       

| | 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, 2006, 2007 and 2008 amounted to approximately $
339, $ 400 and $ 227, respectively.                                                                                                                                                                                                                                                                                                                                                                                                             

F - 18

---

---

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

| | t. | Concentrations of credit risk:
| | -- | ------------------------------
| |    |                               

| | Financial instruments that potentially subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents, trade receivables, marketable securities and long-term
loans.                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Cash and cash equivalents are deposited with major banks in Israel and major banks in the United States.
Such deposits in the United States may be in excess of insured limits and are not insured in other
jurisdictions. Management believes that the financial institutions that hold the Companys investments
are institutions with high credit standing, and accordingly, minimal credit risk exists with respect
to these investments.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | The customers of the Company are located mainly in the United States and Europe (see Note 15). 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:
| | -- | ---------------------------------
| |    |                                  

| | The Company accounts for earnings per share based on Statement of Financial Accounting Standards No.
128, Earnings Per Share (SFAS No. 128). SFAS No. 128 requires companies to
compute earnings per share under two different methods, basic and diluted earnings per share, and
to disclose the methodology used for the calculations. Basic earnings per share are calculated using
the weighted average number of shares outstanding during the period. Diluted earnings per share is
computed on the basis of the weighted average number of shares outstanding and the effect of dilutive
potential shares of Ordinary shares considered outstanding during the period.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | 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 685,410, 602,487 and 608,783 for the years ended December
31, 2006, 2007 and 2008, respectively.                                                                                                                                                                                                                                                                                                                        

F - 19

---

---

|                                                           
|-----------------------------------------------------------
|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. | Fair value measurement:
| | -- | -----------------------
| |    |                        

| | In February 2008, the FASB approved FSP FAS No. 157-2, Effective Date of FASB Statement No. 157
(FSP FAS 157-2), which allows companies to elect a one-year delay in applying SFAS 157
to certain fair value measurements, primarily related to nonfinancial instruments. The Company elected
the delayed adoption date for the portions of SFAS 157 impacted by FSP FAS 157-2. The partial adoption
of SFAS 157 was prospective and did not have a significant effect on the Companys consolidated
financial statements. The Company is currently evaluating the impact of applying the deferred portion
of SFAS 157 to the nonrecurring fair value measurements of its nonfinancial assets and liabilities.
In accordance with FSP FAS 157-2, the fair value measurements for nonfinancial assets and liabilities
will be adopted effective for fiscal years beginning after November 15, 2008.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Assets measured at fair value under SFAS 157 on a recurring basis as of December 31, 2008 were presented
on the Companys consolidated balance sheet as follows (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| |                                  |  |  | **Total** |     | **Quoted 
      Prices in 
      Active 
      Markets 
      for 
      Identical 
      Assets 
      (Level 1)** |   | **Significant 
      Other 
      Observable 
      Inputs 
      (Level 2)** |  | **Significant 
      Unobservable 
      Inputs
      (Level 3)** |  
| | -------------------------------- |  |  | --------- | --- | ------------------------------------------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------- |  | ----------------------------------------------------------------- | -
| |                                  |  |  |           |     |                                                                                                                     |   |                                                                               |  |                                                                   |  
| |                                  |  |  |           |     |                                                                                                                     |   |                                                                               |  |                                                                   |  
| | Restricted marketable securities |  |  | $         | 196 |                                                                                                                     | $ | 196                                                                           |  | $                                                                 | 

| |    |                                                
| | -- | -----------------------------------------------
| | w. | Impact of recently issued accounting standards:
| |    |                                                

| | In December 2007, the FASB issued SFAS 160, Non-controlling Interests in Consolidated
Financial Statements (SFAS 160). SFAS 160 amends ARB 51, Consolidated
Financial Statements, to establish accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a non-controlling
interest in a subsidiary is an ownership interest in the consolidated entity that should be reported
as equity in the consolidated financial statements. SFAS 160 also changes the way the consolidated
income statement is presented by requiring consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the non-controlling interest. It also requires
disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the non-controlling interest. SFAS 160 requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded
disclosures in the consolidated financial statements that clearly identify and distinguish between
the interests of the parent owners and the interests of the non-controlling owners of a subsidiary.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | SFAS 160 is effective for fiscal periods, and interim periods within those fiscal years, beginning
on or after December 15, 2008. The adoption of SFAS 160 is not expected to have a material
effect on accounting for current subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F - 20

---

---

|                                                           
|-----------------------------------------------------------
|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 141(R), Business Combinations (SFAS
141(R)). The Statement replaces SFAS No. 141, Business Combinations,
and requires an acquirer to recognize the assets acquired, the liabilities assumed, including those
arising from contractual contingencies, any contingent consideration and any non-controlling interest
in the acquiree at the acquisition date, measured at their fair values as of that date, with limited
exceptions specified in the statement. SFAS 141(R) also requires the acquirer in a business
combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable
assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts
of their fair values (or other amounts determined in accordance with SFAS 141(R)). In addition, SFAS
141(R)s requirement to measure the non-controlling interest in the acquiree at fair value will
result in recognizing the goodwill attributable to the non-controlling interest in addition to that
attributable to the acquirer.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15, 2008.
As such, the adoption of SFAS 141(R) is not expected to have a material effect on accounting for
our current subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | In February 2008, the FASB issued FSP FAS No. 157-2, Effective Date of FASB Statement No. 157
(FSP FAS 157-2), to delay the effective date of FASB Statement 157 for one year for certain
nonfinancial assets and nonfinancial liabilities, excluding those that are recognized or disclosed
in financial statements at fair value on a recurring basis (that is, at least annually). For purposes
of applying the FSP FAS 157-2, nonfinancial assets and nonfinancial liabilities include all assets
and liabilities other than those meeting the definition of a financial asset or a financial liability
in SFAS No. 159. FSP FAS 157-2 defers the effective date of SFAS No. 157 to fiscal years beginning
after November 15, 2008, and interim periods within those fiscal years for items within the scope
of this FSP FAS 157-2. The Company does not expect the adoption of FSP FAS 157-2 for the items within
the scope of FSP FAS 157-2 to have a material impact on its financial position, results of operations
or cash flows.                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | In 2008, the FASBs Emerging Issue Task Force issued EITF No. 08-6, Equity-Method Investment
Accounting(EITF 08-6), which concludes that the cost basis of a new equity-method
investment would be determined using a cost-accumulation model, which would continue the practice
of including transaction costs in the cost of investment and would exclude the value of contingent
consideration. Equity-method investment should be subject to other-than-temporary impairment analysis.
It also requires that a gain or loss to be recognized on the portion of the investors ownership
sold. EITF 08-6 will be effective for the reporting period beginning after December 15, 2008. The
Company does not expect a material impact on its consolidated financial statements from adoption
of EITF 08-6.                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | In April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of Intangible Assets
(FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets. FSP 142-3 is effective for fiscal years beginning
after December 15, 2008. The Company does not expect the adoption of FSP 142-3 to have a material
impact on the Companys consolidated financial position, results of operations and cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F - 21

