20-F

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                    FORM 20-F

[_]  REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                                       OR

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

                                       OR

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

             FOR THE TRANSITION PERIOD FROM __________ TO __________

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

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

                         COMMISSION FILE NUMBER: 0-28950

                        MER TELEMANAGEMENT SOLUTIONS LTD.
              (Exact Name of Registrant as specified in its charter
               and translation of Registrant's name into English)

                                     ISRAEL
                 (Jurisdiction of incorporation or organization)

                    22 ZARHIN STREET, RA'ANANA 43662, ISRAEL
                    (Address of principal executive offices)

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

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

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

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

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

     ORDINARY SHARES, PAR VALUE NIS 0.01 PER SHARE............... 5,773,845
                            (as of December 31, 2006)

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

                               Yes [_]     No [X]

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

                               Yes [_]     No [X]

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

                               Yes [X]     No [_]

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

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

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

                           Item 17 [_]     Item 18 [X]

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

                               Yes [_]     No [X]

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

                                  INTRODUCTION

     Mer Telemanagement Solutions Ltd. is a worldwide provider of solutions for
telecommunications expense management, or TEM, used by enterprises, and business
support systems, or BSS, used by information and telecommunication service
providers, or ITSPs. 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 TEM solutions
support our clients on an ongoing basis with both sophisticated software
applications and a variety of managed services relationship models. Our
converged BSS solutions for ITSPs have been successfully implemented worldwide
by wireless providers, Voice over Internet Protocol, Internet Protocol
Television, and content service providers. Our converged BSS solutions include
charging and invoicing customers, interconnect billing and partner revenue
management using pre-pay and post-pay schemes. Our pre-configured BSS solutions
have been designed to be implemented quickly and are competitively priced.

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

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

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

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

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


                                       i

                                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.........................................15
            A. History and Development of the Company........................15
            B. Business Overview.............................................17
            C. Organizational Structure......................................23
            D. Property, Plants and Equipment................................24
ITEM 4A.  UNRESOLVED STAFF COMMENTS..........................................24
ITEM 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS.......................24
            A. Operating Results.............................................24
            B. Liquidity and Capital Resources...............................36
            C. Research and Development......................................37
            D. Trend Information.............................................38
            E. Off-Balance Sheet Arrangements................................38
            F. Tabular Disclosure of Contractual Obligations.................38
ITEM 6.   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.........................38
            A. Directors and Senior Management...............................38
            B. Compensation..................................................40
            C. Board Practices...............................................41
            D. Employees.....................................................46
            E. Share Ownership...............................................47
ITEM 7.   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS..................51
            A. Major Shareholders............................................51
            B. Related Party Transactions....................................52
            C. Interests of Experts and Counsel..............................53
ITEM 8.   FINANCIAL INFORMATION..............................................53
            A. Consolidated Statements and Other Financial Information.......53
            B. Significant Changes...........................................54
ITEM 9.   THE OFFER AND LISTING..............................................54
            A. Offer and Listing Details.....................................54
            B. Plan of Distribution..........................................55
            C. Markets.......................................................55
            D. Selling Shareholders..........................................55
            E. Dilution......................................................55
            F. Expense of the Issue..........................................55
ITEM 10.  ADDITIONAL INFORMATION.............................................55
            A. Share Capital.................................................55
            B. Memorandum and Articles of Association........................56
            C. Material Contracts............................................58
            D. Exchange Controls.............................................58
            E. Taxation......................................................59
            F. Dividend and Paying Agents....................................69
            G. Statement by Experts..........................................69
            H. Documents on Display..........................................69
            I. Subsidiary Information........................................69

                                       ii

ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS........70
ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.............70

PART II......................................................................70

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

PART III.....................................................................72

ITEM 17.  FINANCIAL STATEMENTS...............................................72
ITEM 18.  FINANCIAL STATEMENTS...............................................72
ITEM 19.  EXHIBITS...........................................................73

S I G N A T U R E S..........................................................75


                                      iii

                                     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, 2006 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, 2006 and as of December 31, 2005 and 2006 appear elsewhere in this
Annual Report. Our selected consolidated financial data as of December 31, 2004,
2003 and 2002 and for the years ended December 31, 2003 and 2002 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,
                                           ---------------------------------------------------------------------------
                                               2002           2003            2004             2005            2006
                                           -----------     -----------     -----------     -----------     -----------
                                                         (in thousands, except share and per share data)

Revenues                                   $     9,787     $     9,230     $     9,413     $    11,563     $    10,484
Cost of revenues                                 1,896           1,849           2,814           3,802           3,355
                                           -----------     -----------     -----------     -----------     -----------
Gross profit                                     7,891           7,381           6,599           7,761           7,129
Selling and marketing                            3,954           3,916           6,300           4,797           3,078
Research and development, net                    2,127           1,825           2,362           4,395           3,633
General and administrative                       1,858           1,830           2,101           2,830           2,651
                                           -----------     -----------     -----------     -----------     -----------
Operating loss                                     (48)           (190)         (4,164)         (4,261)         (2,233)
Financial income (expenses), net                    (6)            130              78              53             (54)
                                           -----------     -----------     -----------     -----------     -----------
Loss before taxes on income                        (54)            (60)         (4,086)         (4,208)         (2,287)
Taxes on income                                     52             198             266              10             118
                                           -----------     -----------     -----------     -----------     -----------
Net loss before equity in earnings of
   affiliate                                      (106)           (258)         (4,352)         (4,218)         (2,405)
Equity in earnings of affiliate                    236             345             225               2             159
                                           -----------     -----------     -----------     -----------     -----------
Net loss                                   $       130     $        87     $    (4,127)    $    (4,216)    $    (2,246)
                                           ===========     ===========     ===========     ===========     ===========
Basic and diluted net loss per share       $      0.03     $      0.02     $     (0.89)    $     (0.83)    $     (0.39)
                                           ===========     ===========     ===========     ===========     ===========

Weighted average number of ordinary
shares used in computing basic net
loss per share                               4,709,796       4,617,099       4,634,413       5,092,117       5,762,311
                                           ===========     ===========     ===========     ===========     ===========
Weighted average number of ordinary
shares used in computing diluted net
loss per share                               4,709,796       4,628,249       4,634,413       5,092,117       5,762,311
                                           ===========     ===========     ===========     ===========     ===========

                                       4

BALANCE SHEET DATA:

                                        As of December 31,
                         --------------------------------------------------
                          2002       2003       2004       2005       2006
                         ------     ------     ------     ------     ------
                                           (in thousands)

Working capital         $ 9,244    $ 9,437    $ 2,773    $ 2,065    $   186
Total assets             17,707     18,182     15,323     13,816     14,054
Long-term loans               8         --         --         --        583
Shareholders' equity     14,013     14,464     10,657      9,174      7,542

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.

     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. 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.

OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY.

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

     o    demand for our products;

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

     o    new product announcements by us and our competitors;

     o    the number, timing and significance of product enhancements;

     o    product life cycles;

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

     o    changes in the level of our operating expenses;


                                       5

     o    budgeting cycles of our customers;

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

     o    changes in our strategy;

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

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

     Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast, and it is likely that our future operating results will
be adversely affected by these or other factors.

     Revenues are also difficult to forecast because the market for
telecommunication management and billing solutions is rapidly evolving and our
sales cycle for our solutions, from initial evaluation to purchase, is lengthy
and varies substantially from customer to customer.

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

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

OUR QUARTERLY FINANCIAL PERFORMANCE VARIES SIGNIFICANTLY.

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

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


                                       6

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

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

     One of the primary distribution channels for our call accounting management
products are private branch exchange, or PBX, original equipment manufacturers,
or OEMs, and vendors who market our products to end-users in conjunction with
their own products. We are highly dependent upon the active marketing and
distribution efforts of our PBX OEMs. In 2004, 2005 and 2006, our three major
OEMs, Siemens Gmbh, Philips Communications Systems B.V. and Ericsson, generated
together 47.0%, 42.0% and 34.0%, respectively, of our consolidated revenues. The
following percentage of sales were attributable to each of these OEMs in each of
the 12 months ended December 31:

                   2004           2005          2006
                   ----           ----          ----

Siemens           38.0%          36.0%          29.0%
Philips            5.0%           4.0%           4.0%
Ericsson           4.0%           2.0%           1.0%

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

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


                                       7

IN DECEMBER 2004, WE ACQUIRED CERTAIN ASSETS AND LIABILITIES OF TELEKNOWLEDGE
GROUP LTD. AND ON JULY 31, 2006, WE ACQUIRED CERTAIN ASSETS AND LIABILITIES OF
TELSOFT SOLUTIONS, INC. AND WE MAY NOT BE ABLE TO SUCCESSFULLY EXPLOIT THE
ACQUIRED PRODUCTS.

     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, and on July 31, 2006, we completed the
acquisition of certain assets and liabilities of TelSoft, a California
corporation, a provider of call accounting and TEM solutions. The acquisition of
the Teleknowledge billing solution enables us 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.
These products offer a complementary solution to our own products. We believe
that the acquisition of TelSoft's TEM and call accounting software will enable
us to expand our TEM solutions and will assist us to strengthen our growing
business in the United States. We may not be able to successfully integrate the
operations of Teleknowledge and TelSoft into our business or successfully
exploit the solutions that we acquired from them.

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

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

WE ARE SUBJECT TO RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.

     We are based in Israel and generate a large percentage of our sales outside
the United States. Our sales in the United States accounted for 53.0%, 52.0% and
51.1% of our total revenues for the years ended December 31, 2004, 2005 and
2006, respectively. We may not be able to maintain or increase international
market demand for our products. To the extent that we cannot do so in a timely
manner, our business, operating results and financial condition will be
materially and adversely affected.

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

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

     o    costs of localizing products for foreign markets;

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

     o    unexpected changes in regulatory requirements;

     o    difficulties and costs of staffing and managing foreign operations;


                                       8

     o    reduced protection for intellectual property rights in some countries;

     o    potentially adverse tax consequences; and

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

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

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

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

     o    result in costly litigation;

     o    divert management's attention and resources;

     o    cause product shipment delays; or

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

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

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


                                       9

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
($1.4 million). We have appealed to the Israeli District Court in respect of
such tax demand and believe that certain defenses can be raised against the
demand of the tax authorities. We have made a provision in our financial
statements for this tax demand for the amount deemed probable.

     If we are unsuccessful in these matters or if actual results are not
consistent with our assumptions and judgments, we may be exposed to losses that
could be material to our company.

OUR RESULTS MAY BE ADVERSELY AFFECTED BY COMPETITION.

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

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

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


                                       10

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.

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

     Mr. Chaim Mer, our Chairman, and his wife, Dora Mer, our Israeli counsel,
currently control the vote of approximately 35.05% of our outstanding ordinary
shares, and Isaac Ben-Bassat, one of our directors, is the owner of 11.94% of
our outstanding ordinary shares. As a result, such persons control and will
continue to control the election of our entire Board of Directors other than our
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 and support for up to one year for end-users and
up to 15 months for our OEM distributors. Our sales agreements typically contain
provisions designed to limit our exposure to potential product liability or
related claims. The limitation of liability provisions contained in our
agreements may not be effective. Our products are used by businesses to reduce
communication costs, recover charges payable by third parties, prevent abuse and
misuse of telephone networks and converged BSS solutions for ITSPs, 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.

RISK FACTORS RELATED TO 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 2006. If we are classified in
the future as a PFIC for U.S. federal income tax purposes, highly complex rules
would apply to U.S. Holders owning ordinary shares. Accordingly, you are urged
to consult your tax advisors regarding the application of such rules.

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

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

     o    quarterly variations in our operating results;


                                       11

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

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

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

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

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

     o    changes in the status of our intellectual property rights;

     o    additions or departures of key personnel;

     o    future sales of our ordinary shares; and

     o    general stock market prices and volume fluctuations.

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

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

WE DO NOT EXPECT TO DISTRIBUTE CASH DIVIDENDS.

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

COMPLIANCE WITH CORPORATE GOVERNANCE REGULATIONS COULD INCREASE THE COST OF OUR
OPERATIONS.

     As a result of changing laws, regulations and standards relating to
accounting, corporate governance and public disclosure, the costs of being a
public company in general have increased in recent years. The Sarbanes-Oxley Act
of 2002 requires changes in some of our corporate governance and securities
disclosure or compliance practices. We expect that the on-going implementation
of these regulations will further increase our legal compliance costs and will
make some activities more time consuming. We are presently evaluating and
monitoring regulatory developments and cannot estimate the magnitude of
additional costs we may incur as a result of such developments. In connection
with our future implementation of Section 404 of the Sarbanes-Oxley Act of 2002,
which governs internal controls and procedures for financial reporting, we have
expended and will need to further expend significant management time and
financial resources to comply with the applicable requirements. This and other
proposed legislation may increase the fees of our professional advisors and our
insurance premiums.


                                       12

RISKS RELATING TO OPERATIONS IN ISRAEL

CONDUCTING BUSINESS IN ISRAEL ENTAILS SPECIAL RISKS.

     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, the 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.

     Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Although Israel has entered into
various agreements with Egypt, Jordan and the Palestinian Authority, there has
been an increase in unrest and terrorist activity in Israel, which began in
September 2000 and which has continued with varying levels of severity through
2006. In July 2006, an armed conflict began between Israel and Hezbollah forces
in Lebanon, which involved rocket attacks on populated areas in the northern
parts of Israel. On August 14, 2006, a cease-fire between Hezbollah and Israel
took effect. This situation has had an adverse effect on Israel's economy,
primarily in the geographical areas directly harmed by this conflict. Any future
armed conflict, political instability or violence in the region may have a
negative effect on our business condition, harm our results of operations and
adversely affect our share price. No predictions can be made as to whether or
when a final resolution of the area's problems will be achieved or the nature
thereof and to what extent the situation will impact Israel's economic
development or our 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.

     Many 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.

     Since we report our financial results in dollars, fluctuations in rates of
exchange between the dollar and non-dollar currencies may affect our results of
operations. A significant amount of our expenses are paid in NIS (primarily
salaries) and are 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. Over time, the NIS has been
devalued against the dollar, generally reflecting inflation rate differentials.
We cannot predict any future trends in the rate of inflation in Israel or the
rate of devaluation of the NIS against the dollar. If the dollar cost of our
operations in Israel increases, our dollar measured results of operations will
be adversely affected. Likewise, our operations could be adversely affected if
we are unable to guard against currency fluctuations in the future.


                                       13

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

     We have benefited from certain Israeli Government grants, programs and tax
benefits. In late 2005 and early 2006 and 2007, we applied to the Office of the
Chief Scientist of the Israeli Ministry of Industry, Trade and Labor for grants
for our research and development projects. We received an approval for the 2005
and 2006 applications and our two 2007 applications are currently pending. The
2007 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.

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

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

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

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

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

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

     We are incorporated under Israeli law. The rights and responsibilities of
holders of our ordinary shares are governed by our memorandum of association,
articles of association and by 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.


                                       14

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

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

ITEM 4. INFORMATION ON THE COMPANY

A.   HISTORY AND DEVELOPMENT OF THE COMPANY

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

     We are a worldwide provider of solutions for telecommunications expense
management, or TEM, used by enterprises, and business support systems, or BSS,
used by information and telecommunication service providers, or ITSPs. 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 TEM solutions support our
clients on an ongoing basis with both sophisticated software applications and a
variety of managed services relationship models. Our converged BSS solutions for
ITSPs have been successfully implemented worldwide by wireless providers, Voice
over Internet Protocol, Internet Protocol Television, and content service
providers. Our converged BSS solutions include applications for charging and
invoicing customers, interconnect billing and partner revenue management using
pre-pay and post-pay schemes. Our pre-configured BSS solutions have been
designed to be implemented quickly and are competitively priced.

     Call accounting systems afford businesses easy access to complete
information on telephone usage, including the dialed number, calling extension,
call duration, time of day, destination, trunk line usage, cost of each call and
multi-carrier analysis. We started developing the TABS line of call accounting
products for the DOS operating system and have upgraded and re-written our call
accounting and management systems as the industry and technology advanced
providing full compatibility to support the Windows operating systems and most
versions of Windows NT. As our sales of TABS were worldwide, we needed to have a
flexible and easily updated set of pricing tables to accommodate the different
pricing schemes and modes used worldwide and with different carriers. As
enterprises expanded and required information from their remote sites, so TABS
has expanded to accommodate their needs by providing multi-site solutions and
supporting most business telephone switching systems currently available for
sale. The TABS solutions are capable of monitoring up to 100,000 extensions. The
Application Suite provides for an unlimited number of extensions, subject to the
capabilities of the customer's hardware, as well as an unlimited number of
remote sites. The sites can be monitored from a browser at any point as the
application is web based. Various modules were developed to service the needs of
different vertical markets such as our Property Management System interface, or
PMSi, module for the hotel industry and a solution for performing tie-line
reconciliation for organizations and utilities having multiple PBXs. TRAK-View,
our fault management system, provides an enterprise with early warning problem
detection and prevention for multi-site and multi-vendor networks including
PBXs. In 1998, we introduced IP.TRAK, a Web-based call accounting and management
system that was built on the original model and principles of TABSweb. IP.TRAK
was designed to harness the power of the Internet for the needs of information
technology managers through its ability to access reports using a standard
Internet browser. We added additional modules to IP TRAK that could collect the
information from routers, firewalls and gateways. These additional modules
provided tools for a comprehensive communications management system. We were
able to collect additional data from files, file transfer protocol (FTP)
servers, VoIP, and external buffers. We subsequently merged the functionality of
PBX systems and IP networks to provide a unified management solution for
multiple communication platforms from different vendors supporting voice, VoIP,
video and data communications. The functionality of IP TRAK was subsequently
superseded by the enhanced Application Suite.


                                       15

     We operate in five geographical areas. Our operations in Israel include
research and development, sales, marketing and support. Our operations in the
United States, Brazil, Europe and Asia include sales, marketing and customer
service.

     On April 24, 2000, we acquired all of the assets and assumed certain
liabilities of IntegraTRAK Inc., a privately held Seattle-based company, engaged
in the development and sale of packaged computer software for tracking telephone
calls and costs.

     In 2001, we developed our Web Access module that provides access and
control to the communications usage database, under strict control and privacy,
from anywhere on the web. During the second quarter of 2002, we added
FaciliTRAK, which is a comprehensive software system that greatly simplifies the
day-to-day task of maintaining and managing the physical layer details for any
network. FaciliTRAK allows the user to record the equipment, cables, and
pathways for the cable plant and define the connectivity and circuit routes. A
user can utilize FaciliTRAK to plan and manage the moves and changes within his
or her organization with the aid of the self-documenting service desk functions.
The FaciliTRAK system is an essential tool for any enterprise that is thinking
of implementing a disaster recovery program.

     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 $2.374 million in cash and agreed to pay additional
contingent consideration of up to $3.65 million over a period of three years
based on post acquisition revenue performance. The acquisition of the
Teleknowledge billing solution enables us 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 2005, we conducted extensive research and development so that our
products and solutions could operate in the high-end enterprise market. As a
result, an advanced TEM module was developed, based on our Application Suite
infrastructure. The modular and scalable architecture topology of our
Application Suite lends itself easily to an open platform where modules can be
added and integrated seamlessly into the platform, thus allowing customers to
buy such modules as they require.

     In addition, in 2005 we strengthened our product offerings to the service
provider and carrier market as a result of our release of a new billing solution
module that we acquired from Teleknowledge and through significant investment in
research and development in order to provide a complete end-to-end billing
solution for the wholesale trade. As a result, we introduced an interconnect
billing solution and our retail billing solution was expanded to accommodate
legacy telephony that carriers can use to bill their subscribers. Also, new
value-added services (such as video-on-demand (VOD), multimedia message service,
short message service (SMS)) and content (such as news and games) were added to
our billing solutions package. We believe that an advantage of our solutions is
that they operate off a single data base. We also introduced a partner revenue
management module to our billing solutions product, which complements our
product line by enabling carriers to reconcile bills among one another.

     During 2006, we enhanced our interconnect billing solution to include a
sophisticated and user-friendly rate loader, that automatically loads the rates
from the various Excel sheets that service providers receive and provides a
composite picture of the rates.


                                       16

     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
as a stand-alone solution that allows for 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 corporation, a provider of call accounting
and TEM solutions. The 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. We believe that the acquisition of TelSoft's TEM and call
accounting software will enable us to expand our TEM solutions and will assist
us to strengthen our growing business in the United States.

     On February 6, 2006, our board of directors approved the sale of all of the
shares of TABS Brazil Ltda., our wholly-owned subsidiary in Brazil, to certain
Brazilian individuals for an aggregate of $334,850. The purchase price shall be
paid in 60 installments, with the first installment, in the sum of $66,972,
being due and payable on January 1, 2008, and the remaining balance in equal
monthly installments of $5,581 each.

B.   BUSINESS OVERVIEW

INDUSTRY BACKGROUND

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

     Telemanagement solutions have evolved from the stand-alone PC-based
telephone call accounting and billing systems of the mid-1980's to local area
network or LAN-based systems offering call accounting, fraud detection and fault
management solutions for users with complex voice and data networks. Today, the
trend is moving more and more to web-based solutions, and to converged solutions
where all expenses associated with the usage of a person or device are shown in
one report or invoice.

     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 managers to optimize an enterprise's telecommunications
resources and reduce communication expenses, typically the second or third
highest administrative expense of a business, through cost-tracking and
management awareness.


                                       17

     As the trend continues toward enterprises utilizing one infrastructure for
both voice and data services, more and more emphasis will be placed on finding
efficient solutions to cope with the increasing demand on network resources and
for reducing congestion. Enterprises have been required to buy additional
communications resources to meet this demand immediately rather than optimizing
their existing networks due to the time consuming nature of such projects.
Information technology managers are constantly trying to justify the ever
increasing expenses created by managing the enormous amount of data that is
being transmitted through the Internet.

     The abuse and misuse of telephone and data networks, either by employees
making unauthorized telephone calls or by outside "hackers" who tap into an
organization's long distance service has become a major problem for
organizations resulting in great losses. Likewise, employees surfing the web for
private use during working hours overloads the network, preventing critical
tasks from getting through as well as reducing the overall productivity of the
enterprise. These losses have led to the development of intelligent toll fraud
detection systems that immediately alert or initiate preventive measures upon
detecting a suspicious occurrence in network usage traffic.

     Organizations with multiple PBXs and providers of maintenance services
require systems that are capable of alerting telecommunications managers of
impending or actual problems in a communications network. Financial and
operational benefits of a fault management system can be immediate and
significant, as down time of the system is reduced due to early problem
detection and real information on remote site events. Maintenance costs are
significantly lowered through better use of human resources and more efficient
inventory management.

     In addition, other executives and operational managers are now seeking
telemanagement solutions which permit them to assess how efficiently employees
are using their time, monitor customer service calls, analyze the effectiveness
of marketing expenditures, utilize toll-free responses to determine demographics
of callers through the use of caller identification information, know who is
using the network and when they are using it, and obtain additional data that
aid them in management of the business.

     IP telephony and video conferencing are reaching technological maturity and
are being adopted by an increasing number of organizations. Enterprises have
begun to use the IP platform as a single common telecommunication infrastructure
for all services. The convergence of voice, data and video has become
commonplace, and there is a trend of data equipment manufacturers and PBX system
manufacturers offering platforms that support all services. These developments
as well as customer demands will require future management systems to be
upgraded to support the convergence of voice, data and video and provide a
unified management system that will provide information technology managers with
knowledge about the usage of their resources, the ability to ensure the optimal
use of these resources and centralized control over their networks.

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

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

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


                                       18

     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, BSS 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, the BSS for IPTV must be able to identify such events and charge the
advertiser accordingly.

PRODUCTS AND SERVICES

     We offer a range of TEM solutions for enterprises and BSS solutions for
ITSPs, based on our standard platforms which can be adjusted to specific
customers' needs and requests, as well as fault management systems for networks
and PBXs, and facilities management for cabling and equipment. Additionally,
some of our products are geared for communications resellers and as such enable
them to issue regular bills for the communications services rendered.

BACKGROUND HISTORY

     We were the first company to offer a PC-based non-dedicated call accounting
system when we introduced the first version of TABS in 1985. To date, over
70,000 TABS accounting systems have been sold to end-users located in over 80
countries. TABS supports worldwide charging methods (pulse and duration), call
pricing tables and currencies and is available in different languages. Our PBX
interface database includes default formats for the major PBX manufacturers and
business phone systems, including those manufactured by Ericsson, Philips,
Siemens, Lucent, Nortel, Alcatel, ECI/Tadiran, Harris, NEC, Avaya, Mitel,
Damovo, LG and Panasonic, making TABS compatible with substantially all
currently available PBX and business phone systems. Our flexible format allows
some of the newer equipment such as VoIP PBXs and routers/gateways to be
inputted to and reported on TABS. This includes the RADVision and Cisco gateways
and gatekeepers.

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

     The powerful 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.

     Version 7 of TABS.IT is fully web-based allowing users to see their own
call usage on-line from anywhere, and incorporates most of the features that
were offered as separate modules in previous versions. This version is easily
adapted to companies that have multiple sites, and would want to view the
activity from a central site. The administrative functions can also be performed
remotely using Internet Explorer. Full security and privacy is assured by use of
various levels of password protection.


                                       19

     APPLICATION SUITE

     The Application Suite is an integrated, customized solution to manage and
control the entire communications network. The Application Suite implements and
monitors real time performance and usage defined by the organization to maintain
budget control, usage performance and system health, and utilized by service
providers for converged pre and post paid billing. The system's flexible
architecture enables organizations to effectively manage their entire billing
process, adding on capabilities as their business grows, in accordance with
customer's requests, special projects or market trends. 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.

     The main functions of the TABS.IT and our prior WinTRAK family of products
were incorporated into the Application Suite solution, which supersedes these
solutions. In addition, budget control monitoring modules were added to the
Application Suite solution to verify that the extensions, departments, cost
centers operate within budget, and a credit limit may be assigned.

     In 2005, we enhanced and expanded our Application Suite to include an
invoice management module. This new module 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 new module checks that the services 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.

BILLING SOLUTIONS

     In today's growing telecommunication services world, operators and service
providers must have full control and real-time monitoring capabilities of their
expenses and revenues associated with the services provided. To achieve that,
telecommunication BSS need to manage all aspects of their business, primarily in
three main areas:

     o    Retail Billing - settlement with the end customer (business or
          residential) who purchases and consumes the services. Services may be
          consumed by either online or offline charging methods (supporting
          postpaid and prepaid scenarios).

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

     o    Interconnect Settlement - settlement between the operator / service
          provider and other local or international carriers for the traffic
          which 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. We believe that
          obtaining interconnect agreements is essential for new entrants that
          cannot deliver services without other networks to complete their
          calls.

     To efficiently manage the foregoing business requirements, operational and
economical wise, carriers and service providers require a convergent billing
platform. This kind of platform should simplify the way in which an operator and
service provider settles invoices with its customers and interconnects with
value added partners.

     Our IPTV solution meets market requirements and may be installed
side-by-side with legacy systems and may provide an economic solution to new
providers of virtual IPTV services. We believe that partnering with network
vendors and system integrators is the most advantageous means to generate sales
and to focus our resources on product marketing and software development.


                                       20

     OTHER MODULES

     An add-on module, Tie Line Reconciliation, or TLR, provides for the
accurate costing of calls in a private PBX network by calculating the actual
cost of calls routed over private tie lines and assigning charges to the
originating extension. The call is resolved into an accurate
origination-destination configuration even though the call may pass many "nodes"
along the way, with each potentially discharging an independent call record.

     Another add-on module, Property Management System interface, or PMSi,
provides an interface protocol and format for telecommunication management
systems with hotel billing solutions (Front Office or PMS systems). Through the
use of this interface, which can also connect to PBXs, the hotel system is able
to control the opening and closing of guest extensions on check in or out.

     Another add-on module is our Budget Manager, which allows an administrator
to assign credit limits to extensions, departments, cost centers, or any other
organizational hierarchy, and monitor whether these limits have been exceeded or
the calls remain within their allocated budgets.

CUSTOMER SERVICE AND INSTALLATION

     We provide customer support to end-user customers in the United States,
Israel, Hong Kong, the Netherlands 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.

     Our support staff installs our call accounting products at end-user
locations, if required, from offices in Israel, the United States, Hong Kong,
the Netherlands and Brazil. Our TEM products and BSS solutions are installed by
our support staff at the and user locations or remotely from our offices in
Israel, the United States, Hong Kong, the Netherlands and Brazil. Customers who
maintain their own technical staffs are generally able to install our call
accounting products themselves. We charge our customers a fee for each
installation performed by our employees. Our distributors are responsible for
the installation and support of our products with respect to their end-user
customers.

SALES AND MARKETING

     We market our TEM products in over 80 countries worldwide through OEM
distribution channels and our own direct sales force in the United States,
Europe, Israel, Hong Kong and Brazil, and through a network of local
distributors in these and various other countries in Europe, Asia, Africa and
Latin America. We market our BSS solutions for ITSPs through next generation
telecommunications network solutions suppliers and our own direct sales force.
We employed 20 persons in sales and marketing and 29 persons in support as of
December 31, 2006, as compared to 18 persons in sales and marketing and 30
persons in support as of December 31, 2005.

     With the acquisition of IntegraTRAK in April 2000, our marketing efforts in
North America were significantly increased. This also enabled us to acquire
additional Fortune 500 companies as our customers. We also sell our products to
business telephone switching systems manufacturers and vendors, distributors and
PTTs. Since 1985, over 70,000 TABS call accounting products have been sold, many
of which have been sold to large organizations. In addition, as customers move
to consolidate the management of their multi-site telecommunications activities,
we intend to capitalize on our initial successes with our customers and expand
the use of our products by offering these organizations the added capabilities
of expanding and monitoring on the web. By acquiring the FaciliTRAK software in
March 2002, we gained access to a whole new realm of opportunities and we now
are able to offer a complete solution to the high-end market sector. With the
acquisition of TelSoft in July 2006, our marketing efforts in North America
increased. The purchase of TelSoft has enabled us to increase our customer base.


                                       21

MANAGED SERVICES

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

     SWITCHING SYSTEMS MANUFACTURERS AND VENDORS. We believe that the most
efficient means of selling our telemanagement products is to enter into
relationships with major business telephone system manufacturers and vendors who
market our products on either an original equipment manufacturer, or 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 and PTTs. These manufacturers have begun to consider
telemanagement capability as a competitive tool when selling their products and
have begun to offer end-users a complete, integrated solution. Among the
companies that sell our telemanagement products are Siemens, Philips, Ericsson,
Lucent, Nortel, Alcatel, ECI/Tadiran, Harris, NEC, Avaya, Mitel, Cisco, Damovo,
LG and Panasonic. We have also entered into an agreement with Airspan and
another major global manufacturer with respect to our billing products. In
addition, we work with gateway providers such as Cisco, Mera, ArelNet and
RADVision. The percentages of sales attributable to our three largest OEM
customers, Siemens, Philips and Ericsson, in each of the three years ended
December 31, 2006 are as follows:

                  2004           2005            2006
                  ----           ----            ----

Siemens           38.0%          36.0%          29.0%
Philips            5.0%           4.0%           4.0%
Ericsson           4.0%           2.0%           1.0%

     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.

     PTTS. We also market our products to PTTs (post, telephone and telegraph
authorities) who integrate our solutions with the telephone systems they sell or
lease to their customers. Among the PTTs who sell our products are Telecom
Italy, Cable and Wireless, Trinidad PTT and Hong Kong Telecom.