---

---

|                                                           
|-----------------------------------------------------------
|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:-       RESTRICTED MARKETABLE SECURITIES
|-----------------------------------------------
|                                               

| | The following is a summary of the Companys investment in marketable securities:
| | --------------------------------------------------------------------------------
| |                                                                                 

| |                             |  | December 31, 2007 |     | December 31, 2008 |  
| | --------------------------- |  | ----------------- | --- | ----------------- | -
|
|
|
| |                             |  |                   |     |                   |  
| | Available-for-sale:         |  |                   |     |                   |  
| |                             |  |                   |     |                   |  
| | Equity securities           |  | $                 | 72  |                   | $
| | Corporate bonds             |  |                   | 16  |                   |  
| | Israeli Government
   debts |  |                   | 68  |                   |  
| |                             |  |                   |     |                   |  
| |                             |  |                   |     |                   |  
| |                             |  | $                 | 156 |                   | $
| |                             |  |                   |     |                   |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The gross realized gains on sales of available-for-sale securities totaled $ 13, $ 13 and
$ 18 in 2006, 2007 and 2008, 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 income (losses) amounted to $ 1, $ 1
and $ (11) in 2006, 2007 and 2008, respectively.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | None of the unrealized losses as of December 31, 2008 has been outstanding for a period of more than
12 months.                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | The amortized cost and fair value of debt and securities as of December 31, 2008, by contractual
maturity, are shown below.                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                              

| |                                              |  |  | December 31, 2007 |     | December 31, 2008 |  
| | -------------------------------------------- |  |  | ----------------- | --- | ----------------- | -
|
|
|
|
| | Matures up to one year                       |  |  | $                 |    |                   | $
| | Matures after one year through fiveyears     |  |  |                   | 68  |                   |  
| |                                              |  |  |                  
| | Matures after five years                     |  |  |                   | 16  |                   |  
| | Equity securities - no definitematurity date |  |  |                   | 72  |                   |  
| |                                              |  |  |                   |     |                   |  
| |                                              |  |  |                   |     |                   |  
| | Total                                        |  |  | $                 | 156 |                   | $
| |                                              |  |  |                   |     |                   |  

| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | The marketable securities are restricted in order to secure the Companys obligations under one
of its leasing agreements.

F - 22

---

---

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

|NOTE 4:-       OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|-------------------------------------------------------------
|                                                             

| |                                                          |  |  | December 31, |    
| | -------------------------------------------------------- |  |  | ------------ | ---
|
|
|
|
| | Grants receivable from the Office of the Chief Scientist |  |  | $            | 335
| | Government authorities                                   |  |  |              | 17 
| | Prepaid expenses                                         |  |  |              | 29 
| | Deferred income taxes (1)                                |  |  |              | 21 
| | Others                                                   |  |  |              | 142
| |                                                          |  |  |             
| |                                                          |  |  |              |    
| |                                                          |  |  | $            | 544
| |                                                          |  |  |             

| |     |              
| | --- | -------------
| | (1) | See Note 12d.
| |     |              

|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 held an approximately 1% ownership interest, was sold to a third party for a
total estimated consideration of $16, of which the Companys proceeds amounted to approximately
$36. The transaction was consummated on December 31, 2007, following the approval of the shareholders
of the online advertising company and therefore was classified to other accounts receivable. As a
result, the Company recorded a capital loss in the amount of $63. During 2008, the Company received
additional earn out proceeds related to the transaction in the amount of $16 and recorded a capital
gain in the amount of $ 16.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | b. | On February 4, 2008, the Company consummated the sale of its prior ownership interest in cVidya Networks
Inc. to a third party in consideration of approximately $ 603. The consideration reflects a capital
gain of $ 382. The Company recorded its investment in cVidya Networks Inc. as of December 31,
2007 in the amount of $ 221 in the current assets.                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|NOTE 6:-       INVESTMENTS IN AFFILIATE
|---------------------------------------
|                                       

| | On November 29, 2007, the Company sold its 50% ownership interest in Jusan S.A., a former affiliate,
to the affiliates other shareholders, in consideration of Euro 700 thousand ($ 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. The consideration reflects a loss of $ 197 recorded in equity
in loss of affiliate. During 2007, a $ 134 dividend was received from Jusan S.A. During 2008
no additional consideration was received.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

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

|NOTE 7:-       PROPERTY AND EQUIPMENT
|-------------------------------------
|                                     

| |                                    |  |  | December 31, |      
| | ---------------------------------- |  |  | ------------ | -----
|
|
|
|
| | Cost:                              |  |  |              |      
| | Computers and peripheral equipment |  |  | $            | 3,097
| | Office furniture and equipment     |  |  |              | 579  
| | Leasehold improvements             |  |  |              | 93   
| |                                    |  |  |              |      
| |                                    |  |  |              |      
| |                                    |  |  |              | 3,769
| | Accumulated depreciation:          |  |  |              | 3,486
| |                                    |  |  |              |      
| |                                    |  |  |              |      
| | Depreciated cost                   |  |  | $            | 283  
| |                                    |  |  |             

| |                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The depreciation expense for the years ended December 31, 2006, 2007 and 2008 amounted to $ 243,
$ 250 and $ 175, respectively. During 2008, the Company had written-off fully amortized property
and equipment in a gross amount of $ 2,073.
| |                                                                                                                                                                                                                                              

|NOTE 8:-       GOODWILL AND OTHER INTANGIBLE ASSETS
|---------------------------------------------------
|                                                   

| | a. | Goodwill:
| | -- | ---------
| |    |          

| | The changes in the carrying amount of goodwill for the years ended December 31, 2007 and 2008 are as
follows:
| | -------------------------------------------------------------------------------------------------------------

| |                                                                                                                |  |   |        |  
| | -------------------------------------------------------------------------------------------------------------- |  | - | ------ | -
| | Balance as of January 1, 2007                                                                                  |  | $ | 4,058  |  
| |                                                                                                                |  |   |        |  
| | Additional consideration in conjunction with Teleknowledge acquisitionbased on post-contract billing revenues  |  |   | 10     |  
| | Additional consideration based on post-contract TEM activity that was 
    acquired from TelSoft (see Note 1c) |  |   | 606    |  
| | Impairment of goodwill related to billing activity that was acquired from 
    Teleknowledge (1)               |  |   | (1,878 | )
| |                                                                                                                |  |   |       
| |                                                                                                                |  |   |        |  
| | Balance as of December 31, 2007                                                                                |  |   | 2,796  |  
| |                                                                                                                |  |   |       
| |                                                                                                                |  |   |        |  
| | Goodwill acquired, see Note 1(d)                                                                               |  |   | 683    |  
| |                                                                                                                | 
| |                                                                                                                |  |   |        |  
| | Balance as of December 31, 2008                                                                                |  | $ | 3,479  |  
| |                                                                                                                | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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 $1,878 goodwill relating to the acquisition of the Teleknowledge billing activity had been impaired
and the carrying value was written-off.