     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. We are also continuing our relationship with RADVision, a
recognized IP technology leader. Together with RADVision, we offer solutions
consisting of RADVision's Gatekeeper and our advanced web-based call management
solution. We also signed an agreement with Cisco, pursuant to which Cisco will
certify the use of our VoIP solution in their CallManager call processing
software, a key component of Cisco's AVVID (Architecture for Voice, Video and
Integrated Data). Our software provides validated reports on call records, start
time, duration, and origin and final destination. Additional features include
the ability to allocate usage-sensitive call costing and, using an integrated
fraud module, detect unauthorized or inappropriate system access.


                                       22

     OTHER MARKETING ACTIVITIES. We are conducting a wide range of marketing
activities aimed at generating awareness and leads, including public relations,
attendance at trade shows and exhibitions, user conferences, direct mail,
response mail and seminars. We have joined alliances with strategic partners
such as Avaya, Alcatel and Cisco. We regularly advertise our products in
prominent trade publications, and we also participate in major regional and
international technology and communications trade shows, forums, and fairs
worldwide. These activities are intended both to generate leads and maintain the
general public awareness of our products. We maintain our website, allowing for
correspondence and queries from new potential customers as well as promoting
support for our existing customer base.

COMPETITION

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

INTELLECTUAL PROPERTY RIGHTS

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

     Our trademark rights include rights associated with the use of our
trademarks and rights obtained by registration of our trademarks. We have
obtained trademark registrations in Israel and the United States. The use and
registration rights of our trademarks does not ensure that we have superior
rights over other third parties that may have registered or used identical
related marks on related goods or services. Trademark rights are territorial in
nature; therefore we do not have rights in all jurisdictions.

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

C.   ORGANIZATIONAL STRUCTURE

     Our wholly owned subsidiaries in the United States, Hong Kong, the
Netherlands and Brazil, MTS IntegraTRAK Inc., MTS TelSoft Inc., MTS Asia Ltd.,
JARAGA B.V. and TABS Brazil Ltda., respectively, act as marketing and customer
service organizations in those countries. Our 50% owned affiliate in Spain,
Jusan S.A., is engaged in the development, manufacture, assembly, sales,
distribution and maintenance of vocal server and call billing applications.


                                       23

D.   PROPERTY, PLANTS AND EQUIPMENT

     Our executive offices and research and development facilities are located
at 22 Zarhin Street, Ra'anana, Israel, where we occupy approximately 16,300
square feet. The lease, which expires on June 15, 2010, has an annual rental
charge of approximately $400,000. We have subleased approximately 4,400 square
feet of this space until June 15, 2010 for an annual rental charge of
approximately $100,000.

     Our U.S. subsidiary occupies approximately 2,314 square feet of space in
Kirkland, Washington. The lease, which will expire in October 2008, has an
annual rental charge of approximately $51,000.

     In addition, we have an office in New Jersey, where we occupy approximately
2,150 square feet of space. The lease, which will expire in July 31, 2007, has a
remaining obligation of approximately $14,000.

     We also have an office in Glendale, California, where we occupy
approximately 2,340 square feet of space. The lease is on a month-to-month basis
for a rental fee of $4,267 per month.

     The combined total annual rental cost for our Hong Kong and Sao Paulo
offices is approximately $43,000. The lease agreements for these premises will
expire in October 2007 and August 2008, respectively.

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

BACKGROUND

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

     We have wholly-owned subsidiaries in the United States, Hong Kong, the
Netherlands and Brazil, MTS IntegraTRAK Inc., MTS TelSoft Inc., MTS Asia Ltd.,
JARAGA B.V. and TABS Brazil Ltda., respectively, which act as marketing and
customer service organizations in those countries. We also have a 50% owned
affiliate in Spain, Jusan S.A., which is engaged in the development,
manufacture, assembly, sales, distribution and maintenance of vocal server and
call billing applications.

OVERVIEW

     We are a worldwide provider of solutions for TEM used by enterprises and
BSS used by ITSPs. 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 TEM solutions
support our clients on an ongoing basis with both sophisticated software
applications and a variety of managed services relationship models. Our
converged BSS solutions for ITSPs have been successfully implemented worldwide
by wireless providers, Voice over Internet Protocol, Internet Protocol
Television, and content service providers. Our converged BSS solutions include
applications for charging and invoicing customers, interconnect billing and
partner revenue management using pre-pay and post-pay schemes. Our
pre-configured BSS solutions have been designed to be implemented quickly and
are competitively priced.


                                       24

     On July 31, 2006, we completed the acquisition of certain assets and
liabilities of TelSoft, a California corporation, a provider of call accounting
and TEM products. The 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. We believe that the acquisition of TelSoft's TEM and call
accounting software will enable us to expand our TEM solutions and will assist
us to strengthen our growing business in the United States.

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
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 whose functional
currency is not the dollar, have been translated into dollars. All balance sheet
accounts have been translated using the exchange rates in effect at the balance
sheet date. Statement of operations amounts have been translated using the
average exchange rate for the period. The resulting translation adjustments are
reported as a component of shareholders' equity in accumulated other
comprehensive income (loss).

DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATIONS

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

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

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

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


                                       25

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

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

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

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

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

     Many of our software arrangements involve multiple elements. Such elements
typically include any or all of the following: software licenses, software
maintenance, technical support and training services. For multiple-element
arrangements that do not involve significant modification or customization of
the software and do not involve services that are considered essential to the
functionality of the software, we allocate value to each undelivered element
based on vendor specific objective evidence, or VSOE, of the fair value of each
undelivered element in the arrangement, in accordance with the "residual method"
prescribed by SOP No. 98-9, "Modification of SOP No. 97-2, Software Revenue
Recognition With Respect to Certain Transactions." The VSOE used by us to
allocate the sales price to support services and maintenance is based on the
renewal rate charged when these elements are sold separately. License revenues
are recorded based on the residual method. Under the residual method, revenue is
recognized for the delivered elements when (i) there is VSOE of the fair values
of all the undelivered elements, and (ii) all revenue recognition criteria of
SOP No. 97-2, as amended, as described above, are satisfied. Under the residual
method any discount in the arrangement is allocated to the delivered element.

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

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


                                       26

     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, 2006, 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.

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

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

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

     In 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 valuation allowance of $2.9 million was
required for tax loss carryforwards and other temporary differences as of
December 31, 2006. If these estimates prove inaccurate, a change in the
valuation allowance could be required in the future.


                                       27

     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."

     IMPAIRMENT OF LONG-LIVED ASSETS. We review our long-lived assets and
certain identifiable intangible assets for impairment whenever events or changes
in circumstances indicate that the carrying value may not be recoverable.
Factors that could indicate an impairment include significant underperformance
of the asset as compared to historical or projected future operating results,
significant changes in the actual or intended use of the asset, or significant
negative industry or economic trends. When we determine that the carrying value
of an asset may not be recoverable, the related estimated future undiscounted
cash flows expected to result from the use and eventual disposition of the asset
are compared to the carrying value of the asset. If the sum of the estimated
undiscounted future cash flows is less than the carrying amount, we record an
impairment charge based on the difference between the carrying value of the
asset and its fair value, which we estimate based on discounted expected future
cash flows. In determining whether an asset is impaired, we must make
assumptions regarding recoverability of costs, estimated future cash flows from
the asset, intended use of the asset and other related factors. If these
estimates or their related assumptions change, we may be required to record
impairment charges for these assets. As of December 31, 2006, no impairment
losses have been identified.

     GOODWILL. We have recorded goodwill as a result of acquisitions. Goodwill
is not amortized, but rather is subject to an annual impairment test. Statement
of Financial Accounting Standard, or 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. We have elected to perform our analysis of
goodwill at the end of the third quarter of the year. During 2004, 2005 and
2006, no impairment losses were identified.


                                       28

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,
                                                    -------------------------
                                                    2004      2005       2006
                                                    -----     -----     -----
Revenues
Product sales                                        75.1%     66.0%     71.7%
Services                                             24.9      34.0      28.3
                                                    -----     -----     -----
Total revenues                                      100.0%    100.0%    100.0%
Cost of revenues
Product sales                                        25.6      25.7      25.1
Services                                              4.3       7.2       6.9
                                                    -----     -----     -----
Total cost of revenues                               29.9      32.9      32.0
Gross profit                                         70.1      67.1      68.0
Selling and marketing                                66.9      41.5      29.4
Research and development, net                        25.1      38.0      34.7
General and administrative                           22.3      24.5      25.3
                                                    -----     -----     -----
Operating loss                                      (44.2)    (36.9)    (21.4)
Financial income (expenses), net                      0.8       0.5      (0.5)
                                                    -----     -----     -----
Loss before taxes on income                         (43.4)    (36.4)    (21.9)
Taxes on income                                       2.8       0.1       1.1
                                                    -----     -----     -----
Net loss before equity in earnings of affiliate     (46.2)    (36.5)    (23.0)
Equity in earnings of affiliate                       2.4       0.0       1.5
                                                    -----     -----     -----
Net loss                                            (43.8)%   (36.5)    (21.5)
                                                    =====     =====     =====

YEARS ENDED DECEMBER 31, 2006 AND 2005

     REVENUES FROM PRODUCTS AND SERVICES. Revenues consist primarily of software
license fees sales, hardware sales and revenues from services, including service
bureau, maintenance, training, professional services and support. Revenues
decreased by 9.3% to $10.48 million for the year ended December 31, 2006 from
$11.56 million for the year ended December 31, 2005. Revenues from our
wholly-owned U.S. subsidiary, MTS IntegraTRAK, decreased by 11.4% to $5.35
million, or 51.1% of our total revenues, for the year ended December 31, 2006
from $6.04 million, or 52.3% of our total revenues, for the year ended December
31, 2005. The decrease in revenues in 2006 is primarily attributable to a longer
sales cycle for our solutions during the year ended December 31, 2006 compared
with the year ended December 31, 2005. We anticipate that our revenues will
slightly increase in 2007.

     COST OF REVENUES FROM PRODUCTS AND SERVICES. Cost of revenues consists
primarily of (i) production costs (including hardware, media, packaging, freight
and documentation); (ii) certain royalties and licenses payable to third parties
(including the Office of the Chief Scientist of the Ministry of Industry, Trade
and Labor of the State of Israel), (iii) professional services costs; and (iv)
warranty and support costs for up to one year for end-users and up to 15 months
for our OEM distributors. Cost of revenues decreased by 11.8% to $3.34 million
for the year ended December 31, 2006 from $3.80 million for the year ended
December 31, 2005. The decrease in cost of revenues is consistent with the
decrease in revenues and principally a result of a reduction in the number of
employees in professional services and technical support departments.

     RESEARCH AND DEVELOPMENT, NET. Research and development expenses, net
consist primarily of salaries of employees engaged in on-going research and
development activities, outsourcing subcontractor development and other related
costs, net of grants that were approved by the Office of the Chief Scientist of
the Ministry of Industry, Trade and Labor of the State of Israel. Research and
development, net expenses decreased by 17.3% to $3.63 million for the year ended
December 31, 2006 (net of the grant from the Office of the Chief Scientist in
the amount of $578,000) from $4.40 million for the year ended December 31, 2005
(net of the grant from the Office of the Chief Scientist in the amount of
$130,000). The decrease in research and development, net expenses is primarily
attributable to the reduction in the number of employees engaged in research and
development and the increase in the participation of the Office of the Chief
Scientist in 2006. We expect that our research and development expenses will
slightly decrease in 2007.

     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 35.8% to $3.08 million for the year ended
December 31, 2006 from $4.80 million for the year ended December 31, 2005. The
decrease in selling and marketing expenses is primarily attributable to our
reliance on establishing and maintaining partnerships with leading OEMs and
vendors for various initiatives and a reduction in the number of our selling and
marketing personnel.

     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 6.3% to
$2.65 million for the year ended December 31, 2006 from $2.83 million for the
year ended December 31, 2005. The decrease in general and administrative
expenses is primarily attributable to the decrease in expenses associated with
the integration of the activity of Teleknowledge Group Ltd., or Teleknowledge,
that were incurred in the year ended December 31, 2005.


                                       29

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

     TAXES ON INCOME. Our tax expenses were $118,000 for the year ended December
31, 2006, compared to tax expenses of $10,000 for the year ended December 31,
2005. The increase in taxes on income expenses is primarily attributable to a
tax reserve that we established in 2006 for possible tax liabilities relating to
prior years.

     EQUITY IN RESULTS OF AFFILIATE. We recognize income and loss from the
operations of our 50%-owned affiliate, Jusan S.A. For the year ended December
31, 2006 and 2005, we recognized income of $159,000 and $2,000, respectively.

YEARS ENDED DECEMBER 31, 2005 AND 2004

     REVENUES FROM PRODUCTS AND SERVICES. Revenues increased by 22.8% to $11.56
million for the year ended December 31, 2005 from $9.41 million for the year
ended December 31, 2004. In 2005, the revenues from our wholly owned U.S.
subsidiary, MTS IntegraTRAK, increased by 22% from the year ended December 31,
2004 and accounted for 52.3% of our total revenues. The increase in revenues in
2005 was primarily attributable to revenues from billing solutions that were
based on the technology that we acquired from Teleknowledge and revenues from
sales of our new telemanagement solutions.

     COST OF REVENUES FROM PRODUCTS AND SERVICES. Cost of revenues increased by
35.1% to $3.80 million for the year ended December 31, 2005 from $2.81 million
for the year ended December 31, 2004. This increase in cost of revenues
corresponds with the increase in revenues and was primarily a result of the
change in our product mix from "shelf products" to customized telecommunications
equipment manufacturer products and billing solutions.

     RESEARCH AND DEVELOPMENT, NET. Research and development, net expenses
increased by 86.1% to $4.40 million for the year ended December 31, 2005 (net of
the grant from the Office of the Chief Scientist in the amount of $130,000) from
$2.36 million for the year ended December 31, 2004 (after the capitalization of
$386,000 of software development costs). The increase in research and
development, net expenses was primarily due to the continued integration of
Teleknowledge's research and development group, as well as to our continuing
investment in product development.

     SELLING AND MARKETING. Selling and marketing expenses decreased by 23.9% to
$4.80 million for the year ended December 31, 2005 from $6.30 million for the
year ended December 31, 2004. The decrease in selling and marketing expenses is
primarily attributable to our reliance on establishing and maintaining
partnerships with leading OEMs and vendors for various initiatives and a
reduction in the number of our selling and marketing personnel.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by 34.7% to $2.83 million for the year ended December 31, 2005 from $2.10
million for the year ended December 31, 2004. The increase in general and
administrative expenses was primarily attributable to the increase in our
overall activity.

     FINANCIAL INCOME, NET. Financial income, net decreased by 32.1% to $53,000
for the year ended December 31, 2005 from $78,000 for the year ended December
31, 2004. In the year ended December 31, 2005, our interest income was
negatively affected by the decrease in our holdings of cash and cash equivalents
and by foreign currency translation adjustments expenses. These expenses were
offset in part by gains on marketable securities, net in the amount of $81,000.


                                       30

     TAXES ON INCOME. Our taxes on income were $10,000 for the year ended
December 31, 2005, compared to $266,000 for the year ended December 31, 2004.
Most of our taxes in 2004 were the result of our provision for the Israeli tax
authorities' demand for tax payment for the 1997-1999 period. We made a
provision in our financial statements for this tax demand for the amount deemed
probable.

     EQUITY IN RESULTS OF AFFILIATE. We recognize income and loss from the
operations of our 50%-owned affiliate, Jusan S.A. For the year ended December
31, 2005 and 2004, we recognized income of $2,000 and $225,000, respectively.

QUARTERLY RESULTS OF OPERATIONS

     The following tables set forth certain unaudited quarterly financial
information for each of the eight fiscal quarters ended December 31, 2006, in
dollars and as a percentage of revenues. In management's opinion, this data has
been prepared on a basis consistent with our audited consolidated financial
statements included elsewhere in this annual report and include all necessary
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of the unaudited information for the quarters
presented. The operating results for any quarter are not necessarily indicative
of results that we might achieve for any future periods.

                                                                             For the Three Month Periods Ended
                                  ---------------------------------------------------------------------------------------------------------------------------
                                    Mar. 31,        Jun. 30,       Sept. 30,        Dec. 31,       Mar. 31,        Jun. 30,        Sept. 30,       Dec. 31,
                                     2005             2005           2005            2005            2006            2006            2006            2006
                                  -----------     -----------     -----------     -----------     -----------     -----------     -----------     -----------

Revenues                          $     2,726     $     2,812     $     3,013     $     3,012     $     2,814     $     2,704     $     2,652     $     2,314
Cost of revenues                          887           1,006           1,061             848             934             894             813             714
                                  -----------     -----------     -----------     -----------     -----------     -----------     -----------     -----------
Gross profit                            1,839           1,806           1,952           2,164           1,880           1,810           1,839           1,600
                                  -----------     -----------     -----------     -----------     -----------     -----------     -----------     -----------
Selling and marketing                   1,527           1,370             984             916             830             753             814             681
Research and development, net           1,294           1,030           1,118             953           1,060             898             915             760
General and administrative              1,045             677             588             520             578             630             746             697
Operating expenses                      3,866           3,077           2,690           2,389           2,468           2,281           2,475           2,138
                                  -----------     -----------     -----------     -----------     -----------     -----------     -----------     -----------
Operating loss                         (2,027)         (1,271)           (738)           (225)           (588)           (471)           (636)           (538)
Financial income (expense), net            21              83              (6)            (45)             37             (26)            (60)             (5)
Other income (loss), net                   --              --              (2)              2              --              --              --              --
                                  -----------     -----------     -----------     -----------     -----------     -----------     -----------     -----------
Loss before taxes on income            (2,006)         (1,188)           (746)           (268)           (551)           (497)           (696)           (543)
Taxes on income                            --              --              --              10               3              --              --             115
                                  -----------     -----------     -----------     -----------     -----------     -----------     -----------     -----------
Net loss before equity in
   results of affiliate                (2,006)         (1,188)           (746)           (278)           (554)           (497)           (696)           (658)
Equity in results of affiliate            (28)             39              48             (57)             69              49              52             (11)
                                  -----------     -----------     -----------     -----------     -----------     -----------     -----------     -----------
Net loss                          $    (2,034)    $    (1,149)    $      (698)    $      (335)    $      (485)    $      (448)    $      (644)    $      (669)
                                  ===========     ===========     ===========     ===========     ===========     ===========     ===========     ===========
Basic and diluted net loss per
share                             $     (0.44)    $     (0.24)    $     (0.13)    $     (0.06)    $     (0.08)    $     (0.08)    $     (0.11)    $     (0.12)
Weighted average number of
   ordinary shares used in
   computing basic net loss per
   share                            4,638,004       4,712,561       5,306,565       5,724,504       5,744,864       5,763,845       5,765,289       5,773,845
Weighted average number of
ordinary shares used in
computing diluted net loss per
share                               4,638,004       4,712,561       5,306,565       5,724,504       5,744,864       5,763,845       5,765,289       5,773,845

Revenues                                100.0%          100.0%          100.0%          100.0%          100.0%          100.0%          100.0%          100.0%
Cost of revenues                         32.5            35.8            35.2            28.2            33.2            33.1            30.7            30.9
                                  -----------     -----------     -----------     -----------     -----------     -----------     -----------     -----------
Gross profit                             67.5            64.2            64.8            71.8            66.8            66.9            69.3            69.1
                                  -----------     -----------     -----------     -----------     -----------     -----------     -----------     -----------
Selling and marketing                    56.0            48.7            32.7            30.4            29.5            27.8            30.7            29.4
Research and development, net            47.5            36.6            37.1            31.6            37.7            33.2            34.5            32.8
General and administrative               38.3            24.1            19.5            17.3            20.5            23.3            28.1            30.1
Operating expenses                      141.8           109.4            89.3            79.3            87.7            84.3            93.3            92.3
                                  -----------     -----------     -----------     -----------     -----------     -----------     -----------     -----------
Operating  loss                         (74.3)          (45.2)          (24.5)           (7.5)          (20.9)          (17.4)          (24.0)          (23.2)
Financial income (expense), net           0.8             3.0            (0.2)           (1.5)            1.3            (1.0)           (2.3)           (0.2)
Other income (loss), net                    -               -            (0.1)            0.1               -               -               -               -
                                  -----------     -----------     -----------     -----------     -----------     -----------     -----------     -----------
Loss before taxes on income             (73.5)          (42.2)          (24.8)           (8.9)          (19.6)          (18.4)          (26.3)          (23.4)
Taxes on income                             -               -               -             0.3             0.1               -               -             5.0
                                  -----------     -----------     -----------     -----------     -----------     -----------     -----------     -----------
Net loss before equity in
   results of affiliate                 (73.5)          (42.2)          (24.8)           (9.2)          (19.7)          (18.4)          (26.3)          (28.4)
Equity in results of affiliate           (1.0)            1.4             1.6            (1.9)            2.5             1.8             2.0            (0.5)
                                  -----------     -----------     -----------     -----------     -----------     -----------     -----------     -----------
Net loss                                (74.6)%         (40.8)%         (23.2)%         (11.1)%         (17.2)%         (16.6)%         (24.3)%         (28.9)
                                  ===========     ===========     ===========     ===========     ===========     ===========     ===========     ===========


                                       31

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 INFLATION AND DEVALUATION ON RESULTS OF OPERATIONS, LIABILITIES AND ASSETS

     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, companies experience increases in the dollar cost of
their operations in Israel. Unless offset by a devaluation of the NIS, inflation
in Israel will have a negative effect on our profitability, as we receive
payments in dollars for most of our sales, while we incur a portion of our
expenses in NIS.

     In addition, since part of our sales are quoted in NIS and a portion of our
expenses are incurred in NIS, our results have in the past been and would in the
future be adversely affected by a change in the rate of inflation in Israel when
the amount of our revenues in NIS is less than the amount of our expenses in NIS
or if such change in the rate of inflation is not offset, or is offset on a
lagging basis, by a corresponding devaluation of the NIS against the dollar and
other foreign currencies.

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

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

     2002               6.5                     7.3                  (0.7)
     2003              (1.9)                   (7.6)                  6.2
     2004               1.2                    (1.6)                  2.8
     2005               2.4                     6.8                  (4.1)
     2006              (0.1)                   (8.2)                  8.8

     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.

     Because exchange rates between the NIS and the dollar fluctuate
continuously, with a historically declining trend in the value of the NIS,
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

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. Accordingly, our operations in Israel are directly influenced
by political, economic and military conditions affecting Israel. Specifically,
we could be adversely affected by 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, and a significant downturn in the economic or financial condition of
Israel.

POLITICAL CONDITIONS

     Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Although Israel has entered into
various agreements with Egypt, Jordan and the Palestinian Authority, there has
been an increase in unrest and terrorist activity in Israel, which began in
September 2000 and which has continued with varying levels of severity through
2006. In July 2006, an armed conflict began between Israel and Hezbollah forces
in Lebanon, which involved rocket attacks on populated areas in the northern
parts of Israel. On August 14, 2006, a cease-fire between Hezbollah and Israel
took effect. This situation has had an adverse effect on Israel's economy,
primarily in the geographical areas directly harmed by this conflict. Any future
armed conflict, political instability or violence in the region may have a
negative effect on our business condition, harm our results of operations and
adversely affect our share price. No predictions can be made as to whether or
when a final resolution of the area's problems will be achieved or the nature
thereof and to what extent the situation will impact Israel's economic
development or our 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.

     In addition, some of our executive 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.

ECONOMIC CONDITIONS

     In recent years Israel has been going through a period of recession in
economic activity, resulting in low growth rates and growing unemployment.
Although economic activity in Israel has improved recently, our operations could
be adversely affected if the economic conditions in Israel begin to deteriorate
again.

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.


                                       33

     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 2006 was 31%, which was reduced to 29% in 2007,
and will be further reduced to 27% in 2008, 26% in 2009 and 25% in 2010 and
thereafter.

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

     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.

ADOPTION OF NEW ACCOUNTING STANDARD

ACCOUNTING FOR EQUITY-BASED COMPENSATION

     Effective January 1, 2006, we adopted Financial Accounting Standards Board,
or FASB, SFAS No. 123 (revised 2004), "Share-Based Payment," or SFAS No. 123(R).
SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," or APB No. 25, and related interpretations, and
amends FASB SFAS No. 95, "Statement of Cash Flows." Generally, the approach in
SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS
123(R) requires all equity-based payments to employees, including grants of
employee stock options, to be recognized in the statement of income based on
their fair values. Pro-forma disclosure is no longer an alternative. In 2006, we
recognized equity-based compensation expense under SFAS 123(R) in the amount of
$210,000.

     As of December 31, 2006, we had $209,000 of unrecognized compensation
expense related to non-vested stock options. For options granted before January
1, 2006 and which had graded vesting, we recognized compensation expenses based
on the accelerated attribution method over the requisite service period of each
of the awards. Forfeitures were accounted for as they occurred, but have been
estimated with the adoption of SFAS 123(R) for those awards not yet vested. For
options granted after January 1, 2006, we recognize compensation costs using the
straight-line method over the requisite service period of each of the awards,
net of estimated forfeitures, and for stock options granted before adoption of
FAS 123(R) we use the accelerated method. SFAS 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.


                                       34

     We adopted SFAS 123(R) using the modified prospective method. Under this
transition method, compensation costs recognized in 2006 include (a)
compensation costs for all stock-based payments granted prior to, but that had
not yet vested as of, January 1, 2006, based on the grant date fair value
estimated in accordance with the pro-forma provisions of SFAS 123, adjusted for
the effect of estimating forfeitures, and (b) compensation costs for the
equity-based payments granted subsequent to January 1, 2006, based on the grant
date fair value estimated in accordance with SFAS 123(R). Our consolidated
financial statements for prior periods have not been restated to reflect, and do
not include, the impact of SFAS 123(R). We selected the Black-Scholes option
pricing model as the most appropriate fair value method for our stock-options
awards and value restricted stock based on the market value of the underlying
shares at the date of grant.

     As a result of adopting SFAS 123(R) on January 1, 2006, our income before
income taxes for 2006 is $144,000 lower than if we had continued to account for
equity-based compensation under APB No. 25. Basic and diluted earning per share
for 2006 is $0.03 lower than if we had continued to account for equity-based
compensation under APB No. 25.

     The fair value for options granted in 2004, 2005 and 2006 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        2004            2005           2006
 ----------------------        ----            ----           ----

Expected volatility            71.8%          56.9%          74.5%
Risk-free interest              2.0%           3.9%           4.6%
Dividend yield                  0.0%           0.0%           0.0%
Expected life (years)           2.2            4              4


RECENTLY ISSUED ACCOUNTING STANDARDS

     In July 2006, the FASB issued 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 income taxes by prescribing the minimum
recognition threshold a tax position is required to meet before being recognized
in the financial statements. FIN 48 utilizes a two-step approach for evaluating
tax positions. Recognition (step one) occurs when an enterprise concludes that a
tax position, based solely on its technical merits, is more-likely-than-not to
be sustained upon examination. Measurement (step two) is only addressed if step
one has been satisfied (when the position is more-likely-than-not to be
sustained). Under step two, the tax benefit is measured as the largest amount of
benefit, determined on a cumulative probability basis that is
more-likely-than-not to be realized upon ultimate settlement. FIN 48 applies to
all tax positions related to income taxes subject to the FASB SFAS No. 109,
"Accounting for income taxes". This includes tax positions considered to be
"routine" as well as those with a high degree of uncertainty. FIN 48 has
expanded disclosure requirements, which include a tabular roll forward of the
beginning and ending aggregate unrecognized tax benefits as well as specific
detail related to tax uncertainties for which it is reasonably possible the
amount of unrecognized tax benefit will significantly increase or decrease
within twelve months. These disclosures are required at each annual reporting
period unless a significant change occurs in an interim period. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The cumulative
effect of applying FIN 48 will be reported as an adjustment to the opening
balance of retained earnings. We are currently evaluating the effect of the
adoption of FIN 48 on our financial statements.

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

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


                                       35

B.   LIQUIDITY AND CAPITAL RESOURCES

     On December 31, 2006, we had $1.5 million in cash and cash equivalents,
$100,000 in short-term bank deposits, $159,000 in marketable securities and
working capital of $186,000 compared to $3.2 million in cash and cash
equivalents, $0 in short-term bank deposits, $132,000 in marketable securities
and working capital of $2.1 million on December 31, 2005. The decrease in cash
and cash equivalents and working capital at December 31, 2006 was primarily due
to our losses in 2006.

     In order to finance the acquisition of TelSoft in July 2006, we obtained a
loan from Bank Hapoalim in the amount of approximately $1 million. The loan
principal will be repaid in 12 equal monthly installments commencing August 31,
2007. The loan bears annual interest at a rate of the monthly LIBOR + 2%,
payable on a monthly basis on the outstanding loan amount commencing August 31,
2006. Under the loan agreement, we are required to comply with the following
covenants: (i) the ratio between shareholders equity and total shareholders
equity and liabilities may not be less than 40% and in no event may our
shareholders equity decrease below $ 5,000 thousand; (ii) we must generate
operating income for each of the two subsequent quarters commencing the second
quarter of 2007 and onwards; and (iii) our cash and cash equivalents may not
decrease below $1 million at any given time. To secure the loan, we granted the
Bank a floating charge on all of our current and long term assets and a fixed
charge on our goodwill and on authorized but not outstanding shareholders
equity.

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

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

CASH FLOWS

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

                                                        Year ended December 31,
                                                         ------------------
                                                          2005        2006
                                                         ------      ------
                                                          ($ in thousands)

Net cash used in operating activities                    (4,422)     (1,609)
Net cash provided by (used in) investing activities         893      (1,206)
Net cash provided by financing activities                 2,906       1,098
Net decrease (increase) in cash and cash equivalents       (623)     (1,717)
Cash and cash equivalents at beginning of period          3,814       3,191
Cash and cash equivalents at end of period                3,191       1,474

     Net cash used in operating activities was approximately $1.6 million for
the year ended December 31, 2006. The use of our funds in 2006 was primarily
attributable to our continuing investment in product development. Net cash used
in operating activities was approximately $4.4 million for the year ended
December 31, 2005. The use of our funds in 2005 was primarily attributable to
our research and development expenses associated with the integration of the
Teleknowledge activity, as well as to our continuing investment in product
development.


                                       36

     Net cash used in investing activities was approximately $1.2 million for
the year ended December 31, 2006, primarily attributable to the acquisition of
certain assets and liabilities of TelSoft in July 2006. Net cash provided by
investing activities was approximately $893,000 for the year ended December 31,
2005, primarily attributable to the sales of available-for-sale marketable
securities.

     Net cash provided by financing activities was approximately $1.1 million
for the year ended December 21, 2006 compared to approximately $2.9 million for
the year ended December 31, 2005. Of the cash provided by financing activities
in 2006, approximately $1 million was attributable to the loan we obtained form
Bank Hapoalim to finance the acquisition of TelSoft and $100,000 was
attributable to proceeds from exercise of stock options. Of the cash provided by
financing activities in 2005, approximately $2.6 million was attributable to
proceeds from a private offering of our securities in the United States in
August 2005 and approximately $300,000 was attributable to proceeds from
exercise of stock options.

     In December 2000, we publicly announced our stock repurchase program, under
which our officers were authorized to repurchase up to 300,000 of our ordinary
shares. In May 2003, our Board of Directors increased the number of shares to be
repurchased to 600,000 ordinary shares. Through December 31, 2004, we
repurchased an aggregate 395,410 ordinary shares, at a total cost of $486,000.
We did not continue this program during 2005 and 2006 and based on our current
financial situation, we do not expect to repurchase any shares during 2007. We
cancelled 384,610 of the repurchased ordinary shares.

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

C.   RESEARCH AND DEVELOPMENT

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

     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 BSS activities. During 2004, 2005 and 2006, our net
research and development expenditures were $2.4 million, $4.4 million and $3.6
million, respectively. In the past, we received funding from the Israeli
Ministry of Industry, Trade and Labor's Office of the Chief Scientist for
selected research and development projects, but we stopped seeking funding for a
number of years. In late 2005 and early 2006 and 2007, we applied to the Office
of the Chief Scientist for new grants for our research and development projects.
We received an approval for the 2005 and 2006 applications and our two 2007
applications are currently pending.

     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."


                                       37

     We have expensed royalties relating to the repayment of the Office of the
Chief Scientist grants in the amounts of $181,000, $198,000 and $187 for the
years ended December 31, 2004, 2005 and 2006, respectively.

     As of December 31, 2006, we had a contingent obligation to pay royalties in
the amount of approximately $9.49 million (including a contingent obligation in
the amount of $1.64 million relating to royalties from revenues derived from
products that we acquired from Teleknowledge that were funded by the Office of
the Chief Scientist). The $5.5 million of grants received after January 1999 are
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, including obligations of discontinued operations, as of
December 31, 2006 and the effect we expect them to have on our liquidity and
cash flow in future periods.

Contractual Obligations                       Payments Due By Period
- -----------------------         --------------------------------------------------
                                         Less than                        More than
                                Total      1 Year    1-3 Years  3-5 Years  5 Years
                                -----      ------    ---------  ---------  -------
                                            (U.S. dollars in thousands)

Operating lease obligations     $1,135     $  357     $  644     $  134     $   --
Accrued severance pay*             946         --         --         --        946
Total                           $2,081     $  357     $  644     $  134     $  946

- ----------

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

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:


                                       38

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

Chaim Mer                     59     Chairman of the Board
Eytan Bar                     41     President and Chief Executive Officer
Shlomi Hagai                  36     Corporate Chief Operating Officer and Chief Financial Officer
Hanoch Magid                  51     General Manager MTS Asia and Vice President Sales - Europe, Middle East and Africa
Alon Aginsky                  44     Director
Isaac Ben-Bassat              53     Director
Dr. Orna Berry (1)            57     Outside Director
Dr. Yehoshua Gleitman (1)     57     Outside Director
Steven J. Glusband            60     Director
Yaacov Goldman (1)            52     Director

- ----------
(1) Member of our Audit Committee

     Messrs. Mer, Aginsky, Ben-Bassat, Glusband and Goldman will serve as
directors until our 2007 Annual General Meeting of Shareholders. Dr. Gleitman
and Dr. Berry will serve as outside directors pursuant to the provisions of the
Israeli Companies Law for a three-year term until our 2007 annual general
meeting of shareholders and January 28, 2008, respectively, following which the
service of Dr. Gleitman as an outside director may not be extended and the
service of Dr. Berry as an outside director may be renewed for only one
additional three-year term.

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

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

     SHLOMI HAGAI has served as our Corporate Chief Operating Officer and Chief
Financial Officer since March 2005. Prior to that and from 2000, Mr. Hagai
served as our financial controller. Prior to joining our company and from 1998,
Mr. Hagai served as audit team manager in the Professional Department of Ernst &
Young Israel, supervising privately held and publicly traded companies engaged
in the hi-technology, industrial, services and infrastructure sectors. Mr. Hagai
is a certified public accountant since 1999 and holds a B.A. degree in Business
Administration (majoring in accounting) from the College of Management and LLM
degree from Bar-Ilan University.

     HANOCH MAGID has served as our Vice President Sales- Europe, Middle East
and Africa since 2002 and as General Manager of MTS Asia since 2006. Prior to
joining our company and from 2001, Mr. Magid served as Vice President of
Operating and Professional Services of Xcitel Ltd., a start up company engaged
in the field of mobile communication. Prior to that and from 2000, Mr. Magid
served as Chief Operating Officer of Cellonet Interactive Mobile Commerce Ltd.
From 1992 to 2000, Mr. Magid served in various positions of sales, operating and
customer support at Scitex Corporation Ltd. Mr. Magid holds a B.Sc degree in
Mechanical Engineering from the Ben Gurion University, Be'er Sheva.

     ALON AGINSKY has served as a director since June 1996. Since July 2000, Mr.
Aginsky has served as President and Chief Executive Officer of cVidya Inc.,
which is engaged in the development of a service assurance platform for next
generation broadband service providers. Mr. Aginsky served as our Vice President
Sales and Marketing from October 1996 until April 1999. From April 1999 to July
2000, Mr. Aginsky served as sales manager of C. Mer, when he was appointed
Manager of C. Mer. From 1990 until September 1996, Mr. Aginsky served as
President of MTS Inc., our U.S.-based marketing subsidiary. Mr. Aginsky holds a
B.A. degree in Business Administration from the New York Technology Institute.


                                       39

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

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

     DR. YEHOSHUA GLEITMAN has served as an outside director since July 2001 and
is a member of our audit committee. Since March 2000, Dr. Gleitman has been
Chief Executive Officer of SFKT, a company whose activities include venture
capital management, finance and investments in high-tech and telecommunications.
Mr. Gleitman was Chief Executive Officer of Ampal-American Israel Corporation,
or Ampal, from May 1997 and Managing Director of Ampal's Israeli wholly-owned
subsidiaries and head of Ampal's Israeli operations from April 1, 1997 until his
resignation in July 1999. From August 1996 until February 1997, Mr. Gleitman was
Director General of the Israeli Ministry of Industry and Trade and was Chief
Scientist at the Ministry of Industry and Trade of the Government of Israel from
January 1993 through February 1997. From 1991 through 1992, Mr. Gleitman was the
general manager of AIMS Ltd., and between 1990-1991, he was an advisor in charge
of marketing and business for Ashtrom Ltd. Dr. Gleitman holds a B.Sc., M.Sc. and
Ph.D. degrees in Physical Chemistry, all from the Hebrew University of
Jerusalem.

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

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

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, 2006.


                                       40

                                               Salaries, fees,      Pension,
                                                commissions      retirement and
                                                and bonuses     similar benefits
                                                -----------     ----------------
All directors and executive officers
as a group (14 persons)                          $1,081,573       $  162,803

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

     During the year ended December 31, 2006, we paid to each of our directors
an annual fee of approximately $8,400 and a per meeting attendance fee of $300,
except for Mr. Yaacov Goldman, an independent director and our financial expert,
to whom we paid an annual fee of approximately $16,800 and a per meeting
attendance fee of $400.

     As of December 31, 2006, our directors and executive officers as a group,
consisting of 14 persons, held options to purchase an aggregate 238,625 ordinary
shares, having exercise prices ranging from $1.844 to $3.87. The options vest
over a four-year period. Of such options, options to purchase 228,625 ordinary
shares were granted under our 2003 Israeli Share Option Plan (of which, options
to purchase 205,000 ordinary shares will expire in December 2008, options to
purchase 7,500 ordinary shares will expire in August 2009, options to purchase
2,500 ordinary shares will expire in May 2010, options to purchase 7,500
ordinary shares will expire in September 2010, options to purchase 2,500
ordinary shares will expire in November 2010 and options to purchase 3,625
ordinary shares will expire on March 2011) and options to purchase 10,000
ordinary shares were granted under our 1996 Stock Option Plan (all of which will
expire in December 2008). See Item 6.E., "Directors, Senior Management and
Employees - Share Ownership - Stock Option Plans."

C.   BOARD PRACTICES

ELECTION OF DIRECTORS

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

     Pursuant to our articles of association, all of our directors (except the
outside directors) are elected at our annual general meeting of shareholders by
a vote of the holders of a majority of the voting power represented and voting
at such meeting and hold office until the next annual general meeting of
shareholders and until their successors have been elected. 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 of July 2006.

     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:


                                       41

     o    an employment relationship;

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

     o    control; and

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

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

     As of 2006, 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.
This requirement does not apply to outside directors appointed prior to 2006.

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

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

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

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

     Our Board of Directors has determined that Dr. Yehoshua Gleitman and Dr.
Orna Berry both qualify as independent directors under the rules of the
Securities and Exchange Commission and NASDAQ and as outside directors under the
requirements of the Israeli Companies Law. Our Board of Directors has further
determined that Messrs. Alon Aginsky and Yaacov Goldman both qualify as
independent directors under the requirements of the Securities and Exchange
Commission and NASDAQ.


                                       42

AUDIT COMMITTEE

     Our audit committee, which was established in accordance with Section 114
of the Israeli Companies Law and Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, assists our board of directors in overseeing the accounting and
financial reporting processes of our company and audits of our financial
statements, including the integrity of our financial statements, compliance with
legal and regulatory requirements, our independent public accountants'
qualifications and independence, the performance of our internal audit function
and independent public accountants, finding any defects in the business
management of our company for which purpose the audit committee may consult with
our independent auditors and internal auditor, 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 Dr. Yehoshua Gleitman, Dr. Orna Berry
and Mr.Yaacov Goldman. Our Board of Directors has determined that Mr. Goldman
qualifies as a financial expert. The audit committee meets at least once each
quarter.

INTERNAL AUDIT

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

DIRECTORS' SERVICE CONTRACTS

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

APPROVAL OF RELATED PARTY TRANSACTIONS UNDER ISRAELI LAW

     The Israeli Companies Law codifies the fiduciary duties that "office
holders," including directors and executive officers, owe to a company. 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. The duty of loyalty includes avoiding any conflict of interest
between the office holder's position in the company and any other position or
his personal affairs, avoiding any competition with the company, avoiding
exploiting any business opportunity of the company in order to receive personal
gain for the office holder or others, and disclosing to the company any
information or documents relating to the company's affairs which the office
holder has received due to his position as an office holder. Each person listed
as a director or executive officer in the table under Item 6A. "Directors,
Senior Management and Employees -- Directors and Senior Management" is an office
holder.

     Under the Israeli Companies Law, all arrangements as to compensation of
office holders who are not directors require approval of our board of directors,
and the compensation of office holders who are directors must be approved by our
audit committee, board of directors and shareholders, in that order.


                                       43

     The Israeli Companies Law requires that an office holder promptly disclose
any personal interest that he or she may have and all related material
information known to him or her, in connection with any existing or proposed
transaction by 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. 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, as not being adverse to the company's interest. In some cases,
including in the case of an extraordinary transaction, such a transaction,
action and arrangement must be approved by the audit committee and by the board
of directors itself, and further shareholder approval is required to approve the
terms of compensation of an office holder who is a director. An office holder
who has a personal interest in a matter, which 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 this matter,
unless the majority of the members of the board or the audit committee have a
personal interest, as the case may be.

     The Israeli Companies Law also provides that an extraordinary transaction
with a controlling shareholder or in which a controlling shareholder of the
company has a personal interest (including private offerings in which a
controlling shareholder has a personal interest) and 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 an extraordinary transaction must
include at least one-third of the shareholders who have no personal interest in
the transaction who voted on the matter. 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.

     However, under the Companies Regulations (Relief from Related Party
Transactions), 5760-2000, promulgated under the Israeli Companies Law and
amended in January 2002, certain transactions between a company and its
controlling shareholder(s) and certain transaction with its director(s)
regarding terms of compensation do not require shareholder approval.

     In addition, directors' compensation and employment arrangements do not
require the approval of the shareholders if both the audit committee and the
board of directors agree that such arrangements are for the benefit of the
company. If the director or the office holder is a controlling shareholder of
the company, then the employment and compensation arrangements of such director
or office holder do not require the approval of the shareholders provided that
certain criteria are met.

     The above exemptions 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 grant of such relief, provided that such
objection is submitted to the company in writing not later than seven (7) 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 compensation
arrangement of the directors will require shareholders' approval as detailed
above.

     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% shareholder of 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 (1) was made in a private placement that received
shareholder approval, (2) was from a 25% or greater shareholder of the company
which resulted in the acquiror becoming a 25% or greater shareholder of the
company, or (3) was from a shareholder holding more than a 45% interest in the
company which resulted in the acquiror becoming a holder of more than a 45%
interest in the company.


                                       44

     If, as a result of an acquisition of shares, the acquiror will hold more
than 90% of a company's outstanding shares, the acquisition must be made by
means of a tender offer for all of the outstanding 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 acquiror may not acquire shares in the tender offer that will
cause his shareholding to exceed 90% of the outstanding shares

     Regulations under the Israeli Companies Law provide that the Israeli
Companies Law's tender offer rules do not apply to a company whose shares are
publicly traded outside of Israel, if pursuant to the applicable foreign
securities laws and stock exchange rules there is a restriction on the
acquisition of any level of control of the company, or if the acquisition of any
level of control of the company requires the purchaser to make a tender offer to
the public shareholders.

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 moentary 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.


                                       45

     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.

NASDAQ MARKETPLACE RULES AND HOME COUNTRY PRACTICES

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

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

D.   EMPLOYEES

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

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

     On December 31, 2004, we and our consolidated subsidiaries employed 153
persons, of which 47 persons were employed in research and development, 45 in
training and technical support, 35 in sales and marketing and 26 in operations
and administration. As of December 31, 2004, 86 of our employees were located in
Israel, 39 of our employees were located in the United States, 9 of our
employees were located in Hong Kong, 2 of our employees were located in Holland
and 17 of our employees were located in Brazil.


                                       46

     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 adjustments of employees' wages are determined on a
nationwide basis and are legally binding. Under the current inflation rates,
these adjustments compensate employees for approximately 40% of the change in
the cost of living, with certain lag factors in implementation. 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 2006, payments to the National Insurance Institute
amounted to approximately 14.5% of wages, of which approximately two-thirds was
contributed by employees with the balance contributed by the employer.

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

E.   SHARE OWNERSHIP

     The following table sets forth certain information as of March 28, 2007
regarding the beneficial ownership of our ordinary shares by each of our
directors and executive officers.

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

Chaim Mer                 2,023,954 (3)           35.05%
Eytan Bar                   227,725 (4)            3.80%
Shlomi Hagai                  7,625 (4)               *
Hanoch Magid                  1,750 (4)               *
Alon Aginsky                 16,918                   *
Isaac Ben-Bassat            689,214 (5)           11.94%
Dr. Orna Berry                   --                  --
Dr. Yehoshua Gleitman            --                  --
Steven J. Glusband           11,000 (6)               *
Yaacov Goldman                   --                  --

     ----------
      * Less than 1%.

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


                                       47

     (2)  The percentages shown are based on 5,773,845 ordinary shares
          (excluding 10,800 ordinary shares held in treasury) issued and
          outstanding as of March 28, 2007.

     (3)  Mr. Chaim Mer and his wife, Mrs. Dora Mer, are the holders of 267,821
          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., 95 ordinary shares through their controlling interest in Mer &
          Co. (1982) Ltd. and 46 ordinary shares through their controlling
          interest in C. Mer Industries Ltd.

     (4)  Subject to currently exercisable stock options.

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

     (6)  Includes 10,000 ordinary shares subject to currently exercisable stock
          options.

STOCK OPTION PLANS

1996 STOCK OPTION PLAN

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

     The 1996 Plan provides that it is administered by the Board of Directors or
an Option Committee which may be appointed by the Board of Directors, which has
the authority, subject to applicable law, to determine the persons to whom
options will be granted, the number of ordinary shares to be covered by each
option the time or times at which options will be granted or exercised, and the
terms and conditions of the options. The exercise price of options granted under
the 1996 Plan may not be less than 100% of the fair market value of our ordinary
shares on the date of the grant of incentive stock options and 75% in the case
of options not designated as incentive stock options. Fair market value is the
mean between the highest and lowest quoted selling prices on the date of grant
of our shares traded on NASDAQ or a stock exchange on which such shares are
principally traded.

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

     During 2006, options to purchase 15,000 ordinary shares were granted under
our 1996 Plan, with an average exercise price of $3.45, and no options were
exercised into ordinary shares. At December 31, 2006, options to purchase 62,400
ordinary shares were outstanding under the 1996 Plan, exercisable at an average
exercise price of $3.44 per share.

1996 SECTION 102 STOCK OPTION PLAN

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


                                       48

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

     During 2006, no options were granted under the 1996 102 Plan and options to
purchase 30,000 ordinary shares were exercised. At December 31, 2006, no options
were outstanding under the 1996 102 Plan.

2003 ISRAELI SHARE OPTION PLAN

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

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

     The 2003 Plan is administered by the Board of Directors or a committee of
the Board of Directors, if appointed, which has the authority, subject to
applicable law, to determine, the persons to whom options will be granted, the
terms and conditions of the respective options, including the time and the
extent to which the options may be exercised, may designate the type of options,
make an election as to the type of Approved 102 Option. The exercise price of
options granted under the 2003 Plan will be based on the fair market value of
our ordinary shares and are 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 2006, options to purchase an aggregate of 45,000 ordinary shares
were granted under the 2003 Plan at an average exercise price of $3.33 per share
and options to purchase 10,341 ordinary shares were exercised. At December 31,
2006, options to purchase 608,000 ordinary shares were outstanding under the
2003 Plan, exercisable at an average exercise price of $2.66 per share.


                                       49

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.

     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 will be 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.


                                       50

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

     During 2006, no options were granted under the 2006 Plan and no options
were outstanding under the 2006 Plan.

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 has 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.

     On December 7, 2005, we issued a one-year warrant to purchase 100,000
ordinary shares to one of our consultants in connection with certain business
development services performed on our behalf. The warrant, which had an exercise
price of $3.12 per share (subject to anti-dilution adjustments), expired on
December 7, 2006.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.   MAJOR SHAREHOLDERS

     The following table sets forth certain information as of March 28, 2007
regarding the beneficial ownership by all shareholders known to us to own
beneficially 5.0% or more of our ordinary shares:

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

Chaim Mer and Dora Mer     2,023,954(3)              35.05%
Isaac Ben-Bassat             689,214(4)              11.94%

- ----------

(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 5,773,845 ordinary shares (excluding
     10,800 ordinary shares held in treasury) issued and outstanding as of March
     28, 2007.

(3)  Mr. Chaim Mer and his wife, Mrs. Dora Mer, are the holders of 267,821
     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., 95 ordinary
     shares through their controlling interest in Mer & Co. (1982) Ltd. and 46
     ordinary shares through their controlling interest in C. Mer Industries
     Ltd.


                                       51

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

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 28, 2007, there were 42 holders of record of our ordinary shares, of
which six record holders holding approximately 58.35% of our ordinary shares had
registered addresses in the United States and 36 record holders holding
approximately 41.65% of our ordinary shares had registered addresses in Israel.
These numbers are not representative of the number of beneficial holders of our
shares nor are they representative of where such beneficial holders reside,
since many of these ordinary shares were held of record by brokers or other
nominees (including one U.S. nominee company, CEDE & Co., which held
approximately 41.63% of our otstanding ordinary shares as of such date).

B.   RELATED PARTY TRANSACTIONS

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

     Our subsidiaries, MTS Asia Ltd. and MTS IntegraTRAK, entered into an
agreement with C. Mer Industries Ltd., or C. Mer, pursuant to which they
distribute and support certain of C. Mer's products and provide certain services
on behalf of C. Mer. Generally, C. Mer compensates MTS Asia Ltd. for these
activities at cost plus 10% and compensates MTS IntegraTRAK at cost plus 5%. C.
Mer is a publicly traded company controlled by Mr. Chaim Mer, and Mr. Mer has
been the Chairman of its Board of Directors since 1988 and served as its
President and Chief Executive Officer from 1988 until January 2005.

     Presently, the only service provided to us by C. Mer is our participation
in its umbrella liability insurance coverage. We believe that the terms under
which C. Mer provides such participation to us is on a basis no less favorable
than could be obtained from an unaffiliated third party.

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

     Mr. 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. Isaac
Ben-Bassat, a director and one of our major shareholders, receives an annual fee
of approximately $8,400 and a per meeting attendance fee of $300 in connection
with his service as a director of our company. See Item. 6B. "Directors and
Senior Management - Compensation."


                                       52

C.   INTERESTS OF EXPERTS AND COUNSEL

     Not applicable.

ITEM 8. FINANCIAL INFORMATION

A.   CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

FINANCIAL STATEMENTS

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

EXPORT SALES

     See Note 17 of our Consolidated Financial Statements.

LEGAL PROCEEDINGS

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

     In April 2000, the tax authorities in Israel issued to us a demand for a
tax payment in the amount of approximately NIS 6.0 million (approximately $1.4
million) for the 1997-1999 period. We have appealed to the Israeli district
court in respect of this tax demand. We believe that certain defenses can be
raised against the demand of the tax authorities. We have made a provision in
our financial statements for this tax demand for the amount deemed probable,
based on the current evidence, which we believe is adequate. We believe that the
outcome of this matter will not have a material adverse effect on our financial
position or results of operations.

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

     On February 21, 2007, one of our suppliers filed a complaint in the
Kfar-Saba Magistrate Court against us, under which he seeks the payment of NIS
179,000 (approximately $42,000) for electronic components that were ordered by
us for a third party, which is the customer referred to in the foregoing
paragraph. On March 13, 2007, we filed a statement of defense. We have made a
provision in our financial statements for the claimed amount. Due to the
preliminary stage of this litigation, we and our legal advisors cannot currently
assess the outcome or possible adverse effect on our financial position or
results of operations.


                                       53

     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 312,933 ($74,000), of
which NIS 112,933 ($27,000) is demanded from our company and NIS 200,000
($47,000) is demanded from TIM. The plaintiff is a former minority shareholder
of a company in which we were the major shareholder. The claim relates to the
rights to proceeds received under a software development project in which TIM
and our company participated and in which the plaintiff was involved. A
preliminary hearing was held on Jan. 15, 2007. Due to the preliminary stage of
this litigation, we and our legal advisors cannot currently assess the outcome
or possible adverse effect on our financial position or results of operations.

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

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

DIVIDEND DISTRIBUTION POLICY

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

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

B.   SIGNIFICANT CHANGES

     Except as otherwise disclosed in this annual report, no significant change
has occurred since December 31, 2006.

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
            ----                             ----         ---

            2006                            $3.50       $1.50
            2005                            $4.23       $3.01
            2004                            $4.00       $1.90
            2003                            $3.56       $0.87
            2002                            $1.65       $0.75

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.


                                       54

                                     HIGH        LOW
                                     ----        ---

2005
First Quarter                       $4.00       $3.15
Second Quarter                      $3.83       $3.10
Third Quarter                       $4.23       $3.01
Fourth Quarter                      $3.98       $3.05

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

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 2006                      $2.49          $2.01
November 2006                     $2.26          $1.70
December 2006                     $1.97          $1.50
January 2007                      $1.92          $1.53
February 2007                     $1.77          $1.60
March 2007 (until 28)             $1.73          $1.60

B.   PLAN OF DISTRIBUTION

     Not applicable.

C.   MARKETS

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

D.   SELLING SHAREHOLDERS

     Not applicable.

E.   DILUTION

     Not applicable.

F.   EXPENSE OF THE ISSUE

     Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A.   SHARE CAPITAL

     Not applicable.


                                       55

B.   MEMORANDUM AND ARTICLES OF ASSOCIATION

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

PURPOSES AND OBJECTS OF THE COMPANY

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

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

THE POWERS OF THE DIRECTORS

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

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

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

RIGHTS ATTACHED TO SHARES

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

     The rights attached to the ordinary shares are as follows:

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

     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.


                                       56

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

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

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

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

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

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

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

CHANGING RIGHTS ATTACHED TO SHARES

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

ANNUAL AND EXTRAORDINARY MEETINGS

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


                                       57

LIMITATIONS ON THE RIGHTS TO OWN SECURITIES IN OUR COMPANY

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

PROVISIONS RESTRICTING CHANGE IN CONTROL OF OUR COMPANY

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

DISCLOSURE OF SHAREHOLDERS OWNERSHIP

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

CHANGES IN OUR CAPITAL

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

C.   MATERIAL CONTRACTS

     On August 10, 2005, we entered into definitive agreements with
institutional and private investors, including our President, 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. 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.

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.


                                       58

     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 2006 was 31%, which was reduced to 29% in 2007,
and will be further reduced to 27% in 2008, 26% in 2009 and 25% in 2010 and
thereafter. However, the effective tax rate payable by a company, which derives
income from an approved enterprise (as further discussed below), may be
considerably less.

CONTROLLED FOREIGN COMPANIES

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

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.


                                       59

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

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

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

                                                                 The company
     For a company with foreign investment of                    tax rate is
     ----------------------------------------                    -----------

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

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

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

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

     AMENDMENT TO THE INVESTMENTS LAW

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


                                       60

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

TAX BENEFITS FOR RESEARCH AND DEVELOPMENT

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

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

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

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

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

     o    accelerated depreciation rates on equipment and buildings; and

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

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


                                       61

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

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

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

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

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

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

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


                                       62

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

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

SPECIAL PROVISIONS RELATING TO TAXATION UNDER INFLATIONARY

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

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

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

TAXATION OF NON-ISRAELI SHAREHOLDERS ON RECEIPT OF DIVIDENDS

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


                                       63

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

CAPITAL GAINS TAXES APPLICABLE TO NON-ISRAELI SHAREHOLDERS

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

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

FOREIGN EXCHANGE REGULATIONS

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

UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

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

          o    broker-dealers,

          o    financial institutions,

          o    certain insurance companies,

          o    regulated investment companies,

          o    investors liable for alternative minimum tax,

          o    tax-exempt organizations,

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


                                       64

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

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

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

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

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

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

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

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

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

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

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

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

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

TAXATION OF DIVIDENDS

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


                                       65

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

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

     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.


                                       66

     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 2006.

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

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

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

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

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


                                       67

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

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

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

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

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

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

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

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

BACKUP WITHHOLDING AND INFORMATION REPORTING

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

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


                                       68

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

U.S. GIFT AND ESTATE TAX

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

F.   DIVIDEND AND PAYING AGENTS

     Not applicable.

G.   STATEMENT BY EXPERTS

     Not applicable.

H.   DOCUMENTS ON DISPLAY

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

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

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

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

I.   SUBSIDIARY INFORMATION

     Not applicable.


                                       69

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

EXPOSURE TO MARKET RISKS

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

INTEREST RATE RISK

     Our exposure to market risk for changes in interest rates relates primarily
to our short term deposits. Our short term deposits are held in dollars and bear
annual interest of 3.5% to 4.5%, which is based upon the London Inter Bank
Offered Rate (LIBOR). We place our short term deposits with major financial
center U.S. banks. For purposes of specific risk analysis, we use sensitivity
analysis to determine the impact that market risk exposure may have on the
financial income derived from our short term deposits. The potential loss to us
over one year that would result from a hypothetical change of 10% in the LIBOR
rate would be approximately $20,000.

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 2007 sales revenues of $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

     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.


                                       70

ITEM 15T. CONTROLS AND PROCEDURES

     Not applicable.

ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

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

ITEM 16B. CODE OF ETHICS

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

ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES

FEES PAID TO INDEPENDENT PUBLIC ACCOUNTANTS

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

                      Year Ended December 31,
                      ----------------------
Services Rendered       2006          2005
- -----------------     --------      --------

Audit (1)             $ 83,173      $123,162
Audit-related(2)         8,601         7,500
Tax (3)                 20,528        19,537
Other (4)                   --         1,734
                      --------      --------
Total                 $112,302      $151,933

     ----------

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

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

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

     (4)  Other fees relate to services provided by our principal independent
          registered public accounting firm other than services covered by above
          categories.

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.


                                       71

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

     Not applicable.

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

ISSUER PURCHASE OF EQUITY SECURITIES

     Neither we nor any affiliated purchaser has purchased any of our securities
during 2006.

                                    PART III

ITEM 17. FINANCIAL STATEMENTS

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

ITEM 18. FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS OF MER TELEMANAGEMENT SOLUTIONS LTD.

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

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

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

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

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

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

         Notes to Consolidated Financial Statements........................F-9 - F-43

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

         Index to Financial Statements of Jusan, S.A.......................F-44

         Report of Independent Registered Public Accounting Firm...........F-45

         Balance Sheets....................................................F-46

         Statements of Income..............................................F-47

         Statements of Changes in Shareholders' Equity.....................F-48

         Statements of Cash Flows..........................................F-49

         Notes to Financial Statements.....................................F-50


                                       72

ITEM 19. EXHIBITS

     Index to Exhibits

EXHIBIT        DESCRIPTION

1.1            Memorandum of Association of the Registrant (1)

1.2            Articles of Association of the Registrant (1)

2.1            Specimen of Ordinary Share Certificate (1)

4.1            1996 Employee Stock Option Plan (1)

4.2            Section 102 Stock Option Plan (1)

4.3            2003 Israeli Share Option Plan (2)

4.4            2006 Stock Option Plan (3)

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

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

4.7            Form of Warrant (6)

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

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

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

8.1            List of Subsidiaries of the Registrant

11.1           Code of Ethics (9)

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

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

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

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

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


                                       73

15.2           Consent of BDO Audiberia Auditores, S.L.

- ----------

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

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

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

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

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

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

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

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

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


                                       74

             MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 2006

                            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 - 43


                                     F - 1

             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, 2005 and 2006, 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, 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. We did not audit the
financial statements of Jusan SA, a 50% owned affiliate for the years ended
December 31, 2005 and 2006, in which the Company's investments totaled $ 1,615
thousand and $ 1,598 thousand as of December 31, 2005 and 2006, respectively and
the Company's equity in its income in 2004, 2005 and 2006 constitutes $ 225
thousand $ 2 thousand and $ 159 thousand, respectively. We also did not audit
the financial statements of MTS Asia Ltd., a wholly-owned subsidiary, which
statements reflect total assets of $ 302 thousand as of December 31, 2006, and
total revenues of $ 624 thousand for the year then ended. Those statements were
audited by other auditors whose reports have been furnished to us and our
opinion, insofar as it relates to amounts emanating from the financial
statements of Jusan SA and MTS Asia Ltd., is based solely on the reports of the
other auditors.

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

      In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2005 and 2006, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2006, in conformity with accounting principles generally
accepted in the United States.