F - 24

---

---

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

|NOTE 8:-       GOODWILL AND OTHER INTANGIBLE ASSETS (Cont.)
|-----------------------------------------------------------
|                                                           

| | b. | Other intangibles consist of the following:
| | -- | -------------------------------------------
| |    |                                            

| |                           |  | December 31, |      
| | ------------------------- |  | ------------ | -----
|
|
|
| |                           |  |              |      
| | Cost:                     |  |              |      
| | Development technology    |  | $            | 1,183
| | Customer relationship     |  |              | 645  
| | Brand name                |  |              |     
|
| |                           |  |              |      
| |                           |  |              | 1,828
|
| | Accumulated amortization: |  |              |      
| | Development technology    |  |              | 871  
| | Customer relationship     |  |              | 152  
| | Brand name                |  |              |     
|
| |                           |  |              |      
| |                           |  |              | 1,023
|
| |                           |  |              |      
| | Amortized cost            |  | $            | 805  
|

| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Intangible assets resulted from acquisitions of IntegraTRAK (in 2001) and TelSoft (see Note 1c), the
Companys U.S. subsidiaries, and AnchorPoint (see Note 1d).
| |                                                                                                                                                                 

| | c. | Amortization expenses amounted to $ 432, $ 401 and $ 193 for each of the years ended December
31, 2006, 2007 and 2008, 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:                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                 

| |             |  |   |       | 
| | ----------- |  | - | ----- | 
| |             |  |   |       | 
| |             |  |   |       | 
| | 2009        |  | $ | 384   | 
| | 2010        |  |   | 367   | 
| | 2011        |  |   | 343   | 
| | 2012        |  |   | 279   | 
| | 2013        |  |   | 190   | 
| | 2014 - 2019 |  |   | 635   | 
| |             |  |   |       | 
| |             |  |   |       | 
| |             |  | $ | 2,198 | 
| |             |  |   |       | 

F - 25

---

---

|                                                           
|-----------------------------------------------------------
|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:-       ACCRUED EXPENSES AND OTHER LIABILITIES
|-----------------------------------------------------
|                                                     

| |                                |  | December 31, |      
| | ------------------------------ |  | ------------ | -----
|
|
|
| |                                |  |              |      
| | Employees and payroll accruals |  | $            | 919  
| | Income tax payable             |  |              | 735  
| | Accrued expenses               |  |              | 1,314
| | Customer advances              |  |              | 261  
| | Related parties                |  |              | 80   
|
| |                                |  |              |      
| |                                |  | $            | 3,309
| |                                |  |              |      

|                                    | 
|----------------------------------- | 
|NOTE 10:-       LONG-TERM BANK LOAN
|                                    | 

| | Composed as follows:
| | --------------------
| |                     

| |                           |  | December 31, |    
| | ------------------------- |  | ------------ | ---
|
|
|
| |                           |  |              |    
| | Long-term loan            |  | $            | 583
| | Less  current maturities |  |              | 583
|
| |                           |  |              |    
| |                           |  | $            |   
| |                           |  |              |    

| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The interest rate of the loan was the monthly LIBOR rate + 2%, payable on a monthly basis on the outstanding
loan amount commencing August 31, 2006. The loan principal was repaid in 12 equal monthly installments
commencing August 31, 2007. The loan was fully repaid as of December 31, 2008.
| |                                                                                                                                                                                                                                                                                                   

|NOTE 11:-       COMMITMENTS AND CONTINGENT LIABILITIES
|------------------------------------------------------
|                                                      

| | a. | Lease commitments:                                                                                                                         
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                            
| |    | The facilities of the Company and its subsidiaries are rented under operating leases for periods ending
February 2009 through January 2014.
| |    |                                                                                                                                            

| | Future minimum lease commitments under non-cancelable operating leases as of December 31, 2008
are as follows:
| | --------------------------------------------------------------------------------------------------------------
| |                                                                                                               

| | 2009 |  | $ | 659   |  | 
| | ---- |  | - | ----- |  | 
| | 2010 |  |   | 538   |  | 
| | 2011 |  |   | 271   |  | 
| | 2012 |  |   | 80    |  | 
| | 2013 |  |   | 80    |  | 
| |      |  |   |       | 
| |      |  |   |       |  | 
| |      |  | $ | 1,628 |  | 
| |      |  |   |       | 

| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | Lease expenses for the years ended December 31, 2006, 2007 and 2008 were approximately $ 873,
$ 904 and $ 914, respectively.

F - 26

---

---

|                                                           
|-----------------------------------------------------------
|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:-       COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|--------------------------------------------------------------
|                                                              

| | b. | Royalty commitments:
| | -- | --------------------
| |    |                     

| | 1. | The Company is committed to pay royalties to the Office of the Chief Scientist (OCS) of
the Ministry of Trade and Labor 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, 2008,
the Company had a contingent liability to pay royalties in the amount of $ 9,605. 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
OCS grants in the amount of $ 187, $ 178 and $ 312 for the years ended December 31,
2006, 2007 and 2008, 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, 2008, the Company had a contingent obligation to pay royalties
in the amount of $ 259.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                          

| | c. | Claims and demands:
| | -- | -------------------
| |    |                    

| | 1. | In April 2002, 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 ($ 1,578).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                         

| | 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 exposures and provisions related to income taxes have been assessed and provided for in accordance
with FIN 48.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                     

| | 2. | 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 of Euro 79.5 ($ 111) 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.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 27

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---

|                                                           
|-----------------------------------------------------------
|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:-       COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|--------------------------------------------------------------
|                                                              

| | 3. | 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), of which NIS 112 thousand ($ 29) is demanded from the Company and
NIS 200 thousand ($ 52) is demanded from TIM. The plaintiff is a former minority shareholder
of a company in which the Company was 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. On June 1, 2008, the plaintiff submitted an amended statement of claim
to the court to which the Company was added only as a formal defendant, without requesting
from the court any relief or articulating any claim with regard to the Company. The Companys
legal advisors believe that the chances of the plaintiff receiving any monetary relief from MTS are low.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 4. | On February 21, 2007, one of the Companys suppliers 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. On December 10, 2008, the Kfar-Saba
Magistrate Court ruled that the Company shall pay approximately $42 plus interest of Libor+1% and
plus expenses of $14. As of December 31, 2008, the Company had fully paid the amount related to this
ruling.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 5. | On March 15, 2007, the Company received a letter from the legal counsel of one of its customers alleging,
among other things, that the Company materially breached an agreement relating to its billing solutions
it had entered into with the customer on March 30, 2006. The customer is seeking full repayment of
the $141 that was paid by him under the agreement, plus liquidated damages as provided in the agreement.
The Company believes that the claim has no merit. While the Company intends to vigorously reject
the claim, the Company and its legal advisors cannot at this point predict the outcome.                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 6. | During August 2007, TABS Brazil, was ordered by the Labor Law Court in Brazil to pay 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 in the amount of $ 190 to secure its obligations under one
of its leasing agreements.
| | ---------------------------------------------------------------------------------------------------------------------------

F - 28

---

---

|                                                           
|-----------------------------------------------------------
|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:-       TAXES ON INCOME

| | a. | Israeli taxation:
| | -- | -----------------
| |    |                  

| | 1. | Income Tax (Inflationary Adjustments) Law, 1985:
| | -- | ------------------------------------------------
| |    |                                                 

| | According to the Income Tax (Inflation Adjustments) Law, 1985, until 2007, the results for tax purposes
were adjusted for the changes in the Israeli consumer price index (Israeli CPI). In February
2008, the Israeli parliament passed an amendment to the Income Tax (Inflationary Adjustments) Law,
1985, which limits the scope of the law starting 2008 and thereafter. Starting 2008, the results
for tax purposes are measured in nominal values, excluding certain adjustments for changes in the
Israeli CPI carried out in the period up to December 31, 2007. The amendment to the law includes,
among other things, the elimination of the inflationary additions and deductions and the additional
deduction for depreciation starting 2008.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| | 2. | Corporate tax rates:
| | -- | --------------------
| |    |                     

| | Generally, Israeli companies are subject to corporate tax on their taxable income. On July 25,
2005, the Israeli parliament approved the Amendment to Income Tax Ordinance (No. 147), 2005, which
prescribes, among others, a gradual decrease in the corporate tax rate in Israel to the following
tax rates: in 2006 - 31%, in 2007 - 29%, in 2008 - 27%, in 2009 - 26% and in 2010 and thereafter
- 25%. However, the effective tax rate payable by a company which derives income from an approved
enterprise may be considerably less, (see also Note 12c).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| | 3. | 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).                                                                                                                                                                                                                                                                                                                                                                                             

F - 29

---

---

|                                                           
|-----------------------------------------------------------
|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:-      TAXES ON INCOME (Cont.)

| | Accordingly, the Company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 such 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 promulgated thereunder.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Should the Company 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 Law came into effect (the Amendment) and has significantly
changed the provisions of the 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 Election. 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | In addition, the 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 such 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%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F - 30

---

---

|                                                           
|-----------------------------------------------------------
|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:-      TAXES ON INCOME (Cont.)

| | 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.                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                      

| | 4. | Tax assessments:
| | -- | ----------------
| |    |                 

| | With regard to the claim from the tax authorities in Israel, see Note 11c(1). The Company has received
final tax assessments until the 2002 tax year.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                      

| | 5. | Tax benefits under the Law for the Encouragement of Industry (Taxation), 1969:
| | -- | ------------------------------------------------------------------------------
| |    |                                                                               

| | The Law for the Encouragement of Industry (Taxation), 1969, provides several tax benefits for industrial
companies. An industrial company is defined as a company resident in Israel, at least 90% of the
income of which in a given tax year exclusive of income from specified government loans, capital
gains, interest and dividends, is derived from an industrial enterprise owned by it. An industrial
enterprise is defined as an enterprise whose major activity in a given tax year is industrial production
activity.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 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.                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| | Eligibility for benefits under the Law for the Encouragement of Industry (Taxation), 1969, is not subject
to receipt of prior approval from any governmental authority. No assurance can be given that the
Israeli tax authorities will agree that the Company qualifies, or, if the Company qualifies, then
the Company will continue to qualify as an industrial company or that the benefits described above
will be available to the Company in the future.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| | b. | Income taxes on non-Israeli subsidiaries:
| | -- | -----------------------------------------
| |    |                                          

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

F - 31

---

---

|                                                           
|-----------------------------------------------------------
|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:-       TAXES ON INCOME (Cont.)

| | c. | Net operating loss carryforwards:
| | -- | ---------------------------------
| |    |                                  

| | As of December 31, 2008, the Company and its subsidiaries in Hong Kong and the United States have an
estimated total amount of available carryforward tax losses of $ 17,708, $ 227 and $ 626, 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 is subject to U.S. income taxes and has net operating loss carryforwards of approximately
$626 as of December 31, 2008, 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

| | 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:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                      

| |                                                                     |  | December 31, |       
| | ------------------------------------------------------------------- |  | ------------ | ------
|
|
|
| |                                                                     |  |              |       
| | Tax loss carryforward of the Company                                |  | $            | 3,292 
| | Allowances for doubtful accounts and accruals for employee benefits |  |              | 205   
| | In respect of marketable securities                                 |  |              | 47    
| | Goodwill                                                            |  |              | 85    
| | Other intangible assets                                             |  |              | 557   
| | Depreciation and accruals for interest                              |  |              | 249   
|
| |                                                                     |  |              |       
| | Net deferred tax asset before valuation allowance                   |  |              | 4,435 
| | Valuation allowance                                                 |  |              | (4,291
|
| |                                                                     |  |              |       
| | Net deferred income taxes                                           |  | $            | 144   
|
| |                                                                     |  |              |       
| | Presented as follows:                                               |  |              |       
| | Current assets - foreign                                            |  | $            | 21    
|
| |                                                                     |  |              |       
| | Other assets - foreign                                              |  | $            | 123   
|

F - 32

---

---

|                                                           
|-----------------------------------------------------------
|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:-       TAXES ON INCOME (Cont.)
|---------------------------------------
|                                       

| | MTS and certain of its subsidiaries have provided valuation allowances in respect of deferred tax assets
resulting from tax loss carryforwards 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 relating to the loss carryforwards in the Company and other temporary differences
will not be realized in the foreseeable future.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| | 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:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                        

| |                                                                                      |  | **Year ended December 31,** |       
| | ------------------------------------------------------------------------------------ |  | --------------------------- | ------
| |                                                                                      |  |                             |       
| |                                                                                      |  | **2006**                    |       
| |                                                                                      |  |                             |       
| |                                                                                      |  |                             |       
| | Loss before taxes as reported in the statements of 
   operations                    |  | $                           | (2,287
| |                                                                                      |  |                             |       
| |                                                                                      |  |                             |       
| | Tax rates                                                                            |  |                             | 31    
| |                                                                                      |  |                             |       
| |                                                                                      |  |                             |       
| | Theoretical tax benefit                                                              |  | $                           | (709  
| | Increase in taxes resulting from:                                                    |  |                             |       
| | Effect of different tax rates                                                        |  |                             | (17   
| | Tax adjustment in respect of inflation in Israel and others                          |  |                             | (9    
| | Utilization of carryforwards tax loss for which valuation 
   allowance was provided |  |                             | (22   
| | Non-deductible expenses and tax exempt income                                        |  |                             | 13    
| | Taxes and deferred taxes in respect of previous years                                |  |                             | 112   
| | Deferred taxes for which valuation allowance was 
   provided                        |  |                             | 750   
| |                                                                                      |  |                             |       
| |                                                                                      |  |                             |       
| | Taxes on income (benefit), net, as reported in the 
   statements of operations      |  | $                           | 118   
| |                                                                                      |  |                             |       

| |    |                                                  
| | -- | -------------------------------------------------
| | f. | Loss before income taxes is comprised as follows:
| |    |                                                  

| |          |  | **Year ended December 31,** |       
| | -------- |  | --------------------------- | ------
| |          |  |                             |       
| |          |  | **2006**                    |       
| |          |  |                             |       
| |          |  |                             |       
| | Domestic |  | $                           | (1,511
| | Foreign  |  |                             | (776  
| |          |  |                             |       
| |          |  |                             |       
| |          |  | $                           | (2,287
| |          |  |                             |       