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

                                           /s/ Kost Forer Gabbay & Kasierer
                                           ------------------------------------
Tel-Aviv, Israel                             KOST FORER GABBAY & KASIERER
March 30, 2007                             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,
                                                                                     -----------------
                                                                                       2005      2006
                                                                                     -------   -------
      ASSETS

CURRENT ASSETS:
   Cash and cash equivalents                                                         $ 3,191   $ 1,474
   Short term bank deposits                                                                -       100
   Marketable securities (Note 3)                                                        132       159
   Trade receivables (net of allowance for doubtful accounts of $ 402 and $ 505 at
      December 31, 2005 and 2006, respectively)                                        1,895     2,484
   Unbilled receivables                                                                  104        51
   Other accounts receivable and prepaid expenses (Note 4)                               491       763
   Inventories (Note 5)                                                                  181       138
                                                                                     -------   -------

TOTAL current assets                                                                   5,994     5,169
                                                                                     -------   -------

LONG-TERM ASSETS:
   Investments in an affiliate (Note 6)                                                1,615     1,598
   Long-term loans, net of current maturities (Note 7)                                     3         -
   Severance pay fund                                                                    478       673
   Other investments (Note 8)                                                            347       366
   Deferred income taxes (Note 14)                                                       115       112
                                                                                     -------   -------

TOTAL long-term assets                                                                 2,558     2,749
                                                                                     -------   -------

PROPERTY AND EQUIPMENT, NET (Note 9)                                                     571       439
                                                                                     -------   -------

OTHER ASSETS:
   Goodwill (Note 10a)                                                                 3,700     4,058
   Other intangible assets, net (Note 10b)                                               993     1,639

TOTAL other assets                                                                     4,693     5,697
                                                                                     -------   -------

TOTAL assets                                                                         $13,816   $14,054
                                                                                     =======   =======

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,
                                                                                    --------------------
                                                                                      2005       2006
                                                                                    --------    --------
      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Short term bank credit and current maturities on bank loan                       $      -    $    421
   Trade payables                                                                        735         510
   Accrued expenses and other liabilities (Note 11)                                    2,306       2,507
   Deferred revenues                                                                     888       1,545
                                                                                    --------    --------

TOTAL current liabilities                                                              3,929       4,983
                                                                                    --------    --------

LONG-TERM LIABILITIES:
   Long term bank loan (Note 12)                                                           -         583
   Accrued severance pay                                                                 713         946
                                                                                    --------    --------

TOTAL long-term liabilities                                                              713       1,529
                                                                                    --------    --------

COMMITMENTS AND CONTINGENT LIABILITIES (Note 13)

SHAREHOLDERS' EQUITY (Note 16):
   Share capital -
      Ordinary shares of NIS 0.01 par value - Authorized: 12,000,000 shares at
         December 31, 2005 and 2006; Issued: 5,744,304 and 5,784,645 shares at
         December 31, 2005 and 2006, respectively; Outstanding: 5,733,504 and
         5,773,845 shares at December 31, 2005 and 2006, respectively                     17          17
   Additional paid-in capital                                                         15,966      16,109
   Treasury shares (10,800 Ordinary shares at December 31, 2005 and 2006)                (29)        (29)
   Deferred stock compensation                                                          (142)          -
   Accumulated other comprehensive income (loss)                                         (75)        254
   Accumulated deficit                                                                (6,563)     (8,809)
                                                                                    --------    --------

TOTAL shareholders' equity                                                             9,174       7,542
                                                                                    --------    --------

TOTAL liabilities and shareholders' equity                                          $ 13,816    $ 14,054
                                                                                    ========    ========

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,
                                                                             -----------------------------------------
                                                                                2004            2005           2006
                                                                             -----------    -----------    -----------
Revenues (Note 17):
   Product sales                                                             $     7,070    $     7,628    $     7,518
   Services                                                                        2,343          3,935          2,966
                                                                             -----------    -----------    -----------

TOTAL revenues                                                                     9,413         11,563         10,484
                                                                             -----------    -----------    -----------

Cost of revenues:
   Product sales                                                                   2,407          2,968          2,631
   Services                                                                          407            834            724
                                                                             -----------    -----------    -----------

TOTAL cost of revenues                                                             2,814          3,802       (*)3,355
                                                                             -----------    -----------    -----------

Gross profit                                                                       6,599          7,761          7,129
                                                                             -----------    -----------    -----------
Operating expenses:
   Research and development, net of grants from the OCS in the amount
      of $ 0, $ 130, $ 578 in 2004, 2005 and 2006, respectively                    2,362          4,395       (*)3,633
   Selling and marketing                                                           6,300          4,797       (*)3,078
   General and administrative                                                      2,101          2,830       (*)2,651
                                                                             -----------    -----------    -----------

TOTAL operating expenses                                                          10,763         12,022          9,362
                                                                             -----------    -----------    -----------

Operating loss                                                                    (4,164)        (4,261)        (2,233)
Financial income (expenses), net                                                      78             53            (54)
                                                                             -----------    -----------    -----------

Loss before taxes on income                                                       (4,086)        (4,208)        (2,287)
Taxes on income (Note 14)                                                            266             10            118
                                                                             -----------    -----------    -----------

Loss before equity in earnings of affiliate                                       (4,352)        (4,218)        (2,405)
Equity in earnings of affiliate                                                      225              2            159
                                                                             -----------    -----------    -----------

Net loss                                                                     $    (4,127)   $    (4,216)   $    (2,246)
                                                                             ===========    ===========    ===========
Net loss per share:

Basic and diluted net loss per Ordinary share                                $     (0.89)   $     (0.83)   $     (0.39)
                                                                             ===========    ===========    ===========

Weighted average number of Ordinary shares used in computing basic
   and diluted net loss per share                                              4,634,413      5,092,117      5,762,311
                                                                             ===========    ===========    ===========

(*)   Including stock-based employee compensation in the amounts of $ 21, $ 101,
      $ 17 and $ 71 in cost of revenues, research and development, selling and
      marketing and general and administrative, respectively.

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

                                                                                                                                     ACCUMULATED
                                                                       SHARE CAPITAL       ADDITIONAL                   DEFERRED        OTHER      ACCUMULATED      TOTAL          TOTAL
                                                                   ---------------------    PAID-IN      TREASURY        STOCK      COMPREHENSIVE   EARNINGS    COMPREHENSIVE  SHAREHOLDERS'
                                                                     NUMBER      AMOUNT     CAPITAL       SHARES      COMPENSATION  INCOME (LOSS)    DEFICIT)     INCOME (LOSS)     EQUITY
                                                                   ---------    --------    --------     ----------    -----------    --------     -----------    -----------    --------

Balance as of January 1, 2004                                      4,624,471    $     14    $ 12,613     $      (20)   $       (10)   $     87     $     1,780                   $ 14,464
  Exercise of options                                                 17,333    *)     -           2              -              -           -               -                          2
  Employee stock based compensation                                        -           -         264              -           (264)          -               -                          -
  Amortization of deferred stock compensation                              -           -           -              -             66           -               -                         66
  Purchase of treasury shares                                         (3,800)          -           -             (9)             -           -               -                         (9)
  Other comprehensive loss:
    Unrealized gains on available-for-sale
      marketable securities, net                                           -           -           -              -              -          83               -    $        83          83
    Foreign currency translation adjustments                               -           -           -              -              -         171               -            171         171
    Gain from cash flows hedging transaction                               -           -           -              -              -           7               -              7           7
                                                                                                                                                                  -----------
  Total other comprehensive income                                         -                                                                                              261
  Net loss                                                                 -           -           -              -              -           -          (4,127)        (4,127)     (4,127)
                                                                   ---------    --------    --------     ----------    -----------    --------     -----------    -----------    --------
  Total comprehensive loss                                                                                                                                        $    (3,866)
                                                                                                                                                                  ===========
Balance as of December 31, 2004                                    4,638,004          14      12,879            (29)          (208)        348          (2,347)                    10,657
  Issuance of shares, net                                            937,500           2       2,623              -              -           -               -                      2,625
  Exercise of options                                                158,000           1         308              -              -           -               -                        309
  Stock based compensation related to warrants
    issued to non employees                                                -           -         156              -              -           -               -                        156
  Amortization of deferred stock compensation                              -           -           -              -             66           -               -                         66
  Other comprehensive loss:
    Unrealized losses on available-for-sale
      marketable securities, net                                           -           -           -              -              -         (76)              -    $       (76)        (76)
    Foreign currency translation adjustments                               -           -           -              -              -        (347)              -           (347)       (347)
                                                                                                                                                                  -----------
  Total other comprehensive loss                                                                                                                                         (423)
  Net loss                                                                 -           -           -              -              -           -          (4,216)        (4,216)     (4,216)
                                                                   ---------    --------    --------     ----------    -----------    --------     -----------    -----------    --------
  Total comprehensive loss                                                                                                                                        $    (4,639)
                                                                                                                                                                  ===========
Balance as of December 31, 2005                                    5,733,504          17      15,966            (29)          (142)        (75)         (6,563)                     9,174
  Exercise of options                                                 40,341    *)     -          65              -              -           -               -                         65
  Stock based compensation related to warrants
      issued to non employees                                              -           -          10              -              -           -               -                         10

  Stock based compensation related to options issued
    to employees                                                           -           -         210              -              -           -               -                        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               -    $         1           1
    Foreign currency translation adjustments                               -           -           -              -              -         328               -            328         328
                                                                                                                                                                  -----------
  Total other comprehensive income                                         -           -           -              -              -           -               -            329
  Net loss                                                                 -           -           -              -              -           -          (2,246)        (2,246)     (2,246)
                                                                   ---------    --------    --------     ----------    -----------    --------     -----------    -----------    --------
  Total comprehensive loss                                                                                                                                        $    (1,917)
                                                                                                                                                                  ===========
Balance as of December 31, 2006                                    5,773,845    $     17    $ 16,109     $      (29)   $         -    $    254     $    (8,809)                  $  7,542
                                                                   =========    ========    ========     ==========    ===========    ========     ===========                   ========
Accumulated unrealized gains from available-for-sale
  marketable securities                                                                                                               $     11
Accumulated foreign currency translation adjustments                                                                                       243
                                                                                                                                      --------
                                                                                                                                      $    254
                                                                                                                                      ========

*)    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,
                                                                        ------------------------------
                                                                          2004       2005       2006
                                                                        --------   --------   --------
CASH FLOWS FROM OPERATING ACTIVITIES:

  Net loss                                                              $ (4,127)  $ (4,216)  $ (2,246)
  Adjustments required to reconcile net loss to net cash used in
    operating activities:
    Gains on sale of available-for-sale marketable securities                  -        (77)       (13)
    Loss on sale of property and equipment                                     1          -          -
    Impairment of other investments                                            -         27          -
    Equity in earnings of affiliate                                         (225)        (2)      (159)
    Depreciation and amortization                                            399        655        675
    Deferred income taxes, net                                                33         10          3
    Employee stock-based compensation                                         66         66        210
    Stock based compensation related to warrants issued to non
      employees                                                                -        156         10
    Accrued severance pay, net                                                 2        119         38
    Decrease (increase) in trade receivables and unbilled
      receivables                                                            144       (672)      (549)
    Decrease (increase) in other accounts receivable and prepaid
      expenses                                                               175        (99)      (321)
    Decrease (increase) in inventories                                        15         (3)        43
    Increase (decrease) in trade payables                                    326         16       (218)
    Increase (decrease) in accrued expenses and other liabilities            611        (46)       168
    Increase (decrease) in deferred revenues                                 (41)      (366)       610
    Increase in related parties, net                                          20         15        140
                                                                        --------   --------   --------

Net cash used in operating activities                                     (2,601)    (4,417)    (1,609)
                                                                        --------   --------   --------

CASH FLOWS FROM INVESTING ACTIVITIES:

  Proceeds from sale of property and equipment                                22          7          1
  Purchase of property and equipment                                        (293)      (251)      (107)
  Capitalization of research and development costs                          (386)         -          -
  Investment in short term bank deposit                                        -          -       (100)
  Investment in lease deposits                                                (5)       (26)        (6)
  Investment in available-for-sale marketable securities                    (220)      (163)      (221)
  Proceeds from sale of available-for-sale marketable securities             891      1,089        208
  Additional investment in goodwill in consideration of
    TeleKnowledge acquisition                                                  -        (21)      (204)
  Acquisition of certain assets and liabilities of
    Teleknowledge (a)                                                     (2,445)         -          -
  Acquisition of certain assets and liabilities of Telsoft (a)                 -          -     (1,202)
  Dividend from an affiliate                                                 136        195        409
  Others                                                                      50         63         16
                                                                        --------   --------   --------

Net cash provided by (used in) investing activities                       (2,250)       893     (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,
                                                                        ------------------------------
                                                                          2004       2005       2006
                                                                        --------   --------   --------
CASH FLOWS FROM FINANCING ACTIVITIES:

  Proceeds from long term loan                                          $      -   $      -   $  1,000
  Proceeds from short term bank credit                                         -          -          4
  Repayment of long-term loans                                                (8)         -          -
  Proceeds from issuance of shares and warrants, net                           -      2,625          -
  Proceeds from exercise of options and warrants                               2        281         94
  Purchase of treasury shares                                                 (9)         -          -
                                                                        --------   --------   --------

Net cash provided by (used in) financing activities                          (15)     2,906      1,098
                                                                        --------   --------   --------

Effect of exchange rate changes on cash and cash equivalents                  (4)        (5)         -
                                                                        --------   --------   --------

Decrease in cash and cash equivalents                                     (4,870)      (623)    (1,717)
Cash and cash equivalents at the beginning of the year                     8,684      3,814      3,191
                                                                        --------   --------   --------

Cash and cash equivalents at the end of the year                        $  3,814   $  3,191   $  1,474
                                                                        ========   ========   ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS ACTIVITIES:

  Cash paid during the year for:

    Interest                                                            $      1   $      3   $     38
                                                                        ========   ========   ========

    Income taxes                                                        $     25   $     17   $    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 1C AND NOTE 1D):

        Working capital (excluding cash and cash equivalents)           $     24   $      -   $    (47)
        Estimated fair value of assets acquired and liabilities
          assumed at the acquisition date:
        Property and equipment                                                40          -          5
        Goodwill                                                           1,391          -        166
        Developed technology                                                 690          -        433
        Customer relationship                                                300          -        645
                                                                        --------   --------   --------

                                                                        $  2,445   $      -   $  1,202
                                                                        ========   ========   ========
(b)   SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:

        Earn out in respect of Teleknowledge acquisition                $      -   $    264   $    123
                                                                        ========   ========   ========

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 & billing ("CC&B") solutions that enable
                  business organizations and other enterprises to improve the
                  efficiency and performance of all IP operations, and reduce
                  associated costs. The Group products include call accounting
                  and management products, fault management systems and web
                  based management solutions for converged voice, voice over
                  Internet Protocol, IP data and video and CC&B solutions. As
                  for MTS's subsidiaries, see Note 18.

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

                  The Group markets its products worldwide through distributors,
                  business telephone switching systems manufacturers and vendors
                  and its direct sales force. Several international private
                  automatic branch exchange ("PBX") manufacturers market the
                  Group's products as part of their PBX selling efforts or on an
                  Original Equipment Manufacturer ("OEM") basis. The Group is
                  highly dependent upon the active marketing and distribution of
                  its OEM's. If the Group is unable to effectively manage and
                  maintain a relationship with its OEM or any event negatively
                  affecting such dealer's financial condition, could cause a
                  material adverse effect on the Group's results of operations
                  and financial position. In 2004, 2005 and 2006, one major
                  customer generated 38%, 36% and 29% of the Group's revenues,
                  respectively.

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

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

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

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

                                      F - 9

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 1:  -  GENERAL (CONT.)

                  2.    Additional contingent consideration of up to an amount
                        of $ 3,650, based on post acquisition revenue
                        performance (calculated as 10% of renewal maintenance
                        fees and 20% of all other revenues from sales which
                        included Teleknowledge products), over a period of three
                        years. Such payments will be recorded as additional
                        goodwill, during the contingency period, when actual
                        revenue performance will be evaluated (see Note 10a). In
                        2005 and 2006 additional considerations of $285 and
                        $192, respectively, were recorded, in accordance with
                        the agreement.

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

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

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

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

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

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

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

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

                  Goodwill including accumulated earnout as of December 31, 2006
                  amounted to $ 1,868.

                                     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.)

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

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

                  2.    Additional earn-out payments based on revenue milestones
                        for the 12 months period following the acquisition. Such
                        payments will be recorded as additional goodwill, during
                        the contingency period, when actual revenue performance
                        will be evaluated (see Note 10a).

                  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 12).

                  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 - ProductA
                    (six-year useful life)                                  270
                  Developed technology - Product B
                    (four-year useful life)                                 163
                  Customer relationship (six-year useful life)              645
                  Goodwill                                                  166
                                                                       --------

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

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

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

                                     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 1:  -  GENERAL (CONT.)

                  Pro forma results (Unaudited):

                  The following unaudited proforma information does not purport
                  to represent what the Company's results of operations would
                  have been had the acquisitions occurred on January 1, 2005 and
                  2006, nor does it purport to represent the results of
                  operations of the Company for any future period.

                                                                                       YEAR ENDED DECEMBER 31,
                                                                                       -----------------------
                                                                                          2005         2006
                                                                                       ----------   ----------

                  Revenues                                                             $   13,045   $   12,032
                                                                                       ==========   ==========

                  Net loss from continuing operations                                  $   (3,923)  $   (1,888)
                                                                                       ==========   ==========
                  Basic and diluted net loss per share for continuing operations       $    (0.77)  $    (0.33)
                                                                                       ==========   ==========
                  Weighted average number of Ordinary shares in computation of basic
                     and diluted net loss per share                                     5,092,117    5,762,311
                                                                                       ==========   ==========

NOTE 2:  -  SIGNIFICANT ACCOUNTING POLICIES

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

            a.    Use of estimates:

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

            b.    Financial statements in U.S. dollars:

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

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

                                     F - 12

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 2:  -  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

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

            c.    Principles of consolidation:

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

            d.    Cash equivalents:

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

            e.    Marketable securities:

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

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

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

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

                                     F - 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.)

            f.    Inventories:

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

                  The Company and its subsidiaries periodically evaluate the
                  quantities on hand relative to current and historical selling
                  prices and historical and projected sales volume. Based on
                  this evaluation, provisions are recorded when required to
                  write-off inventory according to its market value.

                  Cost is determined as follows:

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

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

            g.    Investments in an affiliate:

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

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

                  Goodwill is reviewed annually (or more frequently if
                  circumstances indicate impairment has occurred) for impairment
                  in accordance with the provisions of Statement of Financial
                  Accounting Standard No. 142, "Goodwill and Other Intangible
                  Assets" ("SFAS No. 142").

                  Under APB 18, an impairment of value of an investment
                  accounted for under the equity method, which is other than a
                  temporary decline, should be recognized as a realized loss,
                  establishing a new carrying value for the investment. Factors
                  the Company considers in making this evaluation include: the
                  length of time and the extent to which the market value has
                  been lower than cost, the financial condition and near-term
                  prospects of the issuer, including cash flows of the investee
                  and any specific events which may influence the operations of
                  the issuer and the intent and ability of the Company to retain
                  its investments for a period of time sufficient to allow for
                  any anticipated recovery in market value. A current fair value
                  of an investment that is less than its carrying amount may
                  indicate an impairment of value of the investment. No
                  impairment losses were recorded during 2006.

                                     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.)

            h.    Investment in other companies:

                  The investment in these companies is stated at cost, since the
                  Group does not have the ability to exercise significant
                  influence over operating and financial policies of those
                  investments. The Company's investments in other companies are
                  reviewed for impairment whenever events or changes in
                  circumstances indicate that the carrying amount of an
                  investment may not be recoverable, in accordance with APB
                  No.18. As of December 31, 2006 and 2005, based on management's
                  most recent analyses, impairment losses in the amount of $ 0
                  and $ 27, respectively, have been identified and recorded.

            i.    Property and equipment:

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

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

                  Computers and peripheral equipment                     33
                  Office furniture and equipment                       6 - 20
                  Motor vehicles                                         15
                  Leasehold improvements                Shorter of useful life or lease term

            j.    Impairment of long-lived assets:

                  The Company's long-lived assets and certain identifiable
                  intangibles are reviewed for impairment in accordance with
                  Statement of Financial Accounting Standard No. 144,
                  "Accounting for the Impairment or Disposal of Long-Lived
                  Assets" ("SFAS No. 144"), whenever events or changes in
                  circumstances indicate that the carrying amount of an asset
                  may not be recoverable. Recoverability of assets to be held
                  and used is measured by a comparison of the carrying amount of
                  an asset to the future undiscounted cash flows expected to be
                  generated by the assets. If such assets are considered to be
                  impaired, the impairment to be recognized is measured by the
                  amount by which the carrying amount of the assets exceeds the
                  fair value of the assets. As of December 31, 2006, no
                  impairment losses have been identified.

            k.    Goodwill:

                  Goodwill has been recorded as a result of acquisitions.
                  Goodwill is not amortized, but rather is subject to an annual
                  impairment test.

                                     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.)

                  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 2004, 2005 and 2006, no
                  impairment losses were identified (see also Note 10a).

            l.    Intangible assets:

                  Intangible assets are amortized over their useful lives using
                  a method of amortization that reflects the pattern in which
                  the economic benefits of the intangible assets are consumed or
                  otherwise used up, in accordance with SFAS 142. Developed
                  technology is amortized over a weighted average of four-six
                  years and customer relationship is amortized over a period of
                  six years. As for capitalized software costs, see n below.

            m.    Revenue recognition:

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

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

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

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

                                     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.)

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

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

                  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, 2006, no such
                  estimated losses were identified.

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

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

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

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

                                     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.)

            n.    Research and development costs:

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

                  Research and development costs incurred in the process of
                  developing product improvements or new products, are generally
                  charged to expenses as incurred, net of grants received from
                  the Office of the Chief Scientist of Israel's Ministry of
                  Industry, Trade and Labor (see Note 13b).

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

                  Capitalized software costs are amortized by the greater of the
                  amount computed using the: 1) ratio that current gross
                  revenues from sales of the software to the total of current
                  and anticipated future gross revenues from sales of that
                  software, or 2) the straight-line method over the estimated
                  useful life of the product (three years). The Company assesses
                  the recoverability of this intangible asset on a regular basis
                  by determining whether the amortization of the asset over its
                  remaining life can be recovered through undiscounted future
                  operating cash flows from the specific software product sold.
                  Based on its most recent analyses, management believes that no
                  impairment of capitalized software development costs exists as
                  of December 31, 2006.

            o.    Government grants:

                  Royalty-bearing grants from the Government of Israel for
                  funding certain approved research and development projects are
                  recognized at the time the Company is entitled to such grants,
                  on the basis of the related costs incurred and recorded as a
                  deduction of research and development costs. Research and
                  development grants amounted $ 0, $ 130 and $ 578 in 2004, 2005
                  and 2006, respectively. Total royalties accrued or paid
                  amounted to $ 181, $ 198 and $ 187 in 2004, 2005 and 2006,
                  respectively and were recorded as part of the cost of goods
                  sold.

            p.    Income taxes:

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

                                     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.)

            q.    Accounting for stock-based compensation:

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

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

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

                  The Company recognizes compensation expenses for the value of
                  its awards granted subsequent to January 1, 2006 based on the
                  straight line method over the requisite service period of each
                  of the awards, net of estimated forfeitures. SFAS No. 123(R)
                  requires forfeitures to be estimated at the time of grant and
                  revised, if necessary, in subsequent periods if actual
                  forfeitures differ from those estimates. Estimated forfeitures
                  are based on actual historical pre-vesting forfeitures.
                  Forfeitures were previously accounted for as they occurred,
                  but have been estimated with the adoption of SFAS No. 123(R)
                  for those awards not yet vested. For awards granted prior to
                  January 1, 2006, the Company recognizes compensation expenses
                  based on the accelerated attribution method over the requisite
                  service period of each of the awards. The net loss for the 12
                  months period ended December 31, 2006 was $ 22 lower than if
                  the Company had continued to account for share-based
                  compensation according to the accelerated attribution method.

                                     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.)

                  As a result of adopting SFAS No. 123(R) on January 1, 2006,
                  the Company's loss before taxes on income and operating loss
                  and net loss for the year ended December 31, 2006, were $ 144
                  lower, than if the Company had continued to account for
                  stock-based compensation under APB No. 25. Basic and diluted
                  net loss per share for the year ended December 31, 2006 were $
                  0.03 lower, than if the Company had continued to account for
                  stock-based compensation under APB No. 25.

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

                  The fair value for options granted in 2004, 2005 and 2006 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                2004     2005     2006
                  ----------------------------------   ------   ------   ------

                  Expected volatility                   71.8%    56.9%    74.5%
                  Risk-free interest                     2.0%     3.9%     4.6%
                  Dividend yield                         0.0%     0.0%     0.0%
                  Expected life (years)                  2.2        4        4

                  The following table illustrates the effect on 2004 and 2005
                  net loss and earnings per share, assuming that the Company had
                  applied the fair value recognition provision of SFAS No. 123
                  on its stock-based employee compensation:

                                                                                     YEAR ENDED DECEMBER 31,
                                                                                  ----------------------------
                                                                                      2004            2005
                                                                                  ------------    ------------

                  Net loss available to Ordinary shares, as reported              $     (4,127)   $     (4,216)
                  Add: Stock-based employee compensation - intrinsic value                  66              66
                  Deduct: Stock-based compensation expense determined under
                    fair value method for all awards, net of related tax effect           (274)           (264)
                                                                                  ------------    ------------

                  Pro forma net loss                                              $     (4,335)   $     (4,414)
                                                                                  ============    ============

                  Basic and diluted net loss per share, as reported               $      (0.89)   $      (0.83)
                                                                                  ============    ============

                  Basic and diluted net loss per share, pro forma                 $      (0.94)   $      (0.87)
                                                                                  ============    ============

                                     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.)

            r.    Warranty costs:

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

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

                  No changes to the provision have been recorded during 2006.

            s.    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).

            t.    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, 2004, 2005
                  and 2006 amounted to approximately $ 344, $ 585 and $ 339,
                  respectively.

                                     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 2:  -  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

            u.    Concentrations of credit risk:

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

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

                  The customers of the Company are located mainly in the U.S.
                  and Europe (see Note 17). 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.

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

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

                  The total number of shares related to the outstanding options
                  excluded from the calculation of diluted net loss per share
                  was 667,101, 1,011,584 and 685,410 for the years ended
                  December 31, 2004, 2005 and 2006, respectively.

            w.    Impact of recently issued accounting standards:

                  In July 2006, the FASB issued 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 income taxes by prescribing the minimum
                  recognition threshold a tax position is required to meet
                  before being recognized in the financial statements. FIN 48
                  utilizes a two-step approach for evaluating tax positions.
                  Recognition (step one) occurs when an enterprise concludes
                  that a tax position, based solely on its technical merits, is
                  more-likely-than-not to be sustained upon examination.

                                     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 2:  -  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                  Measurement (step two) is only addressed if step one has been
                  satisfied (i.e., the position is more-likely-than-not to be
                  sustained). Under step two, the tax benefit is measured as the
                  largest amount of benefit, determined on a cumulative
                  probability basis that is more-likely-than-not to be realized
                  upon ultimate settlement.

                  FIN 48 applies to all tax positions related to income taxes
                  subject to the Financial Accounting Standard Board Statement
                  No. 109, "Accounting for income taxes" ("FAS 109"). This
                  includes tax positions considered to be "routine" as well as
                  those with a high degree of uncertainty.

                  FIN 48 has expanded disclosure requirements, which include a
                  tabular roll forward of the beginning and ending aggregate
                  unrecognized tax benefits as well as specific detail related
                  to tax uncertainties for which it is reasonably possible the
                  amount of unrecognized tax benefit will significantly increase
                  or decrease within twelve months. These disclosures are
                  required at each annual reporting period unless a significant
                  change occurs in an interim period.

                  FIN 48 is effective for fiscal years beginning after December
                  15, 2006. The cumulative effect of applying FIN 48 will be
                  reported as an adjustment to the opening balance of retained
                  earnings.

                  The Company is currently evaluating the effect of the adoption
                  of FIN 48 on its financial statements.

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

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

                                     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 3:  -  MARKETABLE SECURITIES

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

                                                 DECEMBER 31, 2005                                DECEMBER 31, 2006
                                   ----------------------------------------------   ----------------------------------------------
                                                 GROSS         GROSS       FAIR                   GROSS         GROSS      FAIR
                                   AMORTIZED   UNREALIZED   UNREALIZED    MARKET    AMORTIZED   UNREALIZED   UNREALIZED   MARKET
                                      COST       GAINS        LOSSES      VALUE        COST       GAINS        LOSSES     VALUE
                                   ---------   ----------   ----------   --------   ---------   ----------   ----------   --------
            Available-for-sale:

            Equity securities      $      35   $       12   $       (5)  $     42   $      40   $        5   $       (2)  $     43
            Corporate bonds                -            -            -          -          45            1            -         46
            Israeli Government
              debts                       87            4           (1)        90          63            7            -         70
                                   ---------   ----------   ----------   --------   ---------   ----------   ----------   --------

                                   $     122   $       16   $       (6)  $    132   $     148   $       13   $       (2)  $    159
                                   =========   ==========   ==========   ========   =========   ==========   ==========   ========

            The gross realized gains on sales of available-for-sale securities
            totaled $ 0, $ 77 and $ 13 in 2004, 2005 and 2006, respectively,
            recorded in financial income. The net adjustment to unrealized
            holding gains (losses) on available-for-sale securities included as
            a separate component of shareholders' equity, "Accumulated other
            comprehensive gains (losses)" amounted to $ 83, $ (76) and $ 1 in
            2004, 2005 and 2006, respectively.

            None of the unrealized loss as of December 31, 2006, are outstanding
            over than 12 months period.

            The amortized cost and fair value of debt and marketable equity
            securities as of December 31, 2006, by contractual maturity, are
            shown below.

                                                             DECEMBER 31, 2006
                                                            ------------------
                                                                         FAIR
                                                            AMORTIZED   MARKET
                                                              COST       VALUE
                                                            ------------------

            Matures after one year through five years       $      63   $   70
            Matures after five years through ten years             29       30
            Matures after ten years                                16       16
            Equity securities - No definite maturity date          40       43
                                                            ---------   ------

            Total                                           $     148   $  159
                                                            =========   ======

                                     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 4:  -  OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

                                                                            DECEMBER 31,
                                                                       ---------------------
                                                                          2005        2006
                                                                       ---------   ---------

            Grants receivable from the Office of the Chief Scientist   $     130   $     454
            Government authorities                                            75          77
            Prepaid expenses                                                 142         147
            Deferred income taxes (1)                                         14          14
            Others                                                           130          71
                                                                       ---------   ---------

                                                                       $     491   $     763
                                                                       =========   =========

            (1)   See Note 14d.

NOTE 5:  -  INVENTORIES

                                                                            DECEMBER 31,
                                                                       ---------------------
                                                                          2005        2006
                                                                       ---------   ---------

            Raw materials                                              $      58   $      57
            Finished products                                                123          81
                                                                       ---------   ---------

                                                                       $     181   $     138
                                                                       =========   =========

NOTE 6:  -  INVESTMENTS IN AFFILIATE

            a.    Composed as follows:

                                                                            DECEMBER 31,
                                                                       ---------------------
                                                                          2005        2006
                                                                       ---------   ---------
                  Investment in Jusan S.A. (50% owned)

                     Equity, net (1)                                   $   1,580   $   1,563
                     Goodwill                                                 35          35
                                                                       ---------   ---------

                                                                       $   1,615   $   1,598
                                                                       =========   =========

                  (1)   Investment as of purchase date                 $   1,171   $   1,171
                        Retained earnings (Net of dividends)                 409         392
                                                                       ---------   ---------

                                                                       $   1,580   $   1,563
                                                                       =========   =========

                  Dividend received from Jusan S.A. during the year    $     195   $     409
                                                                       =========   =========

                                     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 6:  -  INVESTMENTS IN AFFILIATE (CONT.)

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

                                                            DECEMBER 31,
                                                         ------------------
                                                           2005       2006
                                                         --------   -------

                  Current assets                         $  4,177   $ 3,743
                  Non-current assets                     $     45   $    88
                  Current liabilities                    $ (1,057)  $  (694)

                                                  YEAR ENDED DECEMBER 31,
                                               ----------------------------
                                                 2004      2005       2006
                                               -------   --------   -------

                  Revenues                     $ 6,892   $  5,682   $ 5,462
                  Gross profit                 $ 3,158   $  2,530   $ 2,658
                  Net income                   $   444   $      4   $   318

NOTE 7:  -  LONG-TERM LOAN, NET OF CURRENT MATURITIES

            The Company's long term loans include a loan granted to the
            purchaser of Silverbyte Ltd. shares which were sold by the Company
            in July, 2000. The loan will be fully repaid in April 2007.

            a.    Composed as follows:

                                                            DECEMBER 31,
                                                         ------------------
                                                           2005       2006
                                                         --------   -------

                  Loan to others in NIS - unlinked (1)   $     21   $     4
                  Less - current maturities (2)                18         4
                                                         --------   -------

                                                         $      3   $     -
                                                         ========   =======

                  (1)   The weighted average interest rate for the years ended
                        December 31, 2005 and 2006 is 7.65%.

                  (2)   Included in other accounts receivable.

            b.    As of December 31, 2006, the aggregate annual maturities of
                  long-term loans are as follows:

                  2007 (current maturities)              $      4
                                                         ========

                                     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 8:  -  OTHER INVESTMENTS

                                                       DECEMBER 31,
                                                    -----------------
                                                      2005      2006
                                                    -------   -------

            Long-term leasing deposits (1)          $    27   $    46
            Investment in other companies               320       320
                                                    -------   -------

                                                    $   347   $   366
                                                    =======   =======

            (1)   Linked to the Israeli CPI.

NOTE 9:  -  PROPERTY AND EQUIPMENT

                                                       DECEMBER 31,
                                                    -----------------
                                                      2005      2006
                                                    -------   -------
            Cost:
              Computers and peripheral equipment    $ 3,022   $ 3,118
              Office furniture and equipment            566       572
              Motor vehicles                             48        48
              Leasehold improvements                    140       150
                                                    -------   -------
                                                      3,776     3,888
            Accumulated depreciation:                 3,205     3,449
                                                    -------   -------

            Depreciated cost                        $   571   $   439
                                                    =======   =======

            The depreciation expense for the years ended December 31, 2004, 2005
            and 2006 amounted to $ 211, $ 254 and $ 243, respectively.

NOTE 10: -  GOODWILL AND OTHER INTANGIBLE ASSETS

            a.    Goodwill:

                  The changes in the carrying amount of goodwill for the year
                  ended December 31, 2005 are as follows:

                  Balance as of January 1, 2005                           $ 3,415

                  Additional consideration in conjunction with TK
                    acquisition based on post-contract billing revenues,
                    see Note 1(c)                                             285
                                                                          -------

                  Balance as of December 31, 2005                           3,700

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

                  Balance as of December 31, 2006                         $ 4,058
                                                                          =======

                                     F - 27

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 10: -  GOODWILL AND OTHER INTANGIBLE ASSETS (CONT.)

            b.    Other intangibles consist of the following:

                                                                 DECEMBER 31,
                                                              -----------------
                                                                2005      2006
                                                              -------   -------
                  Cost:
                     Development technology                   $ 1,440   $ 1,873
                     Capitalized software development costs       386       386
                     Customer relationship                        300       945
                                                              -------   -------

                                                                2,126     3,204
                                                              -------   -------

                  Accumulated amortization:
                     Development technology                       923     1,131
                     Capitalized software development costs       160       289
                     Customer relationship                         50       145
                                                              -------   -------

                                                                1,133     1,565
                                                              -------   -------

                  Amortized cost                              $   993   $ 1,639
                                                              =======   =======

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

            c.    Amortization expenses amounted to $ 188, $ 401 and $ 432 for
                  each of the years ended December 31, 2004, 2005 and 2006,
                  respectively.

            d.    Estimated amortization expenses for:

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

                  2007                                        $   512
                  2008                                            416
                  2009                                            243
                  2010                                            227
                  2011                                            153
                  2012                                             88
                                                              -------

                                                              $ 1,639
                                                              =======

                                     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 11: -  ACCRUED EXPENSES AND OTHER LIABILITIES

                                                                  DECEMBER 31,
                                                               -----------------
                                                                 2005      2006
                                                               -------   -------

            Employees and payroll accruals                     $   991   $   949
            Income tax payable                                     291       498
            Accrued expenses                                       760       638
            Customer advances                                      187       205
            Related parties                                         77       217
                                                               -------   -------

                                                               $ 2,306   $ 2,507
                                                               =======   =======

NOTE 12: -  LONG-TERM BANK LOAN

            a.    Composed as follows:

                                                                 2006
                                                               -------

                  Long-term loan                               $ 1,000
                  Less - current maturities                        417
                                                               -------

                                                               $   583
                                                               =======

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

            b.    As of December 31, 2006, the aggregate annual maturities of
                  long-term loans are as follows:

                  2007 (current maturities)                    $   417
                  2008                                             583
                                                               -------

                                                               $ 1,000
                                                               =======

            c.    The loan agreement includes the following covenants:

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

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

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

                  In the event that the Company violates one of the above
                  covenants the loan shall become immediately due.

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

                                     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 13: -  COMMITMENTS AND CONTINGENT LIABILITIES

            a.    Lease commitments:

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

                  Future minimum lease commitments under non-cancelable
                  operating leases as of December 31, 2006 are as follows:

                  2007             $    357
                  2008                  352
                  2009                  292
                  2010                  134
                                   --------

                                   $  1,135
                                   ========

                  Lease expenses for the years ended December 31, 2004, 2005 and
                  2006 were approximately $ 334, $ 489 and $ 479, respectively.

            b.    Royalty commitments:

                  1.    The Company is committed to pay royalties to the Office
                        of the Chief Scientist of the Ministry of Trade ("OCS")
                        of the Government of Israel on proceeds from sales of
                        products resulting from the research and development
                        projects in which the Government participated. In the
                        event that development of a specific product in which
                        the OCS participated is successful, the Company will be
                        obligated to repay the grants through royalty payments
                        at the rate of 3% to 5% based on the sales of the
                        Company, up to 100%-150% of the grants received linked
                        to the dollar. As of December 31, 2006, the Company has
                        a contingent liability to pay royalties in the amount of
                        $ 9,486. The obligation to pay these royalties is
                        contingent upon actual sales of the products and, in the
                        absence of such sales, no payment is required.

                        The Company has paid or accrued royalties in its cost of
                        revenues relating to the repayment of such grants in the
                        amount of $ 181, $ 198 and $ 186 for the years ended
                        December 31, 2004, 2005 and 2006, 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, 2006, the Company has a
                        contingent obligation to pay royalties in the amount of
                        $ 259.

                                     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 13: -  COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)

            c.    Claims and demands:

                  1.    In April 2000, the Tax Authorities in Israel issued to
                        the Company a demand for a tax payment, for the period
                        of 1997-1999, in the amount of approximately NIS 6,000
                        thousand ($ 1,420).

                        The Company has appealed to the Israeli Tel Aviv
                        district court in respect of the abovementioned tax
                        demand. The Company believes that certain defenses can
                        be raised against the demand of the tax authorities. The
                        Company believes that the outcome of this matter will
                        not have a material adverse effect on its financial
                        position or results of operations. The Company has
                        provided a provision for the amount considered probable.

                  2.    On April 18, 2005, Amdocs (Israel) Ltd. and Amdocs Ltd.
                        ("the plaintiffs") filed a complaint with the Tel-Aviv
                        District Court against the Company, its Chief Executive
                        Officer and others ("the Defendants") alleging, among
                        other things, that professional and commercial
                        information belonging to the plaintiffs was transferred
                        to the defendants for use in the Company's activity. The
                        plaintiffs are seeking an injunction prohibiting the
                        defendants from making any use of the information and
                        trade secrets that were allegedly transferred,
                        injunctions requiring the return of such information and
                        estimated damages of NIS 14,775 thousand (approximately
                        $ 3,500).

                        On June 27, 2005, the defendants filed a statement of
                        defense, in which the defendants claim that the factual
                        and legal allegations by the plaintiffs are baseless,
                        and the causes of action and relief requested are
                        without merit.

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

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

                  4.    On February 21, 2007, one of the Company's suppliers
                        ("the plaintiffs") filed a complaint with the Kfar-Saba
                        Magistrate Court against the Company, in which he
                        demands payment of NIS 179 thousand (approximately $ 42)
                        with respect to electronic components that were ordered
                        by the Company. The Company made a provision in its
                        financial statements for this claimed amount. The
                        abovementioned claim is related to the claims raised in
                        Note 13c(3).

                                     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 13: -  COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)

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

            d.    Guarantees:

                  1.    The Company provided a bank guarantee through April 2007
                        in the amount of $ 60 to secure its obligations under
                        one of its leasing agreements.

                  2.    The Company provided a bank guarantee through February
                        2007 in the amount of $ 55 in favor of one of its
                        customers to secure its obligations under the agreement
                        that was signed by the parties.

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

NOTE 14: -  TAXES ON INCOME

            a.    ISRAELI TAXATION:

                  1.    CORPORATE TAX STRUCTURE:

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

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

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

                                     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 14: -  TAXES ON INCOME (CONT.)

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

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

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

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

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

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

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

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

                                     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 14: -  TAXES ON INCOME (CONT.)

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

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

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

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

                        Out of the Company's retained earnings as of December
                        31, 2006 approximately $ 2,250 are tax exempt
                        attributable to its Approved Enterprise programs. . If
                        such tax exempt income is distributed in a manner other
                        than upon the complete liquidation of the Company, it
                        would be taxed at the reduced corporate tax rate
                        applicable to such profits (between 10%-25%) and an
                        income tax liability of up to approximately $ 562 would
                        be incurred as of December 31, 2006.

                        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.

                  3.    Tax assessments:

                        Regarding the claim from the tax authorities in Israel,
                        see Note 13c(1). The Company has received final tax
                        assessments until the 1996 tax year.

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

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

                                     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 14: -  TAXES ON INCOME (CONT.)

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

                        MTS is currently qualified as an "industrial company"
                        under the above law and, as such, is entitled to certain
                        tax benefits, mainly accelerated depreciation of
                        machinery and equipment, as prescribed by regulations
                        published under the Inflationary Adjustments Law, the
                        right to claim public issuance expenses and amortization
                        of intangible property rights as a deduction for tax
                        purposes.

            b.    Income taxes on non-Israeli subsidiaries:

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

            c.    Net operating losses carryforward:

                  As of December 31, 2006, the Company and its subsidiaries in
                  Israel, Asia and U.S. have an estimated total amount of
                  available carryforward tax losses of $ 10,705, $ 381 and $
                  437, respectively to offset against future taxable profits.
                  The operating tax loss carryforwards in Israel and in Hong
                  Kong (Asia) may be offset indefinitely against operating
                  income.

                  MTS IntegraTrak and MTS TelSoft are subject to U.S. income
                  taxes and have a net operating loss carryforward amounting to
                  approximately $ 437 as of December 31, 2006, which expires in
                  the years 2015 to 2021. 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,
                                                                      ------------------
                                                                        2005      2006
                                                                      --------   -------
                  Tax loss carryforward of the Company                $  1,985   $ 2,416
                  Allowances for doubtful accounts and accruals for
                    employee benefits                                       57        69
                  In respect of marketable securities                       47        47
                  Goodwill and other intangible assets-liability          (208)     (253)
                  Capitalized software and other intangible assets          76       304
                  Other                                                    208       442
                                                                      --------   -------

                  Net deferred tax asset before valuation allowance      2,176     3,025
                  Valuation allowance                                   (2,036)   (2,899)
                                                                      --------   -------

                  Net deferred income taxes                           $    129   $   126
                                                                      ========   =======

                  Presented as follows:
                    Current assets - foreign                          $     14   $    14
                                                                      ========   =======

                    Other assets - foreign                            $    115   $   112
                                                                      ========   =======

                                     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: -  TAXES ON INCOME (CONT.)

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

            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,
                                                                  ------------------------------
                                                                    2004       2005       2006
                                                                  --------   --------   --------

                  Loss before taxes as reported in the
                    statements of operations                      $ (4,086)  $ (4,208)  $ (2,287)
                                                                  ========   ========   ========

                  Tax rates                                             35%        34%        31%
                                                                  ========   ========   ========

                  Theoretical tax benefit                         $ (1,430)  $ (1,431)  $   (709)
                  Increase in taxes resulting from:
                  Effect of different tax rates                          2         38        (17)
                  Tax adjustment in respect of inflation in
                    Israel and others                                   12        (17)        (9)
                  Utilization of carryforward tax losses for
                    which valuation allowance was provided             (21)         -        (22)
                  Non-deductible expenses and tax exempt income          -         10         13
                  Taxes and deferred taxes in respect of
                    previous years                                     256        (21)       112
                  Deferred taxes for which valuation allowance
                    was provided                                     1,447      1,431        750
                                                                  --------   --------   --------

                  Taxes on income as reported in the statements
                    of operations                                 $    266   $     10   $    118
                                                                  ========   ========   ========

            f.    Loss before income taxes is comprised as follows:

                  Domestic                                        $ (3,918)  $ (4,042)  $ (1,511)
                  Foreign                                             (168)      (166)      (776)
                                                                  --------   --------   --------

                                                                  $ (4,086)  $ (4,208)  $ (2,287)
                                                                  ========   ========   ========

                                     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: -  TAXES ON INCOME (CONT.)

            g.    Taxes on income are comprised as follows:

                                                                YEAR ENDED DECEMBER 31,
                                                            ------------------------------
                                                              2004       2005       2006
                                                            --------   --------   --------

                  Current taxes                             $     10   $      -   $      5
                  Deferred taxes                                  33         10          3
                  Taxes and deferred taxes in respect of
                    previous years                               223          -        110
                                                            --------   --------   --------

                                                            $    266   $     10   $    118
                                                            ========   ========   ========

                  Domestic                                  $    256   $      -   $      -
                  Foreign                                         10         10        118
                                                            --------   --------   --------

                                                            $    266   $     10   $    118
                                                            ========   ========   ========

NOTE 15: -  RELATED PARTIES TRANSACTIONS AND BALANCES

            a.    On November 8, 1999, the Board of Directors and the audit
                  committee approved, subject to the shareholders' approval, an
                  increase in the monthly salary of the Chairman of the Board of
                  Directors from $ 5 to $ 7 per month and the grant of options
                  to purchase 98,824 Ordinary shares. The options were granted
                  to him at his request in lieu of salary for the 12 month
                  period ending December 31, 2000. The exercise price of the
                  options is $ 6 per share, expected dividend yield is 0%, and
                  the risk free interest rate is 6%. The options will vest
                  ratably over an eight-month period beginning January 1, 2000
                  and will terminate five years from the date of grant. The
                  options were forfeited by the end of the year 2004.

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

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

            b.    In 2005 and 2006, the balance with C. Mer reflects short-term
                  debt and other receivables. Due to the short-term nature, no
                  interest was charged by or paid to C. Mer through December 31,
                  2005 and 2006.

                                     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: -  RELATED PARTIES TRANSACTIONS AND BALANCES (CONT.)

            c.    Transactions with related parties were as follows:

                                                                    YEAR ENDED DECEMBER 31,
                                                                ------------------------------
                                                                  2004       2005       2006
                                                                --------   --------   --------

                  Sales through related parties                 $     15   $      -   $      -
                                                                ========   ========   ========

                  Amounts charged by related parties:

                  Cost of revenues                              $     32   $      8   $     10
                  Operating expenses                                   7         42         60
                                                                --------   --------   --------

                                                                $     39   $     50   $     70
                                                                ========   ========   ========

                  Amounts charged by MTS Integra TRAK and MTS
                    Asia to related parties:

                  Selling and marketing                         $     18   $      -   $    246
                                                                ========   ========   ========

                  Payments from (repayments to) the related
                    parties, net                                $     20   $    (80)  $    (38)
                                                                ========   ========   ========

            d.    Amounts due from an affiliate:


                                                                               DECEMBER 31,
                                                                           -------------------
                                                                             2005       2006
                                                                           --------   --------

                  Jusan S.A                                                $    (18)  $   (137)
                                                                           ========   ========

                                     F - 38

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 16: -  SHAREHOLDERS' EQUITY

            a.    Share capital:

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

            b.    Private placement agreement:

                  On August 10, 2005, the Company has entered into definitive
                  agreements with institutional and private investors for a
                  private placement of Ordinary shares and warrants to purchase
                  Ordinary shares that has raised $ 2,625 (net of issuance costs
                  of approximately $ 200).

                  Pursuant to the agreements, MTS has issued an aggregate
                  937,500 Ordinary shares at $ 3.00 per share. In addition, the
                  Company provided the investors with warrants to purchase an
                  aggregate 375,000 additional Ordinary shares of MTS at an
                  exercise price of $ 4.00 per share. Each investor received
                  warrants to purchase two Ordinary shares for each five
                  Ordinary shares purchased. The warrants became exercisable six
                  months after their issuance and will expire within three and a
                  half years after they become exercisable.

            c.    Stock options:

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

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

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

                  In June 2006, MTS has authorized, through its 2006 Stock
                  Option plan ("2006 Plan"), the grant of options to officers,
                  management, employees and directors of MTS or any subsidiary
                  of up to 400,000 of MTS's Ordinary shares. Each option granted
                  under the 2006 Plan will be either an option intended to be
                  treated as an "incentive stock option," within the meaning of
                  Section 422 of the Internal Revenue Code of 1986, as amended,
                  or an option that will be treated as a "non-qualified stock
                  option."

                                     F - 39

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 16: -  SHAREHOLDERS' EQUITY (CONT.)

                  Each option granted under the Plan is exercisable until the
                  earlier of five years from the date of the grant of the option
                  or the expiration dates of the option plan. The exercise price
                  of the options granted under the plans may not be less than
                  the fair market value of an ordinary share determined as of
                  the date of grant of the option.

                  As of December 31, 2006, 665,574 options are available for
                  future grant.

            d.    A summary of option activity under the Company's Stock Option
                  as of December 31, 2006 and changes during the twelve months
                  ended December 31, 2006 are as follows:

                                                                                  WEIGHTED-
                                                                                   AVERAGE
                                                                    WEIGHTED-     REMAINING
                                                                     AVERAGE     CONTRACTUAL   AGGREGATE
                                                      NUMBER OF     EXERCISE       TERM (IN    INTRINSIC
                                                       OPTIONS        PRICE         YEARS)       VALUE
                                                     -----------   -----------   -----------   ---------
                                                                                   AUDITED
                                                     ---------------------------------------------------
                  Outstanding at December 31, 2005       725,500   $      2.66          2.68   $       -
                  Granted                                 60,000   $      3.34             -           -
                  Exercised                              (40,341)  $      1.61             -          55
                  Forfeited                             (144,759)  $      3.17             -           -
                                                     -----------

                  Outstanding at December 31,2006        600,400   $      2.67          2.79   $       -
                                                     ===========   ===========   ===========   =========

                  Exercisable at December 31,2006        286,425   $      2.24          2.31   $       -
                                                     ===========   ===========   ===========   =========

                  Vested and expected to vest            545,383   $      2.65          2.76   $       -
                                                     ===========   ===========   ===========   =========

                  The weighted average grant-date fair value of options granted
                  during 2004, 2005 and 2006, was $ 0.781, $ 1.70 and $ 1.94 per
                  option, respectively.

                  The aggregate intrinsic value in the table above represents
                  the total intrinsic value (the difference between the
                  Company's closing stock price on the last trading day of the
                  fiscal year 2006 and the exercise price, multiplied by the
                  number of in-the-money options) that would have been received
                  by the option holders had all option holders exercised their
                  options on December 31, 2006. This amount changes based on the
                  fair market value of the Company's stock. The total intrinsic
                  value of options exercised during the years ended December 31,
                  2006, 2005, and 2004, was $ 55, $ 188, and $ 53, respectively.
                  As of December 31, 2006, there was $ 209 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.

                                     F - 40

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 16: -  SHAREHOLDERS' EQUITY (CONT.)

                  The options outstanding as of December 31, 2006 have been
                  separated into ranges of exercise prices, as follows:

                    RANGE OF                   REMAINING        WEIGHTED                     REMAINING        WEIGHTED
                    EXERCISE                  CONTRACTUAL       AVERAGE                     CONTRACTUAL        AVERAGE
                     PRICE      OUTSTANDING   LIFE (YEARS)   EXERCISE PRICE   EXERCISABLE   LIFE (YEARS)   EXERCISE PRICE
                  -----------   -----------   ------------   --------------   -----------   ------------   --------------

                  $     1.844       250,000           1.94   $        1.844       187,500           1.94   $        1.844
                  $  2.2-2.35        83,500           2.70   $         2.29        41,750           2.70   $         2.29
                  $  2.9-2.95        15,900           1.95   $         2.91        11,925           1.95   $         2.91
                  $  3.27-3.4        70,000           3.60   $         3.38        14,500           3.54   $         3.37
                  $ 3.45-3.49        77,000           3.82   $         3.47         7,750           3.34   $         3.48
                  $      3.87       104,000           3.74   $         3.87        23,000           3.74   $         3.87
                                -----------                                   -----------

                                    600,400                  $         2.67       286,425                  $         2.24
                                ===========                  ==============   ===========                  ==============

            e.    Options and warrants to non-employees:

                                                NUMBER OF                                OPTIONS    EXERCISE
                              IN CONNECTION      OPTIONS     OPTIONS       OPTIONS      FORFEITED   PRICE PER    EXERCISABLE
            ISSUANCE DATE         WITH           GRANTED    EXERCISED    EXERCISABLE   OR EXPIRED     SHARE        THROUGH
            --------------   ----------------   ---------   ---------    -----------   ----------   ---------   --------------

            January 2000      Advisory Board       98,824           -              -       98,824   $   6.000   December 2004
            February 2001    Service provider      25,000           -              -       25,000   $   5.625   February 2006
            January 2005     Service provider      70,000           -         70,000            -   $   3.250   January 2008
            May 2005         Service provider      10,000           -         10,000            -   $   3.490   May 2015
            August 2005      Service provider      37,000           -         37,000            -   $   4.000   August 2009
            September 2005   Service provider      10,000           -              -       10,000   $   3.870   September 2015
            December 2005    Service provider     100,000           -              -      100,000   $   3.120   December 2006
                                                ---------   ---------    -----------   ----------

                                                  350,824           -        117,000      233,824
                                                =========   =========    ===========   ==========

                  During 2006, no options to consultants were granted by the
                  Company. The Company had accounted for its outstanding options
                  to non-employees under the fair value method of SFAS No. 123
                  and EITF 96-18. The fair value for these options was estimated
                  at the measurement date using the Black-Scholes option-pricing
                  model with the following weighted-average assumptions for 2006
                  and 2005: risk-free interest rates of 5.23% and 4.06%,
                  respectively, dividend yields of 0%, volatility factors of the
                  expected market price of the Company's Ordinary shares of
                  34.22% and 52.37%, respectively, and a contractual life of
                  0.85 and 3.3 years, respectively.

                  Compensation expenses related to the granting of stock options
                  to consultants amounted to $ 0, $ 156 and $ 10 for the years
                  ended December 31, 2004, 2005 and 2006, respectively.

            f.    Treasury shares:

                  During 2004, 2005 and 2006, the Company purchased 3,800, 0 and
                  0 treasury shares in consideration of $ 9 $ 0 and $ 0,
                  respectively, according to the stock repurchase program, which
                  authorized the Company's officers to repurchase up to 600,000
                  Ordinary shares of MTS and was approved by the Company's Board
                  of Directors.

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

                                     F - 41

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 16: -  SHAREHOLDERS' EQUITY (CONT.)

            g.    Dividends:

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

NOTE 17: -  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,
                                                  -----------------------------
                                                    2004      2005       2006
                                                  -------   --------   --------
            Revenues from sales:

            United States                         $ 4,967   $  6,043   $  5,353
            Germany                                 1,724      2,059      1,881
            Asia                                      635        359        624
            Holland                                   798        747        561
            Others                                  1,289      2,355      2,065
                                                  -------   --------   --------

                                                  $ 9,413   $ 11,563   $ 10,484
                                                  =======   ========   ========

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

                                                                DECEMBER 31,
                                                            -------------------
                                                              2005       2006
                                                            --------   --------

            TABS                                            $  7,454   $  5,329
            Application suits                                  2,603      4,044
            Billing products                                   1,506      1,111
                                                            --------   --------

                                                            $ 11,563   $ 10,484
                                                            ========   ========
            Long-lived assets:

            Israel                                          $  3,013   $  3,177
            United States                                      2,194      2,913
            Others                                                57         46
                                                            --------   --------

                                                            $  5,264   $  6,136
                                                            ========   ========

                                     F - 42

                                               MER TELEMANAGEMENT SOLUTIONS LTD.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 18: -  SUBSIDIARIES AND AFFILIATES

                                                                          PERCENTAGE    JURISDICTION OF
                                                                         OF OWNERSHIP    INCORPORATION
                                                                         ------------   ---------------
            SUBSIDIARIES:

            MTS IntegraTRAK Inc.                                             100%          Delaware
            MTS TelSoft Inc. (a subsidiary of MTS IntegraTRAK Inc.)          100%          Delaware
            MER Fifth Avenue Realty Inc. (a subsidiary of MTS
              IntegraTRAK Inc.) *)                                           100%          New York
            MTS Asia Ltd.                                                    100%          Hong Kong
            Telegent Ltd. *)                                                 100%            Israel
            Jaraga B.V.                                                      100%         Netherlands
            Verdura B.V. (a subsidiary of Jaraga B.V.) *)                    100%         Netherlands
            Voltera Technologies V.O.F. (a partnership held 99% by
              Jaraga B.V. and 1% by Verdura B.V.) *)                         100%         Netherlands
            Bohera B.V. (a subsidiary of Jaraga B.V.) *)                     100%         Netherlands
            Tabs Brazil Ltd. (a subsidiary of Bohera B.V.)                   100%            Brazil

            AFFILIATE:

            Jusan S.A. (an affiliate of Jaraga B.V.)                          50%            Spain

            *)    Inactive, or having immaterial activity.

NOTE 18: -  SUBSEQUENT EVENTS

            On February 6, 2006, the Board of Directors of the Company approved
            the sale of the shares of TABS Brazil Ltda., to local Brazilian
            individuals in consideration for $ 335 (the "Price"). The Price
            shall be paid in 60 monthly installments, commencing January 1, 2008
            with the first installment being in the amount of $ 67 and the
            remaining installments in the amount of $ 6 each.


                                     F - 43

                                   JUSAN, S.A.

                              FINANCIAL STATEMENTS

                        AS OF DECEMBER 31, 2006 AND 2005



                                      INDEX


                                                                    PAGE
                                                              ----------------

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM             F-45

BALANCE SHEETS                                                      F-46

STATEMENTS OF INCOME                                                F-47

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY                       F-48

STATEMENTS OF CASH FLOWS                                            F-49

NOTES TO FINANCIAL STATEMENTS                                   F-50 - F-61



                                     F - 44

             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 2005 and the related statements of
     income, shareholders' equity and cash flows for each of the three 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 2005 and the results of its operations and its cash
     flows for each of the three 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 Anderson
- ----------------

Madrid, Spain, January, 19, 2007


                                     F - 45

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 JUSAN, S.A.

                                   JUSAN, S.A.
                 BALANCE SHEETS AS OF DECEMBER 31, 2006 AND 2005
                               EUROS IN THOUSANDS

                                                                                            DECEMBER 31,
                                                                                          2006        2005
                                                                                          -----      -----

 ASSETS

 CURRENT ASSETS:
 Cash and cash equivalents                                                                  236        737
 Short-term bank deposits                                                                   867        400
 Trade receivables (net of allowance for doubtful accounts of - thousand euros
 as of December 31, 2006 and 57 thousand euros as of December 31, 2005 and net
 of provision for returns of 4 thousand euros as of December 31, 2006 and 4
 thousand euros as of December 31, 2005) (Note 5)                                         1,098      1,698
 Other accounts receivable and prepaid expenses (Note 3)                                    138        186
 Inventories (Note 4)                                                                       503        671
                                                                                          -----      -----

 Total current assets                                                                     2,842      3,692
                                                                                          -----      -----

 PROPERTY AND EQUIPMENT, NET (Note 6)                                                        67         38
                                                                                          -----      -----

 Total assets                                                                             2,909      3,730
                                                                                          =====      =====

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term bank debt (Note 7)                                                                17          8
Trade payables                                                                              324        482
Accrued expenses and other liabilities (Note 8)                                             176        365
Deferred revenues                                                                            10         49
                                                                                          -----      -----

Total current liabilities                                                                   527        904
                                                                                          -----      -----

COMMITMENTS (Note 9)

SHAREHOLDERS' EQUITY (Note 12):
Share capital -
         15,052 Ordinary shares of (euro) 0.0042 par value - Authorized,  issued and
outstanding as of December 31, 2006 and 2005                                                 63         63
Retained earnings                                                                         2,319      2,763
                                                                                          -----      -----

Total shareholders' equity                                                                2,382      2,826
                                                                                          -----      -----

Total liabilities and shareholders' equity                                                2,909      3,730
                                                                                          =====      =====

     The accompanying notes are an integral part of the financial statements


                                     F - 46

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 JUSAN, S.A.

                                   JUSAN, S.A.

           STATEMENTS OF INCOME AS OF DECEMBER 31, 2006, 2005 AND 2004
              EUROS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)


                                                                             YEAR ENDED DECEMBER 31,
                                                                         2006         2005          2004
                                                                        ------       ------        ------

Revenues (Note 13):

Product sales                                                            3,833        3,935         5,154
Services                                                                   520          632           640
                                                                        ------       ------        ------

Total revenues                                                           4,353        4,567         5,794
                                                                        ------       ------        ------

Cost of revenues:
Product sales                                                            1,812        2,098         2,658
Services                                                                   423          435           447
                                                                        ------       ------        ------

Total cost of revenues                                                   2,235        2,533         3,105
                                                                        ------       ------        ------

Gross profit                                                             2,118        2,034         2,689
                                                                        ------       ------        ------

Operating expenses:
Research and development                                                   456          449           454
Selling and marketing                                                      746          849           872
General and administrative                                                 667          831           849
                                                                        ------       ------        ------

Total operating expenses                                                 1,869        2,129         2,175
                                                                        ------       ------        ------

Operating income / (loss)                                                  249          (95)          514
Financial income, net (Note 14)                                              6           20             2
                                                                        ------       ------        ------

Income before taxes on income                                              255          (75)          516

Income taxes (Note 10)                                                      59          (55)          143
                                                                        ------       ------        ------

Net income / (loss)                                                        196          (20)          373
                                                                        ======       ======        ======

Basic and diluted net earnings per share                                 13.02        (1.33)        24.78

Weighted  average  number of shares used in  computing  basic net
earnings per share                                                      15,052       15,052        15,052

     The accompanying notes are an integral part of the financial statements


                                     F - 47

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 JUSAN, S.A.

                                   JUSAN, S.A.

                  STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                     AS OF DECEMBER 31, 2006, 2005 AND 2004
                               EUROS IN THOUSANDS

                                                                     TOTAL
                                                     RETAINED     SHAREHOLDERS'
                                     SHARE CAPITAL   EARNINGS       EQUITY
                                     -------------   --------       ------

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

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

Balance as of December 31, 2004            63         3,083          3,146
                                        -----         -----          -----

Dividend paid                               -          (300)          (300)
Net income                                  -           (20)           (20)
                                        -----         -----          -----

Balance as of December 31, 2005            63         2,763          2,826

Dividend paid                               -          (640)          (640)
Net income                                  -           196            196
                                        -----         -----          -----

Balance as of December 31, 2006            63         2,319          2,382
                                        =====         =====          =====


     The accompanying notes are an integral part of the financial statements


                                     F - 48

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 JUSAN, S.A.


                                   JUSAN, S.A.
         STATEMENTS OF CASH FLOWS AS OF DECEMBER 31, 2006, 2005 AND 2004
                               EUROS IN THOUSANDS

                                                                                YEAR ENDED DECEMBER 31,
                                                                            2006          2005         2004
                                                                            ----          ----         ----

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income                                                                    196          (20)         373
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation                                                                   29           38           47
Deferred taxes                                                                  2          (30)          21
Decrease (increase) in trade receivables                                      600          367         (333)
Decrease (increase) in other accounts receivable and prepaid expenses          22           12           62
Decrease (increase) in inventories                                            168          241         (119)
Increase (decrease) in trade payables                                        (158)        (177)        (136)
Increase (decrease) in accrued expenses and other liabilities                (165)          14           32
Increase (decrease) in deferred revenues                                      (39)         (11)        (172)
                                                                             ----         ----         ----
Net cash (provided by) operating activities                                   655          434         (225)
                                                                             ----         ----         ----

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in short-term bank deposits                                       (467)          50            -
Purchase of property and equipment                                            (58)         (26)         (19)
                                                                             ----         ----         ----
Net cash provided by (used in) investing activities                          (525)          24          (19)
                                                                             ----         ----         ----

CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend paid                                                                (640)        (300)        (100)
Short-term bank debt                                                            9          (10)         (20)
                                                                             ----         ----         ----
Net cash used in financing activities                                        (631)        (310)        (120)
                                                                             ----         ----         ----

Increase (decrease) in cash and cash equivalents                             (501)         148         (364)
Cash and cash equivalents at the beginning of the year                        737          589          953
                                                                             ----         ----         ----
Cash and cash equivalents at the end of the year                              236          737          589
                                                                             ====         ====         ====

NON-CASH FINANCING INFORMATION:
Accrued dividend                                                                -            -            -

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS ACTIVITIES:
Cash paid during the year for:

Interest                                                                        6           20            2
                                                                             ----         ----         ----

Income taxes                                                                    -            -          120
                                                                             ----         ----         ----

     The accompanying notes are an integral part of the financial statements


                                     F - 49

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 JUSAN, S.A.