| |    |                                          
| | -- | -----------------------------------------
| | g. | Taxes on income are comprised as follows:
| |    |                                          

| | Current taxes                                         |  | $ | 5   |  |  | $ |    |   |  | $ | 4   | 
| | ----------------------------------------------------- |  | - | --- |  |  | - | --- | - |  | - | --- | 
| | Deferred taxes                                        |  |   | 3   |  |  |   |    |   |  |   | 104 | 
| | Taxes and deferred taxes in respect of previous years |  |   | 110 |  |  |   | (68 | ) |  |   |    | 
| |                                                       |  |   |     |  |  |   |     |   | 
| |                                                       |  |   |     |  |  |   |     |   |  |   |     | 
| |                                                       |  | $ | 118 |  |  | $ | (68 | ) |  | $ | 108 | 
| |                                                       |  |   |     |  |  |   |     |   | 
| |                                                       |  |   |     |  |  |   |     |   |  |   |     | 
| | Foreign                                               |  | $ | 118 |  |  | $ | (68 | ) |  | $ | 108 | 
| |                                                       |  |   |     |  |  |   |     |   | 

F - 33

---

---

|                                                           
|-----------------------------------------------------------
|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:-       TAXES ON INCOME (Cont.)
|---------------------------------------
|                                       

| | 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 No. 5 and FIN 48 and, 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, 2008   |  |  | $ | 583 |  | 
| |                                                         |  | 
| |                                                         |  | 
| | Gross unrecognized tax benefits as of December 31 ,2008 |  |  | $ | 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 tax 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 before 2002.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|NOTE 13:-       RELATED PARTIES TRANSACTIONS AND BALANCES
|---------------------------------------------------------
|                                                         

| | a. | On November 8, 1999, an increase in the monthly salary of the Chairman of the Board of Directors (Chain
Mer) from $ 5 to $ 7 per month was approved.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                     

| | Prior to May 2008, Mrs. Dora Mer, the wife of Chaim Mer, provided legal services to the Company, for
which she received a monthly retainer of $5. Since May 2008, Mrs. Mer provides legal services to
the Company through the Israeli law firm of M. Firon & Co., Advocates and Notaries, for a monthly
retainer of $5, to be paid in NIS. The conditions of retaining the services of Mrs. Mer and M. Firon
& Co. were approved by the Companys Audit Committee and Board of Directors.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | MTSs subsidiaries, MTS Asia Ltd. and MTS IntegraTRAK, entered into an agreement with C. Mer (a
company controlled by the Companys major shareholder), 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 2007 and 2008, 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, 2007 and
2008.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 34

---

---

|                                                           
|-----------------------------------------------------------
|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:-       RELATED PARTIES TRANSACTIONS AND BALANCES (Cont.)
|-----------------------------------------------------------------
|                                                                 

| | c. | Transactions with related parties were as follows:
| | -- | --------------------------------------------------
| |    |                                                   

| | (1) | Balances with related parties:
| | --- | ------------------------------
| |     |                               

| |                                                          |  |  | **Year ended December 31,** |   
| | -------------------------------------------------------- |  |  | --------------------------- | --
| |                                                          |  |  |                             |   
| |                                                          |  |  | **2007**                    |   
| |                                                          |  |  |                             |   
| |                                                          |  |  |                             |   
| | Other accounts payable and accrued expenses (see Note 9) |  |  | $                           | 80
| |                                                          |  |  |                             |   

| |     |                                   
| | --- | ----------------------------------
| | (2) | Transactions with related parties:
| |     |                                   

| |                                                                        |  |  | **Year ended December 31,** |    
| | ---------------------------------------------------------------------- |  |  | --------------------------- | ---
| |                                                                        |  |  |                             |    
| |                                                                        |  |  | **2006**                    |    
| |                                                                        |  |  |                             |    
| |                                                                        |  |  |                             |    
| | Amounts charged by related parties:                                    |  |  |                             |    
| |                                                                        |  |  |                             |    
| | Cost of revenues                                                       |  |  | $                           | 10 
| | Operating expenses                                                     |  |  |                             | 60 
| |                                                                        |  |  |                             |    
| |                                                                        |  |  |                             |    
| |                                                                        |  |  | $                           | 70 
| |                                                                        |  |  |                             |    
| | Amounts charged by MTS Integra TRAK and
  MTS Asia to related parties: |  |  |                             |    
| |                                                                        |  |  |                             |    
| | Selling and marketing                                                  |  |  | $                           | 246
| |                                                                        |  |  |                             |    
| |                                                                        |  |  |                             |    
| | Payments from (repayments to) the related
  parties, net               |  |  | $                           |    
| |                                                                        |  |  |                             |    

|                                     | 
|------------------------------------ | 
|NOTE 14:-       SHAREHOLDERS EQUITY
|                                     | 

| | a. | Share capital:
| | -- | --------------
| |    |               

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

| | b. | Private placement agreements:
| | -- | -----------------------------
| |    |                              

| | 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.                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                              
| | On September 30, 2008, the Company and two principal shareholders and directors of the Company and
its Chief Executive Officer entered into a definitive agreement for a private placement of 219,490
Ordinary shares at a price per share of $ 1.14 for the aggregate purchase price of $ 250. The issuance
expenses related to the two private placements amounted to $ 13.
| |                                                                                                                                                                                                                                                                                                                                                                              
| | On December 30, 2008, the Company issued 2,174,615 Ordinary shares at a price per share of $ 0.98
to AnchorPoint, in connection with the AnchorPoint acquisition (see Note 1d).                                                                                                                                                                                              

F - 35

---

---

|                                                           
|-----------------------------------------------------------
|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:-       SHAREHOLDERS EQUITY (Cont.)
|--------------------------------------------
|                                            

| | 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 plan may not be less than the nominal value of the shares into which such options
were exercised. The options vest primarily gradually over 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 893,915 Ordinary shares available at that time
for future grants to 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 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 2006 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 plan 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, 2008, 981,433 Ordinary shares are available for future option grants.                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

| | d. | A summary of option activity under the Companys stock option plans as of December 31, 2008 and
changes during the year ended December 31, 2008 are as follows:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                

| |                                  |  |  | **Number of 
      options** |          | **Weighted-average
      exercise price** |   | **Weighted- average 
      remaining 
      contractual
      term (in years)** |  | **Aggregate 
      intrinsic value** |     
| | -------------------------------- |  |  | ---------------------------- | -------- | ----------------------------------------- | - | ------------------------------------------------------------------------------- |  | ------------------------------------ | ----
| |                                  |  |  |                              |          |                                           |   |                                                                                 |  |                                      |     
| |                                  |  |  | **audited**                  |         
| |                                  |  |  |                              |          |                                           |   |                                                                                 |  |                                      |     
| | Outstanding at December 31, 2007 |  |  |                              | 676,600  |                                           | $ | 2.41                                                                            |  |                                      |    
| | Granted                          |  |  |                              | 289,000  |                                           | $ | 1.08                                                                            |  |                                      |    
| | Exercised                        |  |  |                              |         |                                           |   |                                                                                |  |                                      |    
| | Forfeited                        |  |  |                              | (416,100 | )                                         | $ | 2.27                                                                            |  |                                      |    
| |                                  |  |  |                              |          |                                           |   |                                                                                
| | Outstanding at December 31,2008  |  |  |                              | 549,500  |                                           | $ | 1.83                                                                            |  |                                      | 3.26
| |                                  |  |  |                              |          |                                           |   |                                                                                
| | Exercisable at December 31,2008  |  |  |                              | 206,125  |                                           | $ | 2.53                                                                            |  |                                      | 2.25
| |                                  |  |  |                              |          |                                           |   |                                                                                
| | Vested and expected to vest      |  |  |                              | 496,525  |                                           | $ | 1.79                                                                            |  |                                      | 3.25
| |                                  |  |  |                              |          |                                           |   |                                                                                