                                   JUSAN, S.A.

         NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 2006 AND 2005


NOTE 1: ORGANIZATION AND OPERATIONS

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

b.   The Company has five major customers (see also Note 13a).

c.   In accordance with Spanish Companies' Law the directors present, for
     comparative purposes, each of the balance sheet and profit and loss
     account, the figures for the previous financial years, in addition to those
     for the financial year 2006.

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

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

a.   Use of estimates:

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

b.   Financial statements in euros

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

c.   Cash equivalents:

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

There are no restrictions for cash and cash equivalents.


                                     F - 50

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 JUSAN, S.A.

d.   Short-term bank deposits:

Short-term bank deposits are deposits with maturities of more than three months
but less than one year. The deposits are in Euro and bear interest at an average
rate of 3%. The short-term deposits are presented at their cost, including
accrued interest.

e.   Inventories:

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

f.   Property and equipment:

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

                                                         %

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

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

g.   Research and development costs:

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


                                     F - 51

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 JUSAN, S.A.

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 (euro) 3 is determined
principally on the basis of past experience.

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


                                     F - 52

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 JUSAN, S.A.

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

j.   Warranty costs:

The Company provides free warranty for up to one year. A provision in the amount
of thousand (euro) 10 (thousand (euro) 20 in 2005) is recorded for probable
costs in connection with these services based on the Company's experience.

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

k.   Fair value of financial instruments:

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

There are short term fixed-rate securities as an amount of thousand (euro) 867.

l.   Concentrations of credit risk:

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

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

The trade receivables of the Company are mainly derived from sales to customers
in Spain and Europe (see Note 13b). The Company performs ongoing credit
evaluations of its customers. The allowance for doubtful accounts is determined
with respect to specific debts that are doubtful of collection according to
management estimates (when the ageing of account receivable is more than 180
days). In certain circumstances, the Company may require letters of credit,
other collateral or additional guarantees.

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


                                     F - 53

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 JUSAN, S.A.

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             2005
                                                       ----             ----

            Tax authorities                             99              100
            Deferred taxes                              17               43
            Employee advances                            6               27
            Deposits                                    16               16
                                                      ----             ----

                                                       138              186
                                                      ----             ----

NOTE 4: INVENTORIES

                                                          DECEMBER 31,
                                                      2006           2005
                                                      ----           ----


            Materials                                  479            735
            Work in progress                            31             29
            Provision for obsolescence                  (7)           (93)
                                                      ----           ----

                                                       503            671
                                                      ----           ----


                                     F - 54

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 JUSAN, S.A.

NOTE 5: TRADE RECEIVABLES

                                                          DECEMBER 31,
                                                     2006             2005
                                                     -----           -----

Trade receivables                                      840           1,510
Bills receivable                                       258             245
Allowance for doubtful accounts                          -             (57)
                                                     -----           -----

                                                     1,098           1,698
                                                     -----           -----

NOTE 6: PROPERTY AND EQUIPMENT

                                                          DECEMBER 31,
                                          2005      ADDITIONS     DISPOSALS       2006
                                          ----      ---------     ---------       ----

COST:
Computers and peripheral equipment         122           21            -          143
Office furniture and equipment             307           14           (3)         318
Motor vehicles                              98           23          (21)         100
Leasehold improvements                       -                                      -
                                         -----        -----        -----        -----

                                           527           58          (24)         561
ACCUMULATED DEPRECIATION:
Computers and peripheral equipment        (113)         (10)           -         (123)
Office furniture and equipment            (278)          (8)           3         (283)
Motor vehicles                             (98)         (11)          21          (88)
Leasehold improvements                       -            -            -            -
                                         -----        -----        -----        -----

                                          (489)         (29)          24         (494)
                                         -----        -----        -----        -----

DEPRECIATED COST                            38           29            -           67
                                         =====        =====        =====        =====

Depreciation expenses for the years ended December 31, 2006, 2005 and 2004 were
thousand (euro) 29, 38 and 47, respectively.


                                     F - 55

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 JUSAN, S.A.

NOTE 7: SHORT-TERM BANK DEBT

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

NOTE 8: ACCRUED EXPENSES AND OTHER LIABILITIES

                                          DECEMBER 31,
                                       2006         2005
                                       ----         ----

Employees and payroll accruals          52           75
Income tax payable                      59            -
Deferred tax                             -           24
Tax authorities                        135          182
Current Accounts                       (80)          64
Warranty costs                          10           20
                                      ----         ----

                                       176          365
                                      ====         ====

NOTE 9: COMMITMENTS

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

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

                       2007                          8
                       2008                          8
                       2009                          5
                                                  ----

                                                    21
                                                  ----

Rent expenses for years ended December 31, 2006, 2005 and 2004, were
approximately thousand (euro) 172, 157 and 152, respectively. Rent expenses will
be reviewed every year with the variation of the Consumer Price Index.


                                     F - 56

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 JUSAN, S.A.

NOTE 10: TAXES ON INCOME

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

                                                                YEAR ENDED DECEMBER 31,
                                                            2006          2005         2004
                                                            ----          ----         ----

Income before taxes as reported in the statements
of operations                                               255           (75)          516
Non-deductible bad debt allowance and others 2004             -           (82)           82
Non-deductible bad debt allowance 2005                      (20)           20             -
Tax depreciation                                             37           (37)            -
Increase (decrease) in the taxable base - Forward
sales                                                        33            29           (62)
Increase (decrease)  in the taxable base -
Unrealized  severance allowance                             (75)           75             -
                                                           ----          ----          ----
Taxable income                                              230           (70)          536
                                                           ----          ----          ----

Tax rates                                                    35%           35%           35%


Tax expense (benefit)                                        80           (25)          188
Decrease in taxes resulting from:
Tax deduction for development                               (21)            -           (66)
Deferred tax liability (asset)                                -           (30)           21
                                                           ----          ----          ----

TAXES ON INCOME, TAX EXPENSE (BENEFIT), AS REPORTED
IN THE STATEMENTS OF OPERATIONS                              59           (55)          143
                                                           ====          ====          ====

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 - 57

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 JUSAN, S.A.

NOTE 11: RELATED PARTIES TRANSACTIONS

The balances with and the revenues derived from related parties (related parties
are shareholders, directors and family of both) were as follows:

a.   Payments to related parties:

              YEAR ENDED DECEMBER 31,
            2006       2005       2004
            ----       ----       ----

Wages        332        299        255
            ----       ----       ----

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

b.   Transactions with related parties were as follows:

                                             YEAR ENDED DECEMBER 31,
                                          2006       2005       2004
                                          ----       ----       ----

Sales to related parties                    29         39         18
                                          ----       ----       ----

AMOUNTS CHARGED BY RELATED PARTIES:
Cost of revenues                            41         18        100
                                          ----       ----       ----


                                     F - 58

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 JUSAN, S.A.

c.   Amounts receivable from and payables to related parties:

                                   DECEMBER 31,
                                  2006       2005
                                  ----       ----

RECEIVABLES:
Mer Telemagement Solutions          5         36
MTS Asia                            -          4
MTS IntegraTRAK                     1          -
Jaraga BV                         100          -

PAYABLES:
Mer Telemagement Solutions          -         18

NOTE 12: SHAREHOLDERS' EQUITY

a.   Share capital:

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

b.   Legal reserve

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

c.   Shareholding

There are 15,052 ordinary shares of (euro) 0.0042 par value, authorized, issued
and outstanding as of December 31, 2006.

The shareholders at December 31, 2006 are:

                                                               %

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


                                     F - 59

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 JUSAN, S.A.

d.   Distribution of dividends.

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

             Jaraga, B.V.                                     320
             Jose Lasry Nahon                                 160
             Mauricio Toledano Marques                        160

NOTE 13: - SEGMENTS, CUSTOMERS AND GEOGRAPHIC INFORMATION

a.   Major customers as a percentage of total revenues:

                                    YEAR ENDED DECEMBER 31,
                                  2006       2005        2004
                                  ----       ----        ----
                                               %

Adictis                            10%        13%        14%
Liberty Voz, S.L                    6%         -          -
Cableuropa, S.A                     6%         8%         8%
Siemens, S.A                        -          -          8%
Telefonica de Espana                5%         5%         5%
Eurotelefonia del Sur, S.L          4%         -          4%
Siemens Chile                       -          2%         -
Accentic                            -          2%         4%


                                     F - 60

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 JUSAN, S.A.

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

                              YEAR ENDED DECEMBER 31,
                          2006         2005         2004
                          -----        -----        -----


Spain                     2,586        2,275        2,287
European Community        1,280        1,437        2,796
Other                       487          855          711
                          -----        -----        -----

                          4,353        4,567        5,794
                          -----        -----        -----

NOTE 14: SELECTED STATEMENTS OF OPERATIONS DATA

Financial income, net

                            YEAR ENDED DECEMBER 31,
                           2006      2005      2004
                           ----      ----      ----

Financial expenses:

Interest expenses             6         3         3
Other expenses               27         6        11
                           ----      ----      ----
                             33         9        14
                           ----      ----      ----

Financial income:

Interest income              39        29        16
                           ----      ----      ----

FINANCIAL INCOME, NET         6        20         2
                           ====      ====      ====


                                     F - 61

                               S I G N A T U R E S

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


                                            MER TELEMANAGEMENT SOLUTIONS LTD.


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

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


Dated: March 30, 2007


                                       75

EX-5.0

                                                                     EXHIBIT 5.0

                            ASSET PURCHASE AGREEMENT

                                  BY AND AMONG

                              MTS ACQUISITION CORP.
                             A DELAWARE CORPORATION

                              MTS INTEGRATRAK INC.
                             A DELAWARE CORPORATION

                                       AND

                             TELSOFT SOLUTIONS, INC.
                            A CALIFORNIA CORPORATION

                                       AND

                            CONSULTING SCIENCES, INC.
                            A CALIFORNIA CORPORATION

                                  DONALD SIMONS

                                   DALE ZUEHLS

                                  JULY 25, 2006

                                TABLE OF CONTENTS

ARTICLE I SALE OF ASSETS AND TERMS OF PAYMENT ............................    9

      1.01   Assets Being Sold (the "Purchased Assets") ..................    9

      1.02   Retained Assets .............................................   11

      1.03   Assumed Liabilities .........................................   11

      1.04   Retained Liabilities ........................................   11

      1.05   Purchase Price ..............................................   12

      1.06   Allocation of the Purchase Price ............................   14

      1.07   Escrow ......................................................   15

      1.08   Absolute Sale ...............................................   17

      1.09   Other Contracts .............................................   17

      1.10   Bulk Sales Laws .............................................   18

      1.11   Consignment Inventory .......................................   18

ARTICLE II RELATED AGREEMENTS ............................................   18

      2.01   Escrow Agreement ............................................   18

      2.02   Assignment and Assumption of Liabilities ....................   18

      2.03   Bill of Sale ................................................   18

      2.04   Assignment of Intellectual Property Rights ..................   18

      2.05   Lease of Real Property ......................................   18

      2.06   Employee Employment Agreements ..............................   18

      2.07   Assignment of Domain Names ..................................   19

ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER PRINCIPALS ..........   19

      3.01   Organization and Good Standing ..............................   19

      3.02   Authorization, Compliance with Other Instruments and Law ....   19

      3.03   Financial Statements ........................................   20

                                     - ii -

      3.04   Operation of Seller in the Ordinary Course ..................   20

      3.05   Tax Matters .................................................   21

      3.06   Material Contracts and Commitments ..........................   22

      3.07   Licenses, Permits and Authorizations ........................   22

      3.08   Title to Purchased Assets ...................................   22

      3.09   Transferred Intellectual Property ...........................   22

      3.10   Employee Benefit Plans ......................................   24

      3.11   Litigation and Other Claims .................................   25

      3.12   No Material Adverse Change ..................................   25

      3.13   Sufficiency of Purchased Assets .............................   25

      3.14   Compliance with Laws ........................................   26

      3.15   Insurance ...................................................   26

      3.16   Inventory ...................................................   26

      3.17   Real Property Leases ........................................   26

      3.18   Labor Matters ...............................................   27

      3.19   Condition of Purchased Assets ...............................   27

      3.20   Environmental Matters .......................................   27

      3.21   Absence of Certain Payments .................................   28

      3.22   Full Disclosure .............................................   29

ARTICLE IIIA REPRESENTATIONS AND WARRANTIES OF PRINCIPAL STOCKHOLDERS ....   29

      3A.1.  Organization and Good Standing ..............................   29

      3A.2.  Validity and Enforceability .................................   29

      3A.3.  No Litigation ...............................................   29

      3A.4.  No Conflict .................................................   30

ARTICLE IV REPRESENTATIONS, WARRANTIES AND COVENANTS OF BUYER ............   30

      4.01   Organization ................................................   30

                                     - iii -

      4.02   Due Authorization ...........................................   30

ARTICLE V COVENANTS PENDING CLOSING ......................................   31

      5.01   Conduct of Business of Seller Prior to the Closing ..........   31

      5.02   Access to Information .......................................   32

      5.03   Consents ....................................................   32

      5.04   Public Announcements ........................................   32

      5.05   Confidentiality .............................................   33

      5.06   Related Agreements ..........................................   34

      5.07   No-Shop .....................................................   34

ARTICLE VI CLOSING CONDITIONS ............................................   34

      6.01   Conditions to Each Party's Obligations to Effect the
             Transactions Contemplated Hereby ............................   34

      6.02   Conditions to the Obligations of Seller to Effect the
             Transactions Contemplated Hereby ............................   34

      6.03   Conditions to the Obligations of Buyer to Effect the
             Transactions Contemplated Hereby ............................   35

ARTICLE VII THE CLOSING ..................................................   35

      7.01   Time and Place of Closing ...................................   35

      7.02   Closing .....................................................   36

ARTICLE VIII SUCCESSOR EMPLOYER ..........................................   36

      8.01   Employment with Buyer .......................................   36

      8.02   Additional Employees ........................................   36

      8.03   Third Parties ...............................................   37

      8.04   Accrued Vacation, Personal and Sick Time ....................   37

                                     - iv -

ARTICLE IX WORKERS' COMPENSATION AND PRODUCT LIABILITY RESPONSIBILITY ....   37

      9.01   Workers' Compensation .......................................   37

      9.02   Product Liability and Warranty Claims .......................   37

      9.03   Responsibility for Prior Claims .............................   37

ARTICLE X POST-CLOSING COVENANTS .........................................   38

      10.01  Further Assurances ..........................................   38

      10.02  Commissions and Fees ........................................   38

      10.03  Sales, Transfer and Use Taxes ...............................   38

      10.04  Nondisclosure; Noncompetition ...............................   39

      10.05  Indemnification .............................................   40

      10.06  Defense of Claims ...........................................   41

      10.07  MTS IntegraTRAK Guarantee ...................................   42

      10.08  Name ........................................................   43

      10.09  Expenses ....................................................   43

ARTICLE XI MISCELLANEOUS .................................................   43

      11.01  Binding Effect ..............................................   43

      11.02  No Assignment ...............................................   43

      11.03  Counterparts ................................................   43

      11.04  Governing Law ...............................................   44

      11.05  Arbitration .................................................   44

      11.06  Survival ....................................................   44

      11.07  Notices .....................................................   44

      11.08  Amendment and Modification ..................................   46

      11.09  Waiver of Compliance ........................................   46

      11.10  Interpretation ..............................................   46

      11.11  Entire Agreement ............................................   46

      11.12  Specific Performance ........................................   47

                                      - v -

      11.13  Severability of Covenants ...................................   47

ARTICLE XII TERMINATION AND ABANDONMENT ..................................   47

      12.01  Termination .................................................   47

      12.02  Procedure and Effect of Termination .........................   48

                                     - vi -

                                    SCHEDULES

Schedule               Description
- --------               -----------

1.01(a)      Furniture, Machinery and Equipment

1.01(b)      Inventories

1.01(c)(x)   Materials, Supplies and Services

1.01(c)(y)   Real Property Lease

1.01(c)(z)   Material Contracts

1.01(d)      Patents, Trademarks and Related Assets

1.01(f)      Governmental Licenses, Permits and Authorizations

1.01(g)      Other Current Assets

1.02(i)      Retained Assets

1.02(ii)     Advances to Employees

1.03(a)      Deferred Maintenance Contracts

1.03(b)      Uncompleted Contracts

1.06         Allocation of the Purchase Price

1.11         Consignment Inventory

2.06         Employee Employment Agreements

3.02         Authorization, Compliance with Other Instruments and Law

3.05         Tax Matters

3.07         Licenses, Permits and Authorizations

3.08         Exceptions to Title to Purchased Assets

3.10         Employee Benefit Plans

3.11         Litigation and Other Claims

3.15         Insurance

3.18         Labor Matters

3.20         Environmental Matters

3A.2(i)      Ownership of Securities of Seller

3A.2(ii)     Ownership of Securities of Principal Stockholder

                                     - vii -

6.03(d)      Consents

8.01         Transferred Employees

                                    EXHIBITS

      Exhibit                       Description
      -------                       -----------

         A        Form of Escrow Agreement

         B        Form of Assignment and Assumption of Liabilities Agreement

         C        Form of Bill of Sale

         D        Form of Assignment of Intellectual Property Rights

         E        Form of Lease of Real Property

         F        Forms of Employment Agreement with Transferred Employees

         G        Form of Domain Names Assignment Agreement

         H        Form of Consulting Agreement

         I        Form of Opinion of Principals' Counsel

                                    - viii -

                            ASSET PURCHASE AGREEMENT

      THIS AGREEMENT (the "Agreement") is made as of July 25, 2006 by and among
MTS Acquisition Corp., a company organized under the laws of the State of
Delaware ("Buyer"), MTS IntegraTRAK Inc., a company organized under the laws of
the State of Delaware, the sole stockholder of Buyer ("MTS IntegraTRAK"),
TelSoft Solutions, Inc., a California corporation ("Seller"), Consulting
Sciences, Inc., a California corporation owned by Donald Simons and Dale Zuehls
and a principal stockholder of the Seller (the "Principal Stockholder"), Donald
Simons, a stockholder of Consulting Sciences, Inc., and Dale Zuehls, a
stockholder of the Seller and Consulting Sciences, Inc. (Donald Simons, Dale
Zuehls and the Principal Stockholder shall collectively be referred to as the
"Principal Stockholders"). Seller and Principal Stockholders shall collectively
be referred to herein as "Seller Principals."

                             SUMMARY OF TRANSACTION

      Seller wishes to sell and Buyer wishes to purchase all of the business of
Seller (the "Business") and certain of the assets related to the Business of
Seller, subject to certain of the liabilities of Seller.

                                   ARTICLE I

                       SALE OF ASSETS AND TERMS OF PAYMENT

            1.01  ASSETS BEING SOLD (THE "PURCHASED ASSETS"). Seller agrees to
sell and Buyer agrees to purchase, at the Closing (as defined in Section 7.01
hereof), certain of the assets of Seller related to the Business as they shall
exist on the Closing Date (as defined in Section 7.01 hereof), except for the
Retained Assets (as defined in Section 1.02 hereof), including without
limitation the following assets (the "Purchased Assets):

            (a)   FURNITURE, MACHINERY AND EQUIPMENT. All the furniture,
      machinery, equipment, computers, fixtures and leasehold improvements of
      Seller related to the Business which are listed on SCHEDULE 1.01(a)
      hereto, which shall be updated to include all similar assets of Seller
      acquired hereafter prior the Closing.

            (b)   INVENTORIES. All inventories owned by Seller of any kind
      related to the Business, including, but not limited to, finished goods
      (whether manufactured or purchased), work-in-process, supplies and raw
      materials listed on SCHEDULE 1.01(b) hereto;

            (c)   CONTRACTS AND COMMITMENTS. Subject to the provisions of
      Section 1.09 hereof, all of the right, title and interest of Seller in, to
      and under all pending and executory contracts, agreements, commitments and
      understandings of Seller related to the Business, including, without
      limitation, those with respect to (w) confidentiality of information
      relating to the Business of Seller supplied to potential purchasers of the
      Business of Seller, (x) the purchase of materials, supplies or services,
      including, without limitation, any warranties running with such materials,
      supplies or services, as listed on SCHEDULE 1.01(c)(x) hereto (y) the
      lease of the Seller's premises at 100 N. Brand Blvd., Suite 400, Glendale,
      CA 91203 (the "Real Property Lease") as specified on SCHEDULE 1.01(c)(y),
      and (z) the Material Contracts as defined in Section 3.06, which Material
      Contracts are listed on SCHEDULE 1.01(c)(z) hereto;

                                     - 9 -

            (d)   PROPRIETARY RIGHTS.

                  (i)   PATENTS, TRADEMARKS AND RELATED ASSETS. All United
      States and foreign patents, trademarks, service marks, domain names,
      Internet web sites and their contents (including, without limitation,
      "www.telsoft-solutions.com/index.html" and
      "www.call-accounting.org/index.html"), software and goodwill appurtenant
      thereto, and applications and registrations therefor, copyrights,
      tradenames (including, without limitation, "TelSoft" and variations
      thereof), brand names and licenses ("Proprietary Rights") of Seller
      related to the Business, including those listed in SCHEDULE 1.01(d)
      hereto;

                  (ii)  TECHNICAL KNOW-HOW. All proprietary and other technical
      information, technology, knowledge and expertise ("Technical Know-how")
      owned by Seller related to the Business (including research and
      development in progress), including inventions and discoveries, protocols,
      improvements, processes, know-how, formulae, drawings, specifications,
      production data, trade secrets, plans, files, notebooks and other records
      and documents pertaining to research and development;

                  (iii) LICENSES. All right, title and interest related to the
      Business of Seller in, to and under any licenses of any Proprietary Rights
      or Technical Know-how owned by any third party; and

                  (iv)  RELATED AGREEMENTS. All secrecy or other agreements
      related to the Business of Seller with others, including employees,
      relating to disclosure, assignment or patenting of any Proprietary Rights
      or Technical Know-how;

            (e)   BOOKS AND RECORDS. All books and records and printed
      materials, including all sales and credit records, marketing, advertising
      and sales material, literature, catalogues and other publications,
      customer lists, supplier lists, financial records and personnel and
      payroll records of Seller related to the Business, but excluding the
      corporate books and records of the Seller;

            (f)   GOVERNMENTAL LICENSES, PERMITS AND AUTHORIZATIONS. To the
      extent assignable, all governmental licenses, permits and authorizations
      related to the Business, if any, a complete list of which is set forth on
      SCHEDULE 1.01(f) hereto;

            (g)   OTHER CURRENT ASSETS. To the extent assignable, other current
      assets related to the Business listed on SCHEDULE 1.01(g);

                                     - 10 -

            (h)   INTANGIBLE ASSETS. The Business of Seller as a going concern
      and the goodwill thereof; and

            (i)   OTHER ASSETS. All other assets, properties, and rights of
      every kind and nature owned or held by Seller related to the Business or
      in which Seller has an interest on the Closing Date, known or unknown,
      fixed or unfixed, accrued, absolute, contingent or otherwise, whether or
      not specifically referred to in this Agreement, other than the Retained
      Assets.

            1.02  RETAINED ASSETS. Notwithstanding the foregoing, the Purchased
Assets shall not include any cash, cash equivalents or Seller's accounts
receivable and notes receivable related to the Business as set forth on SCHEDULE
1.02(i) and advances to employees as set forth in SCHEDULE 1.02(ii) (the
"Retained Assets").

            1.03  ASSUMED LIABILITIES. Buyer agrees to assume, perform and
discharge those of Seller's liabilities related to the Business set forth below
(the "Assumed Liabilities");

            (a)   DEFERRED MAINTENANCE CONTRACTS. All of Seller's obligations
      with respect to the deferred maintenance contracts being purchased
      hereunder listed on SCHEDULE 1.03(a) hereto (the "Deferred Maintenance
      Contracts"), but not including any obligations arising from any breach of
      any such Deferred Maintenance Contracts occurring prior to the Closing
      Date, and except as provided in Section 1.09 hereof; and

            (b)   OTHER UNCOMPLETED CONTRACTS. All of Seller's obligations with
      respect to the uncompleted contracts and commitments being purchased as
      Purchased Assets, other than the Deferred Maintenance Contracts, as listed
      on SCHEDULE 1.03(b) hereto, but not including any obligations arising from
      any breach of any such contract or commitment occurring prior to the
      Closing Date, and except as provided in Section 1.09 hereof.

            Buyer shall not assume any liabilities or obligations of Seller
except as specifically assumed by Buyer pursuant to the provisions of this
Section 1.03, 8.03, 9.01 and 9.02 and Seller and Principal Stockholders agree to
jointly and severally indemnify and hold harmless Buyer with respect to any such
non-assumed liabilities and obligations in the manner provided in Section
10.05(a) hereof.

            1.04  RETAINED LIABILITIES. Notwithstanding the foregoing, the
Assumed Liabilities shall not include (i) tax liabilities of Seller arising
prior to the Closing Date and (ii) any liabilities or obligations arising out
of, resulting from, or relating to claims, whether founded upon negligence,
breach of warranty, strict liability in tort or any other similar legal theory,
seeking compensation or recovery for or relating to injury to person or damage
to property arising out of or related to a defect or alleged defect of, or
otherwise related to, any product made or sold by Seller or any predecessor of
Seller on or prior to the Closing Date; and (iii) any liabilities or obligations
arising out of, resulting from, or relating to claims of infringement or other
misappropriation of intellectual property rights of third parties with respect
to the manufacture, use and sale of products by Seller or any predecessor of
Seller on or prior to the Closing Date; and (iv) any liabilities or obligations
arising out of, resulting from or relating to any litigation, proceedings,
actions, arbitrations, claims or investigations at law or in equity or by or
before any governmental agency pending or threatened against Seller as of the
Closing Date; and (v) Environmental Claims (as defined in Section 3.20); and
(vi) any liabilities or obligations of Seller, or any consolidated group of
which Seller is a member, for any foreign, Federal, state or local income,
franchise, gross receipts, property, sales, use or value added taxes or any
interest, additions to tax or penalties thereon, accrued for or applicable to
Seller on or prior to the Closing Date; (vii) any liabilities or obligations
arising prior to the Closing with respect to the Transferred Employees (as
defined in Section 8.01 hereinbelow), including, without limitation, all
obligations for salary, benefits and other compensation which accrue prior to
the Closing, and (viii) any other liabilities (collectively, the "Retained
Liabilities").

                                     - 11 -

            1.05  PURCHASE PRICE.

            (a)   PAYMENT. Buyer, in consideration for the purchase of the
      Purchased Assets being sold pursuant to this Agreement, agrees to pay and
      deliver to Seller:

                  (i)   PURCHASE PRICE. U.S. $1,100,000 (the "Purchase Price")
      that shall be paid at the Closing as follows: (y) cash in the amount of
      U.S. $910,000 (the "Closing Payment") representing U.S. $950,000 minus
      U.S. $40,000 relating to the estimated actual cost of fulfilling the
      Deferred Maintenance Contracts listed on SCHEDULE 1.03(a) being assumed by
      Buyer. Such amount being deducted has been calculated based on the
      assumption that the cost of fulfilling the Deferred Maintenance Contracts
      is equal to 10% of the collected but unearned revenue in the amount of
      $400,000 under the Deferred Maintenance Contracts. The Closing Payment
      shall be paid in immediately available Federal Funds by wire transfer to
      the bank account of Seller designated by Seller in writing not less than
      two (2) days before the Closing (the "Seller Bank Account") and (z) cash
      in the amount of U.S. $150,000 (the "Initial Escrow Amount") in
      immediately available Federal Funds to an escrow account of Carter Ledyard
      & Milburn LLP, counsel to Buyer (the "Escrow Account"), to be held in
      accordance with the terms of Section 1.07 hereof and pursuant to the terms
      of the Escrow Agreement in the form of EXHIBIT A hereto (the "Escrow
      Agreement"). Of the Initial Escrow Amount, (A) $100,000 shall be available
      to satisfy any Working Capital Claim, as defined and in accordance with
      Section 1.07(a)(i) hereof; and (B) $50,000 shall be held to satisfy any
      Indemnification Claim and Deferred Maintenance Claim, as defined and in
      accordance with Section 1.07(a)(ii) hereof. The undistributed portion of
      the Initial Escrow Amount held in the Escrow Account pursuant to the
      Escrow Agreement and any funds transferred to the Escrow Account in
      accordance with Section 1.05(a)(ii) hereof are herein called the "Escrow
      Funds"; and

                                     - 12 -

                  (ii)  CONTINGENT PAYMENT.

                        (w)   A percentage of the revenues (as recognized in
      accordance with U.S. GAAP, as defined below) generated by the Buyer during
      the twelve (12) month period following the Closing (the "Contingent
      Payment Period"), as reflected in Buyer's unaudited financial statements
      covering the Contingent Payment Period that shall be prepared in
      accordance with U.S. GAAP (the "Revenues"), as follows: (w) 100% of the
      Revenues between $1.1 million and $1.7 million; plus (x) 50% of the
      Revenues between $1.7 million and $2.0 million; plus (y) 20% of the
      Revenues over $2 million (collectively, the "Contingent Payment");
      PROVIDED, HOWEVER, that if the employment of Donald Simons with Buyer is
      terminated by Buyer other than for Cause (as such term is defined in the
      employment offer letter to be executed at Closing by and between the Buyer
      and Don Simons) prior to the end of the Contingent Payment Period, the
      Contingent Payment shall be calculated based on the greater of (i) the
      Revenues generated by the Buyer during the Contingent Payment Period and
      (ii) the revenues recognized by the Buyer (in accordance with U.S. GAAP)
      during the period prior to the termination by Buyer of its employment
      relationship with Donald Simons annualized for the entire Contingent
      Payment Period. No later than three (3) months following the Contingent
      Payment Period (the "Initial Contingent Payment Date"), Buyer shall pay
      and deliver to Seller, by wire transfer to the Seller Bank Account, such
      part of the Contingent Payment payable on the Revenues recognized during
      the Contingent Payment Period that have been collected by Buyer during the
      Contingent Payment Period, as shall be reflected in such financial
      statements (the "Initial Contingent Payment"). Within one month of the end
      of each calendar quarter following the Initial Contingent Payment Date
      (each a "Subsequent Contingent Payment Date"), Buyer shall deliver to
      Seller such part of the Contingent Payment payable on the Revenues
      recognized during the Contingent Payment Period that have been collected
      by Buyer during each such calendar quarter (each a "Subsequent Contingent
      Payment"), by wire transfer to the Seller Bank Account, until all of the
      Revenues have been collected or written-off, as shall be reflected in
      Buyer's unaudited financial statements covering such quarter prepared in
      accordance with generally accepted accounting principles in the United
      States ("U.S. GAAP"). The first Subsequent Contingent Payment shall also
      include such part of the Contingent Payment payable on the Revenues
      recognized during the Contingent Payment Period that have been collected
      by Buyer during the three (3) month period following the Contingent
      Payment Period.

                        Notwithstanding the foregoing, in the event that prior
      to or on the Initial Contingent Payment Date any Indemnification Claim or
      Deferred Maintenance Claim, as such terms are defined in Section
      1.07(a)(ii) hereof, has been asserted by Buyer but not satisfied prior to
      or on the Initial Contingent Payment Date or any Subsequent Contingent
      Payment Date, and any such claim exceeds, per claim or together with any
      other claims, the Indemnification Escrow Funds (as such terms is defined
      in Section 1.07(a)(ii) hereof) on the Initial Contingent Payment Date or
      any Subsequent Contingent Payment Date, Buyer shall be entitled to
      transfer the Initial Contingent Payment or Subsequent Contingent Payment,
      as applicable, to the Escrow Account, in whole in or part in order to be
      available to satisfy any such claim, which funds thereafter shall be
      deemed to be Indemnification Escrow Funds, as defined in Section
      1.07(a)(ii) hereof, and shall be held in accordance with the terms of
      Section 1.07(a)(ii) hereof and the Escrow Agreement, and any balance of
      such amounts shall be transferred by Buyer to Seller on the Initial
      Contingent Payment Date or any Subsequent Contingent Payment Date.

                                     - 13 -

                  (x)   For the purpose of calculation of the Contingent
                        Payment:

                        (i) Should Buyer sell Seller's products to its
            affiliates and/or its own customers, such sales, for the purpose of
            determining Revenues shall be calculated at Buyer's current standard
            marketing discounts, if any, without any consideration for internal
            discounts or other mark-downs.

                        (ii) Revenues shall also include the revenues from
            Buyer's sales of its affiliates products to either new customers or
            existing customers of Buyer or such affiliate.

                  (y)   Within the six (6) month period after the end of the
      Initial Contingent Date, Seller shall have the right, at its sole cost and
      expense, at Buyer's headquarters and during Buyer's regular business
      hours, and upon at least fifteen (15) business days prior written notice,
      to audit all records (including, without limitation, financial, accounting
      and contractual records) directly related to confirming the accuracy of
      the Contingent Payment. If Buyer's headquarters are not in Glendale,
      California, Buyer shall make such records available to Seller at an
      alternative location in Glendale, California. Seller must make any claim
      against Buyer within the earlier of thirty (30) days after Seller's
      auditor leaves Buyer's offices otherwise, Seller will be deemed to have
      forever and conclusively waived its right, whether known or unknown, to
      any Contingent Payment other than the amounts reflected in the Buyer's
      records. If Seller disputes the accuracy of the Contingent Payment
      reflected in the Buyer's records, Seller's auditor, and the regular
      auditors of Buyer, shall meet within thirty (30) days after Buyer's
      auditors have presented their initial findings, and at such meeting they
      shall seek to resolve any differences of opinion. If such differences
      cannot be resolved within thirty (30) days of their first meeting, the
      dispute shall be settled by an independent auditor selected by the Buyer
      and Seller, and the decision of such independent auditor shall be
      conclusive and binding on Buyer and Seller. All fees and expenses of such
      independent accountant shall be borne by the non-prevailing party.

            (b)   ASSUMPTION OF OBLIGATIONS. At the Closing, Buyer shall deliver
      to Seller an instrument in the form of EXHIBIT B hereto by which Buyer
      shall assume and agree to perform and discharge the Assumed Liabilities.

            1.06  ALLOCATION OF THE PURCHASE PRICE. Seller and Buyer agree to
allocate the purchase price for the Purchased Assets in the manner set forth on
SCHEDULE 1.06 hereto, which shall be prepared in accordance with the rules under
Section 1060 of the Internal Revenue Code of 1986, and the Treasury Regulations
promulgated thereunder, which allocation the parties shall adhere to for the
purposes of all Federal, state and local tax returns filed by them subsequent to
the Closing, including the determination by Seller of taxable gain or loss on
the sale of the Purchased Assets hereunder and the determination by Buyer of its
tax basis with respect to the Purchased Assets.

                                     - 14 -

            1.07  ESCROW.

            (a)   The Escrow Funds shall be distributed from the Escrow Account
      as follows:

                        (i)   WORKING CAPITAL ESCROW FUNDS.

                              (y)   up to $100,000 (the "Working Capital Escrow
      Funds") during the period beginning ninety (90) days after the Closing and
      ending one hundred and twenty (120) days after the Closing to Buyer,

                                    (A)   (1) if and to the extent that the
      working capital position of the Business is negative at Closing, and (2)
      if and to the extent that the negative working capital position of the
      Business at Closing further declines as of the end of the ninety (90) day
      period following the Closing; or

                                    (B)   if the working capital position of the
      Business purchased by Buyer from Seller is positive or zero at the
      Closing, to extent that the working capital position of the Business is
      negative as of the end of the ninety (90) day period following the
      Closing;

      as reflected in Buyer's unaudited financial statements covering such
      ninety (90) day period that shall be prepared in accordance with U.S. GAAP
      (a "Working Capital Claim"). For this purpose "working capital" shall mean
      current assets minus current liabilities and excluding the Deferred
      Maintenance Contracts and any capital contributions or loans made to
      Buyer; and

                              (z)   one hundred and twenty (120) days after the
      Closing, to Seller, any balance of the Working Capital Escrow Funds minus
      the amount of a Working Capital Claim which has been asserted by Buyer but
      not satisfied (and upon resolution of such Working Capital Claim pursuant
      to Section 1.07(c), the agreed or resolved amount with respect of such
      Working Capital Claim shall be distributed to Buyer and the remainder of
      any Working Capital Escrow Funds shall be distributed to Seller).

                        Notwithstanding the foregoing, during the ninety (90)
      day period following the Closing, Buyer may, at its sole discretion, upon
      written request to the escrow agent, receive such funds from the Working
      Capital Escrow Funds to fund the working capital of the Business during
      such period. If Buyer has drawn funds from the Working Capital Escrow
      Funds as aforesaid, Buyer shall, within fifteen (15) days following the
      end of such ninety (90) day period, calculate the working capital of the
      Business as of the end of the ninety (90) day period following the Closing
      and shall redeposit in the Escrow Account such funds previously drawn by
      Buyer to the extent that they would not be subject to a Working Capital
      Escrow Claim. Such redeposited amounts shall thereafter be deemed to be
      Working Capital Escrow Funds and shall be held in accordance with the
      terms of this Section 1.07(a)(i) and the Escrow Agreement. For the
      avoidance of doubt, the right of Buyer under this paragraph to withdraw
      funds from the Working Capital Escrow Funds shall not derogate from the
      right of Buyer under the preceding paragraph to receive Working Capital
      Escrow Funds if and to extent that the working capital of the Business
      purchased by Buyer from Seller is negative at Closing. During the ninety
      (90) day period following the Closing, Buyer will operate the Business of
      Seller in a manner consistent with the operation of the Business by Seller
      prior to Closing.

                                     - 15 -

                        (ii)  INDEMNIFICATION ESCROW FUNDS

                              (y)   up to $50,000 plus any part of the Initial
      Contingent Payment or any Subsequent Contingent Payment transferred to the
      Escrow Account pursuant to Section 1.05(a)(ii) hereof (the
      "Indemnification Escrow Funds"),

                                    (A)   from time to time, to Buyer as
      requested by Buyer (if agreed by Seller and Principal Stockholders or
      resolved pursuant to Section 1.07(c) below) to satisfy a claim for
      indemnification under Section 10.05(a) of this Agreement (an
      "Indemnification Claim") and

                                    (B)   to Buyer as requested by Buyer (if
      agreed by Seller and Principal Stockholders or resolved pursuant to
      Section 1.07(c) below) if and to the extent that the actual cost of
      fulfilling the Deferred Maintenance Contracts listed on SCHEDULE 1.03(a)
      being assumed by Buyer exceeds $40,000 during the twelve (12) month period
      following the Closing;

      as reflected in Buyer's unaudited financial statements covering such
      twelve (12) month period that shall be prepared in accordance with U.S.
      GAAP (a "Deferred Maintenance Claim"); and

                              (z)   fifteen (15) months after the Closing, to
      Seller, any balance of the Indemnification Escrow Funds minus the amount
      of any Indemnification Claim or Deferred Maintenance Claim which has been
      asserted by Buyer but not satisfied (and upon resolution of any such
      Indemnification Claim or Deferred Maintenance Claim pursuant to Section
      1.07(c), the agreed or resolved amount with respect of such
      Indemnification Claim or Deferred Maintenance Claim shall be distributed
      to Buyer, and when no unsettled or unresolved Indemnification Claims or
      Deferred Maintenance Claims remain, the remainder of any Indemnification
      Escrow Funds shall be distributed to Seller).

                        Notwithstanding the foregoing, if and to the extent that
      the actual cost of fulfilling the Deferred Maintenance Contracts listed on
      SCHEDULE 1.03(a) being assumed by Buyer is less than $40,000 during the
      twelve (12) month period following the Closing, as reflected in Buyer's
      unaudited financial statements covering such twelve (12) month period that
      shall be prepared in accordance with U.S. GAAP, Buyer shall remit to
      Seller such difference within three (3) months following such twelve (12)
      month period.

                                     - 16 -

                  Hereinafter "Escrow Claim" shall mean any Working Capital
Claim, Indemnification Claim or Deferred Maintenance Claim.

            (b)   Buyer shall send Escrow Claim concurrently to Seller and
Principal Stockholders.

            (c)   OBJECTIONS.

                  (i)   Notwithstanding anything contained in Sections
      1.07(a)(i) and 1.07(a)(ii), Seller shall have thirty (30) days from the
      date an Escrow Claim is given to Seller to object in writing to all or
      part of an Escrow Claim (a "Notice of Claim Dispute"). Copies of each
      Notice of Claim Dispute shall be sent by Seller. If Buyer and Seller fail
      to resolve any objection contained in such Notice of Claim Dispute within
      ten (10) days after the date the Notice of Claim Dispute is delivered to
      Buyer, then, at the request of either party, Buyer and Seller shall meet
      in an attempt to resolve the objection described in such Notice of Claim
      Dispute and reach a written agreement with respect to such objection (a
      "Claim Settlement Agreement").

                  (ii)  If Buyer and Seller enter into a Claim Settlement
      Agreement, the objections contained in such Notice of Claim Dispute shall
      be deemed to be as resolved therein. If Buyer and Seller are unable to
      resolve the objection described in such Notice of Claim Dispute within
      twenty (20) days after delivery to Buyer of such Notice of Claim Dispute,
      then either of Buyer or Seller may submit the objections contained in such
      Notice of Claim Dispute to arbitration as contemplated by Section 11.05
      hereof.

            1.08  ABSOLUTE SALE. Seller agrees that the sale, conveyance,
transfer and delivery of the Purchased Assets to Buyer shall be free and clear
of all title defects, liabilities, obligations, liens, encumbrances, charges and
claims of any kind, except any liabilities and obligations expressly assumed by
Buyer pursuant to Section 1.03 hereof and the title exceptions listed in
SCHEDULE 3.08 hereto.

            1.09  OTHER CONTRACTS. This Agreement shall not constitute an
agreement to assign or sublicense, as the case may be, any contracts, leases,
licenses, agreements or arrangements (for purposes of this Section 1.08
collectively called "contracts") if such attempted assignment or sublicense,
without the consent of the other party thereto, is not permitted as a matter of
law or in accordance with the terms of such contracts or would constitute a
breach of such contracts or would in any way impair the rights of Seller or
Buyer thereunder. Seller will use its best efforts to obtain, or will assist
Buyer to obtain, such consents as may be necessary or appropriate to vest in
Buyer all of Seller's right, title and interest in all such contracts. If such
consent is not obtained or if an assignment, attempted assignment or sublicense
is not so permitted or would be ineffective or would impair Buyer's rights
thereunder, Seller will cooperate with Buyer in any reasonable arrangement
designed to provide for Buyer the benefits under any such contracts.

                                     - 17 -

            1.10  BULK SALES LAWS. Seller and Buyer hereby waive compliance with
the provisions of any applicable bulk sales laws; PROVIDED, HOWEVER, that Seller
and Principal Stockholders agree to jointly and severally pay and discharge when
due or to contest or litigate all claims of creditors which are asserted against
Buyer or the Purchased Assets by reason of such noncompliance, to jointly and
severally indemnify, defend and hold harmless Buyer from and against any and all
such claims in the manner provided in Section 10.06(a) hereof, and to take
promptly all necessary action to remove any lien or encumbrance which is placed
on the Purchased Assets by reason of such noncompliance.

                  1.11  CONSIGNMENT INVENTORY. SCHEDULE 1.11 lists all inventory
held by Seller on consignment ("Consigned Inventory"). SCHEDULE 1.11 also lists
the party on whose behalf the Consigned Inventory is held and the terms and
conditions relating thereto. Before the Closing, Seller shall have delivered to
Buyer all written agreements relating to the Consigned Inventory and summarized
all material terms of any oral agreement relating to the Consigned Inventory on
SCHEDULE 1.11. At the Closing, Buyer shall take possession of the Consigned
Inventory and will, upon sale of any Consigned Inventory, act in accordance with
the terms, conditions and agreements delivered to Buyer and contained on
SCHEDULE 1.11.

                                   ARTICLE II

                               RELATED AGREEMENTS

                  Simultaneously with the Closing hereunder the following
agreements (the "Related Agreements") shall be executed and delivered:

                  2.01  ESCROW AGREEMENT. Escrow Agreement substantially in the
form attached as EXHIBIT A;

                  2.02  ASSIGNMENT AND ASSUMPTION OF LIABILITIES. Assignment and
Assumption of Liabilities Agreement substantially in the form attached as
EXHIBIT B;

                  2.03  BILL OF SALE. Bill of Sale substantially in the form
attached as EXHIBIT C;

                  2.04  ASSIGNMENT OF INTELLECTUAL PROPERTY RIGHTS. Assignment
Agreement for Trademarks, Patents and Copyrights substantially in the form
attached as EXHIBIT D;

                  2.05  LEASE OF REAL PROPERTY. Assignment of Lease Agreement
for the premises of the Seller substantially in the form of EXHIBIT E;

                  2.06  EMPLOYEE EMPLOYMENT AGREEMENTS. Employment Agreements
substantially in the forms attached as EXHIBIT F(i) (for Donald Simons), EXHIBIT
F(ii) (for Karen Ritz) and EXHIBIT F(iii) (for all other employees), with the
individuals listed on SCHEDULE 2.06 hereto;

                                     - 18 -

                  2.07  ASSIGNMENT OF DOMAIN NAMES. Domain Names Assignment
Agreement substantially in the form attached as EXHIBIT G.

                  2.08  CONSULTING AGREEMENT. Consulting Agreement substantially
in the form attached as EXHIBIT H.

                                   ARTICLE III

               REPRESENTATIONS AND WARRANTIES OF SELLER PRINCIPALS

                  Seller Principals jointly and severally represent and warrant
to, and covenant with, Buyer that as of the date hereof and as of the Closing
Date:

                  3.01  ORGANIZATION AND GOOD STANDING. Seller is a corporation
duly organized, validly existing and in good standing under the laws of the
State of California, and has the corporate power and authority to own and
operate its properties and assets (including the Purchased Assets) and to
conduct its business as it is now being conducted. Seller is duly qualified to
do business in all other jurisdictions in which Seller owns, leases or operates
property or otherwise conducts Seller's business if the failure to be qualified
would have a material adverse effect on Seller's ability to conduct business
using the Purchased Assets.

                  3.02  AUTHORIZATION, COMPLIANCE WITH OTHER INSTRUMENTS AND
LAW. Seller has full corporate power and authority to enter into this Agreement
and the other agreements and documents to be executed and delivered by it at
Closing as contemplated hereby, including, without limitation, the Related
Agreements (collectively, the "Closing Documents"), to consummate the
transactions contemplated hereby and thereby and to perform its obligations
hereunder and thereunder. The execution, delivery and performance of this
Agreement and the Closing Documents and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
corporate action on the part of the shareholders and board of directors of
Seller. This Agreement has been duly executed and delivered by Seller, and is a
valid and binding obligation of Seller enforceable against Seller in accordance
with its terms and the Closing Documents and will, when executed and delivered
by Seller at Closing, constitute valid and binding obligations of Seller
enforceable against Seller in accordance with their terms. The execution,
delivery and performance of this Agreement and the Closing Documents will not
(i) conflict with or result in a breach or violation of any provision of the
Certificate of Incorporation or By-Laws of Seller or of any order, writ,
injunction, judgment, decree, law, statute, rule or regulation to which Seller
is a party or by which Seller or the Purchased Assets may be bound or affected;
or (ii) except as set forth in SCHEDULE 3.02, result in a default (or give rise
to any right of termination, cancellation or acceleration) or result in the
creation of any lien, encumbrance, security agreement, charge, pledge, equity or
other claim or right of any person in or to the Purchased Assets under the
terms, conditions or provisions of any note, bond, mortgage, indenture, license,
agreement or other instrument or obligation to which Seller is a party or by
which Seller or the Purchased Assets may be bound. All necessary authorizations
of the transactions contemplated by this Agreement required to be obtained by
Seller from any Federal, state, local or foreign government or agency shall have
been obtained prior to the Closing, and any filings, notifications or
disclosures required by law or regulation of any such government or agency shall
have been made in such form as is acceptable as filed. Buyer shall cooperate
with Seller with respect to the aforesaid filings, notifications or disclosures
to the extent necessary to obtain said authorizations. Seller will deliver to
Buyer at the Closing true and complete copies of all resolutions of its
shareholders, if required, and board of directors by which the execution,
delivery and performance of this Agreement and the Closing Documents and the
consummation of the transactions contemplated hereby and thereby were
authorized, certified by its respective Secretary or Assistant Secretary as of
the Closing Date.

                                     - 19 -

                  3.03  FINANCIAL STATEMENTS.

                  (a)   Seller has previously furnished to Buyer true and
      correct copies of (i) the unaudited balance sheets of Seller as at
      December 31, 2004 and 2005; (ii) the unaudited income statements of Seller
      and statements of stockholder's equity and cash flow for the fiscal years
      ended December 31, 2004 and 2005; (iii) unaudited balance sheet as of
      March 31, 2006 and the related statements of income, stockholders' equity
      and cash flow for the three month period then ended (collectively, the
      "Financial Statements"). The Financial Statements have been prepared on a
      cash basis and are not in conformity with U.S. GAAP. The balance sheets
      included in the Financial Statements (including the related notes thereto)
      are true, complete and correct and present fairly the financial position
      of Seller as of their respective dates, and the related income statements
      included in the Financial Statements are true, complete and correct and
      present fairly the results of operations of Seller for the periods then
      ended, and all have been prepared on a consistent basis.

                  (b)   Seller has no liabilities or obligations (whether
      absolute, accrued, contingent or otherwise, and whether due or to become
      due) related to the Business which are not fully reflected or reserved
      against in the Financial Statements except those which have been incurred
      in the ordinary course of business of Seller since the date of the
      Financial Statements (all of which will, unless satisfied on or prior to
      the Closing Date, constitute Retained Liabilities).

                  3.04  OPERATION OF SELLER IN THE ORDINARY COURSE.

                  (a)   Since the close of business on March 31, 2006, Seller's
      Business has been operated, and through the Closing Date will have been
      operated, in the ordinary course, except to the extent that Buyer has
      otherwise agreed (or may prior to the Closing Date otherwise agree) in
      writing or as is expressly contemplated by this Agreement. From the date
      hereof until the Closing Date, Seller shall continue to use its best
      efforts to preserve the goodwill of Seller's Business and its relationship
      with employees, customers and suppliers.

                                     - 20 -

                  (b)   In furtherance of the foregoing, since March 31, 2006,
      Seller has not (a) incurred any obligations or liabilities, whether
      absolute, accrued, contingent or other, other than obligations and
      liabilities incurred in the ordinary course of business, (b) mortgaged,
      pledged or subjected to any lien, lease, security interest or other
      encumbrance (other than liens for taxes, assessments or other governmental
      charges not yet due and payable, or presently payable without penalty or
      interest) any of its assets, real or personal, tangible or intangible, (c)
      acquired or disposed of any assets or properties, or entered into any
      agreement for any such acquisition or disposition, except in the ordinary
      course of business, (d) declared, made, paid or set apart any cash for any
      dividend or other distribution to its shareholders, or purchased or
      redeemed any shares of its capital stock or granted any option, warrant or
      right to purchase any such capital stock, (e) forgiven or canceled any
      debts or claims other than in the ordinary course of business or waived
      any rights of material value not previously accrued for, (f) granted any
      increase in compensation in any form to any officer, salaried employee or
      any class of other employees, or granted any severance or termination pay,
      or entered into any employment agreement, or any modification of a
      previously existing employment agreement, with any officer or any other
      salaried employee, other than increases in compensation of less than 10%
      (ten percent) granted in the ordinary course of business consistent with
      prior practice to employees whose base pay at the time of such increase
      was less than $10,000, (g) adopted, amended or entered into any collective
      bargaining, bonus, profit sharing, compensation, stock option, pension,
      retirement, deferred compensation or other plan, agreement or arrangement
      for the benefit of employees, (h) granted any rights or licenses under or
      to any of its patents, trademarks, trade names, copyrights, domain names
      or other intellectual property rights, (i) suffered any loss of, or
      material adverse change in its relationship with, any supplier or customer
      or has knowledge that any such supplier or customer intends any action
      which would constitute or lead to such a loss or material adverse change,
      (j) suffered any damage, destruction or loss (whether or not covered by
      insurance) which has a material adverse effect on its business, (k)
      suffered any strike or other labor trouble which has had a material
      adverse effect on its operations, (l) terminated or made any substantial
      revision of, or engaged in any renegotiation of, any material contract,
      (m) decreased the level of maintenance on, or its expenditures for
      maintenance of, the real property, machinery, equipment, tools, furniture
      and fixtures owned or leased by it, (n) made any change in accounting
      principles or methods or in classification, depreciation or amortization
      policies or rates, (o) settled any dispute involving payment by the Seller
      in excess of $5,000, (p) made any loan or advance in excess of $5,000 to
      any person or entity other than travel or expense advances in accordance
      with its normal policies which have been accounted for or repaid and
      extension of trade credit in accordance with its normal business
      practices, or (q) entered into any material transaction other than in the
      ordinary course of business.

                  3.05  TAX MATTERS. Other than as disclosed on SCHEDULE 3.05,
there is no tax obligation of Seller which constitutes, or may in the future
constitute, a lien on the Purchased Assets, and if any such lien exists or
arises, it will be promptly discharged by Seller. The Seller has withheld and
paid any and all taxes required to have been withheld and paid in connection
with amounts paid or owing to any employee, independent contractor, creditor,
stockholder, or other third party.

                                     - 21 -

                  3.06  MATERIAL CONTRACTS AND COMMITMENTS. SCHEDULE 1.01(c)(z)
hereto constitutes a full and complete list, as of the date hereof, of all
contracts and commitments of Seller related to the Business involving aggregate
rights or obligations of Seller in excess of $5,000 per contract or which have a
remaining term, as of the date hereof, of over six months in length of
obligation on the part of Seller ("Material Contracts"). Except as indicated on
SCHEDULE 1.01(c)(z), Seller is not in breach or violation of, or in default
under any of the Material Contracts; the execution of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
default or breach under the Material Contracts; and, except as specifically
indicated in SCHEDULE 1.01(c)(z), the execution of this Agreement and the
consummation of the transactions contemplated hereby will not give rise to any
consent requirement under any of the Material Contracts. All of the contracts
listed on SCHEDULE 1.01(c)(z) are in full force and effect and have not been
modified or amended, except as set forth on SCHEDULE 1.01(c)(z).

                  3.07  LICENSES, PERMITS AND AUTHORIZATIONS. Seller has
obtained, and will as of the Closing Date continue to have, all material
approvals, authorizations, consents, licenses, franchises, orders, certificates
and other permits of, and has made and will have made on the Closing Date all
filings with, any governmental authority, whether foreign, Federal, state or
local, which are required for the ownership of the Purchased Assets or the
conduct of Seller's Business as presently conducted. A complete list of all such
approvals, authorizations, consents, licenses, franchises, orders, certificates,
permits and filings is included as SCHEDULE 3.07 hereto.

                  3.08  TITLE TO PURCHASED ASSETS. Seller has good title to the
Purchased Assets and shall at the Closing deliver to Buyer good title to the
Purchased Assets free and clear of all title defects, liabilities, obligations,
liens, mortgages, security interests, encumbrances, easements, claims or similar
adverse interests of any kind or character except (i) any Assumed Liabilities
expressly assumed by Buyer pursuant to Section 1.03 hereof, and (ii) the title
exceptions listed on SCHEDULE 3.08 hereto. All leases pursuant to which Seller
leases any of the Purchased Assets are valid and binding in accordance with
their respective terms.

                  3.09  TRANSFERRED INTELLECTUAL PROPERTY. Except as set forth
in SCHEDULE 1.01(d), to the knowledge of Seller and Principal Stockholders and
only insofar as they relate to the Business:

                  (a)   Seller owns or has the right to use pursuant to license,
      sublicense, public domain, agreement, or permission the following
      intellectual property (the "Transferred Intellectual Property"): (i) all
      trademarks, service marks, trade dress, logos, trade names, and corporate
      names, including all goodwill associated therewith, and all applications
      registrations, and renewals in connection therewith, (ii) all trade
      secrets and confidential business information (including protocols, ideas,
      research and development, know-how, formulas, compositions, manufacturing
      and production processes and techniques, technical data, designs,
      drawings, specifications, customer and supplier lists, pricing and cost
      information, and business and marketing plans and proposals), (iii) all
      other proprietary rights, and (iv) all copies and tangible embodiments
      thereof (in whatever form or medium).

                                     - 22 -

                  (b)   Seller has not knowingly interfered with, infringed
      upon, misappropriated, or otherwise come into conflict with any
      intellectual property rights of third parties, and none of Seller's
      officers have ever received any charge, complaint, claim, demand, or
      notice alleging any such interference, infringement, misappropriation, or
      violation, including any claim that Seller must license or refrain from
      using any intellectual property rights of any third party. To the
      knowledge of Seller, no third party has interfered with, infringed upon,
      or misappropriated in any material respect any intellectual property
      rights of Seller.

                  (c)   SCHEDULE 1.01(d) identifies each patent or registration
      which has been issued to Seller with respect to any of the Transferred
      Intellectual Property, identifies each pending patent application or
      application for registration which Seller has made with respect to any of
      the Transferred Intellectual Property, and identifies each material
      license, agreement, or other permission which Seller has granted to any
      third party with respect to any of the Transferred Intellectual Property
      outside the ordinary course of business. SCHEDULE 1.01(d) also identifies
      each registered trade name or registered trademark used by Seller with
      respect to the Transferred Intellectual Property and identifies each
      pending trademark application filed with respect to the Transferred
      Intellectual Property. Except as set forth on the SCHEDULE 1.01(d) to
      Seller's knowledge with respect to each such item of Transferred
      Intellectual Property required to be identified in SCHEDULE 1.01(d):

                        (i)   Seller possesses all rights, title, and interest
      in and to the item, free and clear of any security interest, license or
      other restriction;

                        (ii)  the item is not subject to any outstanding
      injunction, judgment, order, decree, ruling or charge; and

                        (iii) no action, suit, proceeding, hearing,
      investigation, charge, complaint, claim, or demand is pending or, to the
      knowledge of Seller, is threatened which challenges the legality,
      validity, enforceability, use or ownership of the item.

                  (d)   SCHEDULE 1.01(d) identifies each item of Transferred
      Intellectual Property that any third party owns and that Seller uses
      pursuant to license, sublicense, agreement, or permission. Seller has
      delivered or made available at its offices to Buyer correct and complete
      copies of all such licenses, sublicenses, agreements, and permissions (as
      amended to date). Except as set forth on SCHEDULE 1.01(d), to Seller's
      knowledge with respect to each such item of Transferred Intellectual
      Property:

                        (i)   the license, sublicense, agreement, or permission
      covering the item is, to Seller's knowledge, legal, valid, binding,
      enforceable, and in full force and effect;

                                     - 23 -

                        (ii)  the license, sublicense, agreement, or permission
      will continue to be legal, valid, binding, enforceable, and in full force
      and effect on identical terms and to the same extent following the
      consummation of the transactions contemplated hereby;

                        (iii) no party to the license, sublicense, agreement, or
      permission is in breach or default, and no event has occurred which with
      notice or lapse of time would constitute a breach or default or permit
      termination, modification, or acceleration thereunder;

                        (iv)  no party to the license, sublicense, agreement, or
      permission has repudiated any provision thereof; and

                        (v)   Seller has not granted any sublicense or similar
      right with respect to the license, sublicense, agreement, or permission.

                  (e)   Seller is not aware that any of the Transferred
      Employees (as defined in Section 8.01 hereinbelow) is obligated under any
      contract (including licenses, covenants or commitments of any nature) or
      other agreement, or subject to any judgment, decree or order of any court
      or administrative agency, that would conflict with the Business.

                  3.10  EMPLOYEE BENEFIT PLANS.

                  (a)   SCHEDULE 3.10 contains a description of all employee
      benefit plans, policies, practices and arrangements (including, without
      limitation, those within the meaning of Section 3(3) of the Employee
      Retirement Income Security Act of 1974, as amended) of Seller which have
      been applicable at any time to any of the Seller's employees (as defined
      below) (each an "Employee Plan" and collectively, the "Employee Plans"),
      including, without limitation, retirement, disability, sick leave,
      medical, dental and other health insurance, life insurance, separation,
      stock options, deferred compensation and vacation. All of the Employee
      Plans are and have at all times been in material compliance with and have
      been administered in material accordance with all applicable laws.

                  (b)   There is no pending or, to the best of Seller's
      knowledge, threatened legal action, arbitration or other proceeding or
      investigation against Seller or any Employee Plan with respect to any
      Employee Plan, other than routine claims for benefits, which could result
      in liability to any such Employee Plan, Seller or Buyer, and there is no
      reasonable basis for any such legal action or proceeding.

                  (c)   The execution and delivery of this Agreement and the
      consummation of the transactions contemplated hereby will not result in
      payment (either of severance pay or otherwise) becoming due from any of
      the Employee Plans, Seller or Buyer to any current or former employee or
      self-employed individual, and will not result in the payment, vesting,
      acceleration or increase of any benefit payable under any Employee Plan to
      any current or former employee or self-employed individual.

                                     - 24 -

                  (d)   There does not exist any liability, obligation or claim
      (other than a routine claim for benefits) resulting from, relating to or
      arising out of any Employee Plan, or any liability, obligation or claim
      (other than a routine claim for benefits) resulting from, relating to or
      arising out of any "employee benefit plan," as defined in Section 3(3) of
      ERISA, maintained by an employer which, with Seller, is considered to be,
      or to be part of, a single employer under Section 414(b), (c), (m) or (o)
      of the Code, including, but not limited to, any liability, obligation or
      claim (other than a routine claim for benefits) in connection with a
      "multi-employer plan" as defined in Section 3(37) of ERISA, or in
      connection with the Consolidated Omnibus Budget Reconciliation Act of 1985
      (COBRA).

                  (e)   All obligations relating to the Employee Plans
      (including, without limitation, payroll taxes and deductions) have been
      satisfied and there are no outstanding defaults or violations by any party
      thereto and no taxes, penalties or fees owing or eligible under any of the
      Employee Plans.

                  3.11  LITIGATION AND OTHER CLAIMS. Except as described in
SCHEDULE 3.11, there are no actions, suits, arbitration proceedings, claims or
other proceedings arising out of or related to the Business of the Seller
pending or, to the knowledge of Seller, threatened before any foreign, Federal,
state, municipal or other court, department, commission, arbitration panel,
board, bureau, agency, body or instrumentality against Seller or affecting the
Purchased Assets at law or in equity. Seller is not a party to or subject to the
provisions of any order, writ, injunction, decree or judgment of any court or
foreign, Federal, state, municipal or other governmental or administrative body,
department, commission, board, bureau, securities exchange or other agency or
instrumentality in connection with the ongoing operations of Seller except as
set forth in SCHEDULE 3.11.