F - 36

---

---

|                                                           
|-----------------------------------------------------------
|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:-       SHAREHOLDERS EQUITY (Cont.)
|--------------------------------------------
|                                            

| | The weighted average grant-date fair value of options granted during 2006, 2007 and 2008, was $ 1.94,
$ 0.50 and $ 0.47 per option, respectively.                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The total compensation cost related to options granted to employees under the Companys share-based
compensation plans recognized for the years ended December 31, 2007 and 2008 amounted at $ 92 and
$ 104, respectively, net of estimated forfeitures.                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The total intrinsic value of options exercised during the years ended December 31, 2006, 2007, and
2008, was $ 55, $ 0 and $ 0, respectively. As of December 31, 2008, there was $ 79 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:
| | -- | --------------------------------------
| |    |                                       

| | **Issuance date** |  | **In connection with** |  | **Number of 
      options granted** |  | **Options
      exercised** |  | **Options 
      exercisable** |  | **Options
      forfeited or expired** |  |   | **Exercise price
      per share** |  | **Exercisable 
      through** | 
| | ----------------- |  | ---------------------- |  | ------------------------------------ |  | --------------------------- |  | ------------------------------ |  | -------------------------------------- |  | - | ---------------------------------- |  | ------------------------------ | 
| |                   |  |                        |  |                                      |  |                             |  |                                |  |                                        |  |   |                                    |  |                                | 
| | August 2005       |  | Service provider       |  | 37,000                               |  |                            |  | 37,000                         |  |                                       |  | $ | 4.000                              |  | August 2009                    | 
| |                   |  |                        |  |                                      |  |                             |  |                                |  |                                        |  |   |                                    |  |                                | 

| |                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2008, 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.
| |                                                                                                                                                                                                                                                                                                                            
| | Compensation expenses related to the grant of stock options to consultants amounted to $ 10, $ 0
and $ 0 for the years ended December 31, 2006, 2007 and 2008, respectively.                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                            
| | Compensation expenses related to options granted to employees were recorded to research and development
expenses and general and administrative expenses, as follows:                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                            

| |                                     |  |  | **Year ended December 31,** |    
| | ----------------------------------- |  |  | --------------------------- | ---
| |                                     |  |  |                             |    
| |                                     |  |  | **2006**                    |    
| |                                     |  |  |                             |    
| |                                     |  |  |                             |    
| | Cost of revenues                    |  |  |                             | 21 
| | Research and development expenses   |  |  |                             | 101
| | Selling and marketing               |  |  |                             | 17 
| | General and administrative expenses |  |  |                             | 71 
| |                                     |  |  |                             |    
| |                                     |  |  |                             |    
| |                                     |  |  | $                           | 210
| |                                     |  |  |                             |    

F - 37

---

---

|                                                           
|-----------------------------------------------------------
|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:-       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,** |       
| | -------------------- |  |  | --------------------------- | ------
| |                      |  |  |                             |       
| |                      |  |  | **2006**                    |       
| |                      |  |  |                             |       
| |                      |  |  |                             |       
| | Revenues from sales: |  |  |                             |       
|
| | United States        |  |  | $                           | 5,353 
| | Germany              |  |  |                             | 1,881 
| | China                |  |  |                             | 624   
| | Holland              |  |  |                             | 561   
| | Others               |  |  |                             | 2,065 
| |                      |  |  |                             |       
| |                      |  |  |                             |       
| |                      |  |  | $                           | 10,484
| |                      |  |  |                             |       

| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Total revenues from external customers categorized on the basis of the Companys product lines
are as follows:
| |                                                                                                               

| |                                  |  |  | **Year ended December 31,** |       
| | -------------------------------- |  |  | --------------------------- | ------
| |                                  |  |  |                             |       
| |                                  |  |  | **2006**                    |       
| |                                  |  |  |                             |       
| |                                  |  |  |                             |       
| | Call accounting and TEM solution |  |  | $                           | 9,373 
| | Billing products                 |  |  |                             | 1,111 
| |                                  |  |  |                             |       
| |                                  |  |  |                             |       
| |                                  |  |  | $                           | 10,484
| |                                  |  |  |                             |       

| |                    |  |  | **December 31,** |      
| | ------------------ |  |  | ---------------- | -----
| |                    |  |  |                  |      
| |                    |  |  | **2006**         |      
| |                    |  |  |                  |      
|
| | Long-lived assets: |  |  |                  |      
| |                    |  |  |                  |      
| | Israel             |  |  | $                | 3,177
| | United States      |  |  |                  | 2,913
| | Others             |  |  |                  | 46   
| |                    |  |  |                  |      
| |                    |  |  |                  |      
| |                    |  |  | $                | 6,136
| |                    |  |  |                  |      

F - 38

---

---

|                                |                                     
|------------------------------- | ------------------------------------
|                                | BDO Trevisan Auditores Independentes
|Rua Bela Cintra, 952 - 8° andar
|São Paulo-SP- Brasil           
|01415-000                      
|                                |                                     
|BDO Trevisan                    | Tel : +55 (11) 3138-5000            
|                                | Fax : +55 (11) 3138-5227            
|                                | www.bdotrevisan.com.br              
|                                |                                     

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Quota holders of
Tabs Brasil Comércio e Serviços de Software Ltda.

We have audited the accompanying balance sheets of Tabs Brasil Comércio e Serviços de Software Ltda. as of December 31, 2007 and 2006, and the related statements of operations, change in quota-holders deficit and cash flows for the years then ended. 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 conducted our audits in accordance with generally accepted auditing 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 financing reporting. Our audits includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financing reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tabs Brasil Comércio e Serviços  de Software Ltda. as of December 31, 2007 and 2006 and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

F - 39

---

---

|             | 
|------------ | 
|             | 
|            
|            
|            
|             | 
|BDO Trevisan | 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Quota holders of 
  Tabs Brasil Comércio e Serviços de Software Ltda.
Brazil

The financial statements as of December 31, 2007 were prepared on a going concern basis, which assumes the realization of assets and settlement of liabilities in the normal course of business. Under actual conditions the Company depends on the financial support of its quota-holders to continue as a going concern.

São Paulo, January 18, 2007.



BDO Trevisan Auditores Independentes

F - 40

---

---

| |                              |  |                            |                              |  | 
| | ---------------------------- |  | -------------------------- | ---------------------------- |  | 
| | BDO McCabe Lo Limited        |  | 25th Floor Wing On Centre  |                              | 
| | Certified Public Accountants |  | 111 Connaught Road Central |                             
| |                              |  | Hong Kong                  |                             
| |                              |  |                            | Telephone   (852) 2541 5041  | 
| |                              |  |                            | Facsimile    (852) 2815 2239 |  | 
| |                              |  |                            |                              |  | 

Report of the Independent Registered Public Accounting Firm

To the Board of Directors of
MTS Asia Limited

We have audited the accompanying balance sheet of MTS Asia Limited (the Company) as of December 31, 2008, and the related statements of income and stockholders deficit for the year ended December 31, 2008. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. Our audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2008 and the results of its operations for the year ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.

|                            
|----------------------------
|                            
|                            
|BDO McCabe Lo Limited       
|Certified Public Accountants
|Hong Kong.                  
|19 FEB 2009                 

F - 41

---

---

| |                                             | 
| | ------------------------------------------- | 
| | Greenberg, Rosenblatt, Kull & Bitsoli, P.C.
| | CERTIFIED PUBLIC ACCOUNTANTS               

| | 
| | 
| | 

Independent Auditors Report

The Shareholders and Board of Directors
The Info Group, Inc. (formerly AnchorPoint, Inc.)
Framingham, Massachusetts

We have audited the accompanying special-purpose balance sheet of The Info Group, Inc. (formerly AnchorPoint, Inc.) as of December 31, 2008, and the related special-purpose statements of income, shareholders equity (deficiency) and cash flows for the year then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

The accompanying special-purpose financial statements were prepared for the purpose of complying with, and in conformity with the accounting principles specified in, an acquisition agreement dated December 31, 2008, between the Company and Mer Telemanagement Solutions Ltd., as discussed in Note 1, and are not intended to be a presentation of financial position, results of operations, and cash flows of The Info Group, Inc. (formerly AnchorPoint, Inc.) in conformity with generally accepted accounting principles.

In our opinion, the special-purpose financial statements referred to above present fairly, in all material respects, the financial position of The Info Group, Inc. (formerly AnchorPoint, Inc.) as of December 31, 2008, and the results of its operations and its cash flows for the year then ended, on the basis of accounting described in Note 1.

|                         |                                            
|------------------------ | -------------------------------------------
|                         |                                            
|                         | GREENBERG, ROSENBLATT, KULL & BITSOLI, P.C.
|                         |                                            
|Worcester, Massachusetts |                                            
|February 19, 2009        |                                            

F - 42

---

---

# JUSAN, S.A.

# FINANCIAL STATEMENTS

# AS OF DECEMBER 31, 2006

# 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

---

---

# 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

---

---

# JUSAN, S.A. BALANCE SHEETS AS OF
DECEMBER 31, 2006 Euros in thousands

|                                                                              | December 31,
2006
|----------------------------------------------------------------------------- | -----------------
|
|
|
|
|ASSETS                                                                        |                  
|                                                                              |                  
|CURRENT ASSETS:                                                               |                  
|Cash and cash equivalents                                                     |                  
|Short-term bank deposits                                                      |                  
|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)                              |                  
|Other accounts receivable and prepaid expenses (Note 3)                       |                  
|Inventories (Note 4)                                                          |                  
|                                                                              |                  
|Total current assets                                                          |                  
|                                                                              |                  
|PROPERTY AND EQUIPMENT, NET (Note 6)                                          |                  
|                                                                              |                  
|Total assets                                                                  |                  
|                                                                              |                  
|LIABILITIES AND SHAREHOLDERS' EQUITY                                          |                  
|                                                                              |                  
|CURRENT LIABILITIES:                                                          |                  
|Short-term bank debt (Note 7)                                                 |                  
|Trade payables                                                                |                  
|Accrued expenses and other liabilities (Note 8)                               |                  
|Deferred revenues                                                             |                  
|                                                                              |                  
|Total current liabilities                                                     |                  
|                                                                              |                  
|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                                  |                  
|Retained earnings                                                             |                  
|                                                                              |                  
|Total shareholders' equity                                                    |                  
|                                                                              |                  
|Total liabilities and shareholders' equity                                    |                  

The accompanying notes are an integral part of the financial statements

F - 2

---

---

# JUSAN, S.A.STATEMENTS OF INCOME AS OF DECEMBER 31, 2006Euros in thousands (except share and per share data)

|                                                                  | Year ended
December 31,
2006
|----------------------------------------------------------------- | ----------------------------
|
|
|
|
|Revenues (Note 13):                                               |                             
|Product sales                                                     |                             
|Services                                                          |                             
|                                                                  |                             
|Total revenues                                                    |                             
|                                                                  |                             
|Cost of revenues:                                                 |                             
|Product sales                                                     |                             
|Services                                                          |                             
|                                                                  |                             
|Total cost of revenues                                            |                             
|                                                                  |                             
|Gross profit                                                      |                             
|                                                                  |                             
|Operating expenses:                                               |                             
|Research and development                                          |                             
|Selling and marketing                                             |                             
|General and administrative                                        |                             
|                                                                  |                             
|Total operating expenses                                          |                             
|                                                                  |                             
|Operating income / (loss)                                         |                             
|Financial income, net (Note 14)                                   |                             
|                                                                  |                             
|Income before taxes on income                                     |                             
|                                                                  |                             
|Income taxes (Note 10)                                            |                             
|                                                                  |                             
|Net income / (loss)                                               |                             
|                                                                  |                             
|Basic and diluted net earnings per share                          |                             
|                                                                  |                             
|Weighted  average  number of shares used in  computing  basic net |                             
|earnings per share                                                |                             

The accompanying notes are an integral part of the financial statements

F - 3

---

---

# JUSAN, S.A.STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITYAS OF DECEMBER 31, 2006Euros in thousands

|                                | Share Capital | Retained
earnings | Total
shareholders'
Equity
|------------------------------- | ------------- | ----------------- | --------------------------
|
|
|
|
|Balance as of January 1, 2006   |               |                   |                           
|                                |               |                  
|Dividend paid                   |               |                   |                           
|Net income                      |               |                   |                           
|                                |               |                  
|Balance as of December 31, 2006 |               |                   |                           

The accompanying notes are an integral part of the financial statements

F - 4

---

---

# JUSAN, S.A.STATEMENTS OF CASH FLOWS AS OF DECEMBER 31, 2006Euros in thousands

|                                                                      | Year ended
December 31,
2006
|--------------------------------------------------------------------- | ----------------------------
|
|
|
|
|Cash flows from operating activities:                                 |                             
|Net income                                                            |                             
|Adjustments to reconcile net income to net cash provided by (used in) |                             
|operating activities:                                                 |                             
|Depreciation                                                          |                             
|Deferred taxes                                                        |                             
|Decrease (increase) in trade receivables                              |                             
|Decrease (increase) in other accounts receivable and prepaid expenses |                             
|Decrease (increase) in inventories                                    |                             
|Increase (decrease) in trade payables                                 |                             
|Increase (decrease) in accrued expenses and other liabilities         |                             
|Increase (decrease) in deferred revenues                              |                             
|Net cash (provided by) operating activities                           |                             
|                                                                      |                             
|Cash flows from investing activities:                                 |                             
|Investment in short-term bank deposits                                |                             
|Purchase of property and equipment                                    |                             
|Net cash provided by (used in) investing activities                   |                             
|                                                                      |                             
|Cash flows from financing activities:                                 |                             
|Dividend paid                                                         |                             
|Short-term bank debt                                                  |                             
|Net cash used in financing activities                                 |                             
|                                                                      |                             
|Increase (decrease) in cash and cash equivalents                      |                             
|Cash and cash equivalents at the beginning of the year                |                             
|Cash and cash equivalents at the end of the year                      |                             
|                                                                      |                             
|Non-cash financing information:                                       |                             
|Accrued dividend                                                      |                             
|                                                                      |                             
|Supplemental disclosure of cash flows activities:                     |                             
|Cash paid during the year for:                                        |                             
|Interest                                                              |                             
|                                                                      |                             
|Income taxes                                                          |                             

The accompanying notes are an integral part of the financial statements

F - 5

---

---

# JUSAN, S.A.NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 2006

# 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

---

---

|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 |  
|Office furniture and equipment     |  
|Motor vehicles                     |  

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.

F - 7

---

---

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.

|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  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

---

---

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  10 (thousand  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  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

---

---

|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   |                  
|Deferred taxes    |                  
|Employee advances |                  
|Deposits          |                  
|                  |                  
|                  |                  

# NOTE 4: INVENTORIES

|                           | December 31,
2006
|-------------------------- | -----------------
|
|
|
|
|Materials                  |                  
|Work in progress           |                  
|Provision for obsolescence |                  
|                           |                  
|                           |                  

F - 10

---

---

# NOTE 5: TRADE RECEIVABLES

|                                | December 31,
2006
|------------------------------- | -----------------
|
|
|
|
|Trade receivables               |                  
|Bills receivable                |                  
|Allowance for doubtful accounts |                  
|                                |                  
|                                |                  

# NOTE 6: PROPERTY AND
EQUIPMENT

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

Depreciation expenses for the year
ended December 31, 2006 was thousand  29.

F - 11

---

---

# NOTE 7: SHORT-TERM BANK
DEBT

The Company has a short-term bank
debt in the amount of thousand  17, bearing interest of 5%.

# NOTE 8: ACCRUED EXPENSES
AND OTHER LIABILITIES

|                               | December 31,
2006
|------------------------------ | -----------------
|
|
|
|
|Employees and payroll accruals |                  
|Income tax payable             |                  
|Deferred tax                   |                  
|Tax authorities                |                  
|Current Accounts               |                  
|Warranty costs                 |                  
|                               |                  
|                               |                  

# 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 | 
|2008 | 
|2009 | 
|     | 
|     | 

Rent expenses for year ended December
31, 2006was approximately thousand  172. Rent expenses will be reviewed every year
with the variation of the Consumer Price Index.

F - 12

---

---

# 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
|----------------------------------------------------------------------------------- | ----------------------------
|
|
|
|
|Income before taxes as reported in the statements of operations                     |                             
|Non-deductible bad debt allowance and others 2004                                   |                             
|Non-deductible bad debt allowance 2005                                              |                             
|Tax depreciation                                                                    |                             
|Increase (decrease) in the taxable base - Forward sales                             |                             
|Increase (decrease)  in the taxable base - Unrealized severance allowance           |                             
|Taxable income                                                                      |                             
|                                                                                    |                             
|Tax rates                                                                           |                             
|                                                                                    |                             
|Tax expense (benefit)                                                               |                             
|Decrease in taxes resulting from:                                                   |                             
|Tax deduction for development                                                       |                             
|Deferred tax liability (asset)                                                      |                             
|                                                                                    |                             
|Taxes on income, tax expense (benefit), as reported in the statements of operations |                             

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

---

---

# 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
|----- | ----------------------------
|
|
|
|
|Wages |                             

In 2006 the payments of wages to
related parties are based on the payments to the directors (thousand  290), the
social security paid to the directors (thousand  18) and 20% from the leases
(thousand  24).

|b. | Transactions
with related parties were as follows:
|-- | --------------------------------------------------

|                                    | Year ended
December 31,
2006
|----------------------------------- | ----------------------------
|
|
|
|
|Sales to related parties            |                             
|                                    |                             
|Amounts charged by related parties: |                             
|Cost of revenues                    |                             

F - 14

---

---

|c. | Amounts
receivable from and payables to related parties:
|-- | --------------------------------------------------------

|                           | December 31,
2006
|-------------------------- | -----------------
|
|
|
|
|Receivables:               |                  
|Mer Telemagement Solutions |                  
|MTS Asia                   |                  
|MTS IntegraTRAK            |                  
|Jaraga BV.                 |                  
|                           |                  
|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
 0.0042 par value, authorized, issued and outstanding as of December 31, 2006.

The shareholders at December 31, 2006
are:

|                          | %
|------------------------- | -
|
|
|
|
|Jaraga, B.V.              |  
|Jose Lasry Nahon          |  
|Mauricio Toledano Marques |  

F - 15

---

---

|d. | Distribution
of dividends.
|-- | --------------------------

The distribution of dividends
amounting thousand  640 as a result of reserves distribution, has been paid to the
shareholders in direct proportion of their shares.

|                          | 
|------------------------- | 
|
|
|
|
|Jaraga, B.V.              | 
|Jose Lasry Nahon          | 
|Mauricio Toledano Marques | 

# NOTE 13:- SEGMENTS,
CUSTOMERS AND GEOGRAPHIC INFORMATION

|a. | Major
customers as a percentage of total revenues:
|-- | --------------------------------------------------

|                            | Year ended
December 31,
2006
%
|--------------------------- | ------------------------------
|
|
|
|
|Adictis                     |                               
|Liberty Voz, S.L.           |                               
|Cableuropa, S.A.            |                               
|Siemens, S.A.               |                               
|Telefonica de Espana        |                               
|Eurotelefonia del Sur, S.L. |                               
|Siemens Chile               |                               
|Accentic                    |                               

F - 16

---

---

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

|                   | Year ended
December 31,
2006
|------------------ | ----------------------------
|
|
|
|
|Spain              |                             
|European Community |                             
|Other              |                             
|                   |                             
|                   |                             

# NOTE 14: SELECTED
STATEMENTS OF OPERATIONS DATA

Financial income, net

|                      | Year ended
December 31,
2006
|--------------------- | ----------------------------
|
|
|
|
|Financial expenses:   |                             
|                      |                             
|Interest expenses     |                             
|Other expenses        |                             
|                      |                             
|                      |                             
|Financial income:     |                             
|                      |                             
|Interest income       |                             
|                      |                             
|Financial income, net |                             

F - 17

---

---

# 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 BarChief Executive Officer
| |  | -------------------------------------------------------------------------------------------------

| |  | By: /s/ Alon Mualem
Alon MualemChief Financial Officer
| |  | --------------------------------------------------------------------

Dated: April 2, 2009

81

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