                  3.12  NO MATERIAL ADVERSE CHANGE. Since the close of business
on the date of the Financial Statements, there has been no material adverse
change in the financial condition, results of operations or Business of Seller.

                  3.13  SUFFICIENCY OF PURCHASED ASSETS. The Purchased Assets
are sufficient to operate Seller's Business as currently operated. Seller is not
a party to any contract which is necessary in any material respect to Seller's
Business other than contracts which will be assigned to Buyer at the Closing
hereunder.

                                     - 25 -

            3.14  COMPLIANCE WITH LAWS.

            (a)   Neither the Purchased Assets nor the operations of Seller's
      Business, as conducted at the date hereof and as will be conducted through
      the Closing Date, violate, in any material respect, any foreign, Federal,
      state or local law, ordinance, rule or regulation.

            (b)   Seller is not subject to the regulatory requirements and the
      authority of the Federal Communications Commission.

            3.15  INSURANCE. Seller maintains, and through the Closing Date will
maintain, adequate insurance including self-insurance insuring the Purchased
Assets and the operations of Seller's Business. All policies of insurance of any
kind maintained, owned or held by Seller which cover the Purchased Assets or
Seller's Business are set forth on SCHEDULE 3.15 hereto and such policies are in
full force and effect, all premiums with respect thereto covering all periods up
to and including the Closing Date have been paid, and no notice of cancellation
or termination has been received with respect to any such policy which has not
been replaced on substantially similar terms prior to the date of such
cancellation or termination. The insurance policies to which Seller is a party
which cover the Purchased Assets or Seller's Business are sufficient for
compliance with all requirements of applicable laws and all agreements to which
Seller is a party or by which Seller or the Purchased Assets may be bound. In
the three years preceding the date of this Agreement, Seller has not been
refused any insurance with respect to the Purchased Assets or the operations of
Seller or had its coverage limited by any insurance carrier to which it has
applied for any such insurance or with which it has carried such insurance.

            3.16  INVENTORY. The inventories of the Seller are, as of the most
recent date of the Financial Statements, and as of the Closing Date will be (a)
saleable to customers in the normal course of its business, and (b) not
obsolete, deteriorated, unusable or in excess of customary levels.

            3.17  REAL PROPERTY LEASES. Seller's Real Property Lease, operating
on a month-to-month tenancy, is valid and binding upon the lessor and is in full
force and effect. There are no existing defaults by Seller under the Real
Property Lease and no event has occurred which (whether with or without notice,
lapse of time, or both) would constitute a default thereunder by Seller. Seller
has delivered to Buyer a true and complete copy of the Real Property Lease.

                                     - 26 -

            3.18 LABOR MATTERS. SCHEDULE 3.18 lists the current salaries and
bonuses (together with pending or anticipated increases therein) of each
director, officer, employee, and other remuneration with respect to any
consultant or agent of the Seller currently paid at a rate in excess of $5,000
per year. Except as disclosed on SCHEDULE 3.18, no officer or other key employee
of the Seller has indicated to the Seller or, to the knowledge of the Seller,
has an intention to terminate his or her employment with the Seller. Except as
set forth on SCHEDULE 3.18: (a) Seller is in compliance in all material respects
with all applicable laws respecting employment and employment practices, terms
and conditions of employment and wages and hours, and is not engaged in any
unfair labor practice; (b) there is no unfair labor practice complaint against
Seller pending or threatened with respect to Seller's employees before the
National Labor Relations Board or any other applicable tribunal; (c) there is no
labor strike, dispute, slowdown or stoppage actually pending or, to the best of
Seller's knowledge, threatened against or affecting Seller; (d) Seller has
received no notice that any representation or petition respecting the employees
of Seller has been filed with the National Labor Relations Board or any other
applicable tribunal; (e) no grievance nor any arbitration proceeding arising out
of or under any collective bargaining agreements with respect to Seller's
employees is pending against Seller; and (f) Seller has not experienced any
strike or work stoppage or other industrial dispute involving Seller's employees
in the past five years.

            3.19  CONDITION OF PURCHASED ASSETS. The Purchased Assets are in
good repair and working condition, normal wear and tear excepted, are suited for
the uses currently intended, are in conformity with all applicable laws,
ordinances, rules and regulations and are in good saleable condition, normal
wear and tear excepted.

            3.20  ENVIRONMENTAL MATTERS.

            (a)   Except as set forth in SCHEDULE 3.20 hereto: (i) Seller is in
      compliance in all material respects with all environmental laws,
      regulations, permits and orders applicable to it, and with all laws,
      regulations, permits and orders governing or relating to asbestos removal
      and abatement; (ii) Seller has not transported, stored, treated or
      disposed, or allowed or arranged for any third parties to transport,
      store, treat or dispose, of any Hazardous Substances or other waste to or
      at any location other than a site lawfully permitted to receive such
      Hazardous Substances or other waste for such purposes, or had performed,
      arranged for or allowed by any method or procedure such transportation,
      storage, treatment or disposal in contravention of any laws or
      regulations, nor has Seller disposed of, or allowed or arranged for any
      third parties to dispose of, Hazardous Substances or other waste upon
      property owned or leased by it; (iii) there has not occurred, nor is there
      presently occurring, a Release of any Hazardous Substance on, into or
      beneath the surface of any parcel of real property in which Seller has an
      ownership interest or any leasehold interest; (iv) Seller has not
      transported or disposed of, or allowed or arranged for any third parties
      to transport or dispose of, any Hazardous Substance or other waste to or
      at a site which, pursuant to the U.S. Comprehensive Environmental
      Response, Compensation and Liability Act of 1980, as amended ("CERCLA") or
      any similar law, (A) has been placed on the National Priorities List or
      its state equivalent, or (B) the Environmental Protection Agency or the
      relevant state agency has proposed or is proposing to place on the
      National Priorities List or its state equivalent; (v) Seller has not
      received notice, and has no knowledge of any facts which could give rise
      to any notice, that Seller is a potentially responsible party for a
      Federal or state environmental cleanup site or for corrective action under
      CERCLA or any other applicable law or regulation or notice of any other
      Environmental Claim; (vi) Seller has not received any written or oral
      request for information in connection with any Federal or state
      environmental cleanup site and has not undertaken (or been requested to
      undertake) any response or remedial actions or cleanup actions of any kind
      at the request of any Federal, state or local governmental entity, or at
      the request of any other person or entity; (vii) there are no laws,
      regulations, ordinances, licenses, permits or orders relating to
      environmental or worker safety matters requiring any work, repairs,
      construction or capital expenditures with respect to the assets or
      properties of Seller; and (viii) SCHEDULE 3.20 identifies (w) all
      environmental audits, assessments or occupational health studies
      undertaken by Seller or its agents or by any governmental agencies with
      respect to the operations or properties of Seller; (x) the results of any
      ground water, soil, air or asbestos monitoring undertaken with respect to
      any real property owned or leased by Seller; (y) all written
      communications of Seller with environmental agencies; and (z) all
      citations issued to Seller under the Occupational Safety and Health Act
      (29 U.S.C. Sections 651 ET SEQ.).

                                     - 27 -

            (b)   For the purposes of this Agreement, "Environmental Claim"
      shall mean any demand, claim, governmental notice or threat of litigation
      or the actual institution of any action, suit or proceeding at any time by
      a person other than the parties which asserts that an Environmental
      Condition constitutes a violation of or otherwise may give rise to any
      liability or obligation under, any statute, ordinance, regulation, or
      other governmental requirement or the common law, including, without
      limitation, any such statute, ordinance, regulation, or other governmental
      requirement relating to the emission, discharge, or release of any
      Hazardous Substance into the environment or the generation, treatment,
      storage, transportation, or disposal of any Hazardous Substance.
      "Environmental Condition" shall mean the presence on the Closing Date,
      whether discovered or undiscovered on the Closing Date, in surface water,
      ground water, drinking water supply, land surface, subsurface strata or
      ambient air of any pollutant, contaminant, industrial solid waste or
      Hazardous Substance arising out of or otherwise related to the operations
      or other activities of Seller, or of any predecessor in interest or line
      of business to Seller, conducted or undertaken prior to the Closing Date.
      "Hazardous Substance" shall mean any substance defined in the manner set
      forth in Section 101(14) of the U.S. Comprehensive Environmental Response,
      Compensation and Liability Act of 1980, as amended, and shall include any
      additional substances designated under Section 102(a) thereof. "Release"
      shall mean releasing, spilling, leaking, pumping, pouring, emitting,
      emptying, discharging, injecting, escaping, leaching, dumping or disposing
      into the environment.

            3.21  ABSENCE OF CERTAIN PAYMENTS. The Seller nor any officers,
directors, employees, agents, representatives, or independent contractors of the
Seller has made, or arranged for the making of, any unlawful payment to any
official, officer or employee of any foreign, Federal, state, county, municipal
or other governmental or regulatory body or authority or any self regulatory
body or authority, or made any payment to any customer or supplier of the Seller
or any officer, director, partner, employee or agent of any customer or
supplier, for the unlawful sharing of fees or to any such customer or supplier
or any such officer, director, partner, employee or agent for the unlawful
rebating of charges, or engaged in any other unlawful reciprocal practice, or
made any other unlawful payment or given any other unlawful consideration to any
such customer or supplier or any such officer, director, partner, employee or
agent, in respect of the Seller.

                                     - 28 -

            3.22  FULL DISCLOSURE. All information furnished to Buyer in
accordance herewith is, and as of the Closing Date shall be, correct and
complete in all material respects. No representation or warranty of Seller and
no information, schedule or certificate furnished or to be furnished by or on
behalf of Seller to Buyer, its affiliates or its agents pursuant to or in
connection with this Agreement contains or will contain any untrue statement of
a material fact or omits or will omit to state a material fact necessary in
order to make the statements contained herein or therein not misleading.

                                  ARTICLE IIIA

            REPRESENTATIONS AND WARRANTIES OF PRINCIPAL STOCKHOLDERS

      Each Principal Stockholder hereby represents and warrants to the Buyer,
severally as to itself, and not jointly with the other Principal Stockholders,
as follows:

      3A.1. ORGANIZATION AND GOOD STANDING. If such Principal Stockholder is not
a trust, partnership or a natural person, it is duly incorporated under the laws
of its jurisdiction of incorporation and is validly existing and in good
standing with respect to the filing of annual reports under such laws, and has
all necessary legal and corporate right, authority, power and capacity to own
its property and assets and to carry on its business as presently conducted.

      3A.2. OWNERSHIP OF SECURITIES. Such Principal Stockholder is the sole
registered legal and beneficial owner of the shares of Common Stock of the
Seller designated as being owned by such Principal Stockholder opposite such
Principal Stockholder's name in SCHEDULE 3A.2(i) hereto. Donald Simons and Dale
Zuehls are the sole holders of all of the issued and outstanding shares of the
Principal Stockholder and securities convertible or exercisable into shares of
the Principal Stockholder. Each of Donald Simons and Dale Zuehls is the sole
registered legal and beneficial owner of the shares of the Seller designated as
being owned by such person opposite such person's name in SCHEDULE 3A.2(ii)
hereto.

      3A.3. VALIDITY AND ENFORCEABILITY. This Agreement and any of the Related
Agreements to which such Principal Stockholder is a party have been duly
executed and delivered by such Principal Stockholder and, assuming due
authorization, execution and delivery by Buyer, represent the legal, valid and
binding obligations of such Principal Stockholder, enforceable against such
Principal Stockholder in accordance with their respective terms, subject to the
effect of (a) applicable bankruptcy, insolvency, reorganization, moratorium and
other similar laws in effect relating to the rights of creditors generally, and
(b) rules of law and equity governing specific performance, injunctive relief
and other equitable remedies. No further action on the part of such Principal
Stockholder is or will be required in connection with the transactions
contemplated by this Agreement or any of the Related Agreements to which such
Principal Stockholder is a party.

                                     - 29 -

      3A.4. NO LITIGATION. There are no actions or proceedings outstanding or
pending or threatened against or affecting such Principal Stockholder that would
prevent such Principal Stockholder from (a) executing and delivering this
Agreement or any of the Related Agreements to which such Principal Stockholder
is a party, or (b) performing such Principal Stockholder's obligations pursuant
to, or observing any of the terms and provisions of, this Agreement or any of
the Related Agreements to which such Principal Stockholder is a party.

      3A.5. NO CONFLICT. Neither the execution and delivery of this Agreement or
any of the Related Agreements to which such Principal Stockholder is a party,
nor the performance by such Principal Stockholder of its obligations hereunder
or thereunder will (a) if such Principal Stockholder is not an individual,
conflict with, or result in a violation of or default under (with or without
notice, lapse of time, or both) the memorandum and articles of association or
the bylaws (or equivalent constitutional documents) of such Principal
Stockholder or any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to it, (b) conflict with, or result in a violation of or
default under (with or without notice, lapse of time, or both), or give rise to
a right of termination, cancellation, renegotiation or acceleration of any
obligation or loss of any benefit under, or require consent, approval or waiver
from any person or entity in accordance with the terms of any contract to which
such Principal Stockholder is a party, in each case that would reasonably be
likely to have an adverse effect on the ability of the Principal Stockholder to
perform his, her or its obligations hereunder.

                                   ARTICLE IV

               REPRESENTATIONS, WARRANTIES AND COVENANTS OF BUYER

            Buyer hereby represents and warrants to, and covenants with, Seller
and Principal Stockholders:

            4.01  ORGANIZATION. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, and has
the corporate power and authority to own and operate its properties and assets
and to conduct its business as it is now being conducted. Buyer is duly
qualified to do business in all other jurisdictions in which Buyer owns, leases
or operates property or otherwise conducts Buyer's business if the failure to be
qualified would have a material adverse effect on Buyer's ability to conduct
business using the Purchased Assets.

            4.02  DUE AUTHORIZATION. Buyer has full corporate power and
authority to enter into this Agreement and the Related Agreements and to
consummate the transactions contemplated hereby and thereby and to perform its
obligations hereunder and thereunder. The execution, delivery and performance of
this Agreement and the Related Agreements, and the consummation of the
transactions contemplated hereby and thereby, have been duly authorized by all
necessary corporate action on the part of Buyer. This Agreement has been duly
executed and delivered by Buyer, and is a valid and binding obligation of Buyer
enforceable against Buyer in accordance with its terms. The execution, delivery
and performance of this Agreement and the Related Agreements will not conflict
with or result in a violation of any provision of the Memorandum of Association
and Articles of Association (or similar corporate organizational documents) of
Buyer, or of any material contract by which it is bound, or of any judgment or
decree to which it is a party or by which it is bound. All necessary
authorizations of the transactions contemplated by this Agreement and the
Related Agreements required to be obtained by Buyer from any Federal, state,
local or foreign government or agency shall have been obtained prior to the
Closing, and any filings, notifications or disclosures required by law or
regulations of such government or agency shall have been made in such form as is
acceptable to file. Seller shall cooperate with Buyer with respect to the
aforesaid filings, notifications or disclosures to the extent necessary to
obtain said authorizations. Buyer will deliver to Seller at the Closing true and
complete copies of all resolutions of its board of directors by which the
execution, delivery and performance of this Agreement and the Related Agreements
and consummation of the transactions contemplated hereby and thereby were
authorized, certified by the Secretary of Buyer as of the Closing Date.

                                     - 30 -

                                    ARTICLE V

                            COVENANTS PENDING CLOSING

            5.01  CONDUCT OF BUSINESS OF SELLER PRIOR TO THE CLOSING. Except as
contemplated by this Agreement, during the period from the date of this
Agreement to the Closing Date, Seller will conduct Seller's Business and
operations in, and only in, the ordinary course of business and substantially in
the manner heretofore conducted. Without limiting the generality of the
foregoing, and except as contemplated in this Agreement, prior to the Closing
Date, without the prior written consent of Buyer, Seller will not:

            (a)   except for Retained Liabilities, create, incur or assume any
      indebtedness for money borrowed, including obligations in respect of
      capital leases; or incur any material liabilities or obligations other
      than in the ordinary course of business consistent with past practices; or
      assume, guarantee, endorse or otherwise become liable or responsible
      (whether directly or contingently or otherwise) for the obligations of any
      person; PROVIDED, that Seller may endorse negotiable instruments for
      collection in the ordinary course of business;

            (b)   except as a result of a normal individual review cycle, or
      individual plan cycle, increase the rate or terms of compensation payable
      or to become payable by Seller to Seller's employees; or increase the rate
      or terms of any bonus, insurance, pension or other employee benefit plan,
      payment or arrangement made to, for or with the employees of Seller; or
      enter into any new employment agreement or modify the terms of any
      existing employment agreement;

            (c)   except in the ordinary course of business with product
      purchasers, enter into any material contract or arrangement providing for,
      in the aggregate, payment or receipt of more than US$5,000 or which is
      greater than six months in duration without Buyer's consent which shall
      not be unreasonably withheld or delayed;

                                     - 31 -

            (d)   in any material way, violate, breach or allow to lapse any
      Material Contract or enter into any other agreement, commitment or
      transaction (including without limitation any borrowing, capital
      expenditure or capital financing), except in the ordinary course of
      business consistent with past practice;

            (e)   sell, transfer, mortgage, encumber or otherwise dispose of any
      of the Purchased Assets, except in the ordinary course of business
      consistent with past practice; or

            (f)   agree or make any commitment to take any actions prohibited by
      this Section 5.01.

            5.02  ACCESS TO INFORMATION. Between the date of this Agreement and
the Closing Date, Seller will, during ordinary business hours (a) give Buyer and
its authorized representatives and advisors access to all books, records,
offices and other facilities and properties of Seller, (b) permit Buyer to make
such inspections thereof as Buyer may reasonably request, and (c) cause its
officers and advisors to furnish Buyer with such financial and operating data
and other information with respect to Seller as Buyer may from time to time
reasonably request; in addition, Seller will cause its accountants to make their
personnel, their work papers and such other requested documentation relating to
their work papers and to their audits of the books and records of Seller
available to Buyer and its advisors and representatives.

            5.03  CONSENTS. The parties hereto will use their best efforts to
promptly obtain any required consents (including any required consents to the
assignment of contracts) of all persons and governmental authorities necessary
for the consummation of the sale of the Purchased Assets and the other
transactions contemplated by this Agreement and the Related Agreements.

            5.04  PUBLIC ANNOUNCEMENTS. From the date hereof through the
Closing, no party hereto shall make any press release or public announcement or
any disclosure to any third person (other than to employees of Seller, employees
of Buyer, attorneys, accountants and other advisors of the parties hereto in
connection with the transactions contemplated hereby) concerning the
transactions contemplated by this Agreement; PROVIDED, HOWEVER, that the parties
will make such announcements, if any, as are required by applicable law or stock
exchange rules or rules of the association that maintains the listing of the
securities of a party hereto or its affiliates and will mutually agree to the
content thereof. In conjunction with the Closing, Buyer and Seller shall consult
with each other concerning the form of any post-closing press release or any
other public announcement concerning the transactions contemplated by this
Agreement, and the parties shall use their best efforts to cause a mutually
agreeable form of such release or announcement to be issued.

                                     - 32 -

            5.05  CONFIDENTIALITY.

            (a)   All information furnished by Buyer (or its agents and
      representatives) to Seller (or their agents and representatives) or
      furnished by Seller (or their agents or representatives) to Buyer (or its
      agents and representatives) pursuant hereto shall be treated as the sole
      property of the party furnishing the information until the Closing Date,
      and if the Closing shall not occur, the party receiving the information
      shall return to the party which furnished such information all copies of
      any documents or other materials containing, reflecting or referring to
      such information, shall keep confidential all of such information regarded
      as confidential by the party supplying such information, and shall not
      directly or indirectly use such information for any competitive or other
      commercial purpose. The obligation to keep such information confidential
      shall not apply to (i) any information which (w) the party receiving the
      information can establish was already in its possession prior to the
      disclosure thereof by the party furnishing the information, (x) was then
      generally known to the public, (y) became known to the public through no
      fault of the party receiving the information; or (z) was disclosed to the
      party receiving the information by a third party not bound by an
      obligation of confidentiality to the party furnishing the information; or
      (ii) disclosures in accordance with an order of a court of competent
      jurisdiction or as required by any law, rule or regulation applicable to
      the party making the disclosure, including any rule of, or agreement of
      any party or its affiliates with, any stock exchange or association that
      maintains the listing of a party's securities.

            (b)   Seller, each Principal Stockholder and Buyer agree, whether or
      not the Closing shall occur, to maintain, and to cause their agents and
      representatives to maintain, the confidentiality of the terms and
      conditions of this Agreement and the Related Agreements and all documents
      executed and delivered in connection with the transactions contemplated by
      this Agreement and the Related Agreements. The provisions of this Section
      5.05(b) shall not apply to particular conditions or terms of the above
      referenced documents (i) if the party seeking to make such disclosure
      shall have obtained the prior written consent of the other party to the
      disclosure of such conditions or terms, (ii) that are required to be
      disclosed during the course of any litigation or arbitration which may be
      brought by any party related to the provisions of any of the above
      referenced documents, (iii) that are or become generally available to the
      public other than as a result of actions taken by the party seeking to
      make such disclosure or its agents and representatives, or (iv) that are
      required to be disclosed pursuant to and in accordance with any law, rule
      or regulation applicable to the party seeking to make such disclosure,
      including any rule of, or agreement of any party or its affiliates with,
      any stock exchange or association that maintains the listing of a party's
      securities.

            Notwithstanding the foregoing, if a party is requested or required
(by oral questions, interrogatories, requests for information or document
subpoena, civil investigative demand or similar process) to disclose any of the
above-referenced documents, such party will promptly notify the other party of
such request so that such other party may seek an appropriate protective order
or waive compliance with the provisions hereof. If, in the absence of a
protective order or the receipt of a waiver hereunder, a party is nonetheless,
in the opinion of its counsel, compelled to disclose any terms or conditions of
the above-referenced documents to any tribunal or else stand liable for contempt
or suffer other censure or penalty, such party may disclose such information to
such tribunal without liability hereunder.

                                     - 33 -

            5.06  RELATED AGREEMENTS. The parties hereto agree that at Closing
they will execute and deliver (or cause their affiliates to execute and deliver)
the Related Agreements to which they or their affiliates are to be a party.

            5.07  NO-SHOP. Seller hereby agrees that it shall not pursue or
become involved in any negotiations or discussions or enter into any agreement
regarding the sale of the business, assets or stock of Seller to any third
person or entity.

                                   ARTICLE VI

                               CLOSING CONDITIONS

            6.01  CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE
TRANSACTIONS CONTEMPLATED HEREBY. The respective obligations of each party to
effect the transactions contemplated hereby shall be subject to the fulfillment
at or prior to the Closing Date of the following conditions:

            (a)   NO ORDER, DECREE OR INJUNCTION. Neither Seller, any Principal
      Stockholder nor Buyer shall be subject to any order, decree or injunction
      of a court of competent jurisdiction or governmental agency and no
      statute, rule or regulation shall be in effect or be enacted or issued
      which (i) prevents or delays any of the transactions contemplated by this
      Agreement, or (ii) would impose any limitation on the ability of Buyer
      effectively to exercise full rights of ownership of the Purchased Assets.

            (b)   RELATED AGREEMENTS. All Related Agreements shall have been
      executed and delivered by the parties thereto.

            6.02  CONDITIONS TO THE OBLIGATIONS OF SELLER TO EFFECT THE
TRANSACTIONS CONTEMPLATED HEREBY. The obligations of Seller to effect the
transactions contemplated hereby shall be further subject to the fulfillment at
or prior to the Closing Date of the following conditions, any one or more of
which may be waived by Seller:

            (a)   COVENANTS PERFORMED; REPRESENTATIONS AND WARRANTIES TRUE.
      Buyer shall have performed and complied with the covenants and agreements
      contained in this Agreement required to be performed and complied with by
      it at or prior to the Closing Date and the representations and warranties
      of Buyer set forth in this Agreement shall be true and correct as of the
      Closing Date as though made at and as of the Closing Date, and Seller
      shall have received a certificate to that effect signed on behalf of Buyer
      by an authorized officer of Buyer;

                                     - 34 -

            (b)   CORPORATE APPROVAL. At the Closing, Seller shall have received
      from Buyer certified board resolutions of Buyer approving this agreement
      and any and all transactions contemplated by it and the Related
      Agreements.

            (c)   PURCHASE PRICE. At the Closing, Buyer shall have paid and
      delivered the Purchase Price in accordance with Section 1.05(a) hereof.

            6.03  CONDITIONS TO THE OBLIGATIONS OF BUYER TO EFFECT THE
TRANSACTIONS CONTEMPLATED HEREBY. The obligations of Buyer to effect the
transactions contemplated hereby shall be further subject to the fulfillment at
or prior to the Closing Date of the following conditions, any one or more of
which may be waived by Buyer:

            (a)   COVENANTS PERFORMED; REPRESENTATIONS AND WARRANTIES TRUE.
      Seller and each Principal Stockholder shall have performed and complied
      with the covenants and agreements contained in this Agreement required to
      be performed and complied with by them at or prior to the Closing Date,
      and the representations and warranties of Seller and Principal
      Stockholders set forth in this Agreement shall be true and correct as of
      the Closing Date as though made at and as of the Closing Date, and Buyer
      shall have received a certificate to that effect signed by authorized
      officers of Seller;

            (b)   NO MATERIAL ADVERSE CHANGE. There shall not have been, since
      the date of the Financial Statements, any material adverse change in the
      business, results of operations, financial condition or prospects of
      Seller, and Buyer shall have received a certificate to that effect signed
      by authorized officers of Seller;

            (c)   OPINION LETTER. At the Closing, Buyer shall have received an
      opinion or opinions from counsel for Seller and Principal Stockholders,
      dated as of the Closing Date and satisfactory in form and substance to
      Buyer and its counsel, substantially in the form of EXHIBIT I;

            (d)   CONSENTS OBTAINED. Prior to Closing, all licenses, permits and
      other governmental approvals and authorizations and all consents of third
      parties required to effect the transactions contemplated by this
      Agreement, and for the Business of Seller to be operated by Buyer after
      the Closing in the manner and to the extent of Seller's current operations
      (including, without limitation, all consents required for the assignment
      of the Real Property Lease and Material Contracts), as listed on SCHEDULE
      6.03(D), shall have been obtained and delivered to Buyer; and

                                   ARTICLE VII

                                   THE CLOSING

            7.01  TIME AND PLACE OF CLOSING. Upon the terms and subject to the
satisfaction or waiver of the conditions in this Agreement, the Closing of the
transactions contemplated hereby (the "Closing") shall take place on July 31,
2006 at the offices of Buyer's counsel, Carter Ledyard & Milburn LLP, Two Wall
Street, New York, New York 10005, or at such other time and place as the parties
hereto may agree in writing. The effective time of the Closing is herein
referred to as the "Closing Date."

                                     - 35 -

            7.02  CLOSING. At the Closing, the Buyer shall deliver to Seller an
instrument in the form of EXHIBIT B hereto by which Buyer shall assume and agree
to perform and discharge the Assumed Liabilities with effect from the Closing
Date in a form satisfactory to Seller. Seller will deliver to Buyer such
warranty deeds, bills of sale, instruments of assignment, including an
instrument in the form of EXHIBIT C and other good and sufficient instruments of
transfer and the other instruments and documents contemplated hereby, executed
by Seller or its affiliates and in form and substance reasonably satisfactory to
Buyer, as Buyer may reasonably require to vest in Buyer all right, title and
interest of Seller and their affiliates in and to the Purchased Assets, and
Buyer shall pay to Seller the amount, and deliver to Seller the other
instruments and documents required of it at the Closing.

            Seller shall deliver to Buyer at the Closing possession of the
Purchased Assets being sold pursuant to this Agreement and the entire right,
title and interest of Seller in and to such Purchased Assets shall pass to Buyer
at the Closing.

                                  ARTICLE VIII

                               SUCCESSOR EMPLOYER

            8.01  EMPLOYMENT WITH BUYER. Buyer shall offer to enter into
employment agreements substantially in the form of EXHIBIT F hereto immediately
prior to the Closing with those employees of Seller who are employed by Seller
with respect to the Business at such time, as listed on SCHEDULE 8.01. Such
offer of employment shall include provision for compensation at rates not less
than the rates of compensation in effect for such employees immediately prior to
the Closing Date as set forth on SCHEDULE 8.01 and such other terms and
conditions as are set forth on SCHEDULE 8.01. (Those employees of Seller who
accept employment with Buyer are hereinafter referred to as the "Transferred
Employees.") Transferred Employees shall be offered employment for a term of not
less than twelve (12) months after the Closing Date; PROVIDED, HOWEVER, that as
long as he is an employee of Buyer, Donald Simons shall be entitled to terminate
the employment of any Transferred Employee during such twelve (12) month period
at his sole discretion. Buyer shall not be responsible for compensation,
bonuses, sales commissions, severance and any other payment or benefits due to
any Transferred Employee with respect to periods prior to the Closing. Buyer
shall be responsible for the payment of severance, if any, to any employee of
Seller whose employment is terminated after Closing for any reason with respect
to periods after the Closing.

            8.02  ADDITIONAL EMPLOYEES. The employment of any individual by
Buyer following the Closing, other than the Transferred Employees, shall be
subject to the prior written consent of the chief executive officer of Mer
Telemanagement Solutions Ltd., which consent shall not be unreasonably withheld.

                                     - 36 -

            8.03  THIRD PARTIES. The covenants of Buyer and Seller in this
Article VIII are not intended to create any right in any Transferred Employee or
his or her heirs, executors, beneficiaries or personal representatives.

            8.04  ACCRUED VACATION, PERSONAL AND SICK TIME. Buyer shall not be
responsible for any vacation time, personal time or sick time accrued and unused
by any of the Transferred Employees with respect to periods prior to the Closing
Date, and prior to the Closing Date, Seller shall pay each of the Transferred
Employees for any such accrued and unused vacation, personal or sick time.

                                   ARTICLE IX

                            WORKERS' COMPENSATION AND
                        PRODUCT LIABILITY RESPONSIBILITY

            9.01  WORKERS' COMPENSATION. Seller will retain responsibility for
all workers' compensation claims of employees of Seller other than Transferred
Employees and will retain responsibility for workers' compensation claims by
Transferred Employees pending as of the Closing Date or arising as a result of
events occurring or conditions caused solely on or prior to the Closing Date.
For workers' compensation claims by Transferred Employees filed after the
Closing Date and arising solely as a result of events occurring or conditions
caused solely after the Closing Date, Buyer will be responsible. The
responsibility for workers' compensation claims by Transferred Employees
relating to events occurring or conditions caused both during the period before
and the period after the Closing Date shall be shared equitably by Buyer and
Seller.

            9.02  PRODUCT LIABILITY AND WARRANTY CLAIMS. At the Closing, Buyer
shall assume and agree to perform and discharge all product liability and
warranty claims (including claims for injury to person or property) and
litigation relating to the business conducted by Buyer and arising from products
sold after the Closing Date; Seller and Principal Stockholders shall retain
responsibility for such claims and litigation relating to products sold by
Seller or any predecessor of Seller's Business on or prior to the Closing Date,
unless arising from Buyer's improper actions after the Closing Date.

            9.03  RESPONSIBILITY FOR PRIOR CLAIMS. It is understood and agreed
that Buyer does not assume any liability for, and shall not otherwise be
responsible for, any product liability or warranty claims (including warranty
claims for injury to person or property) of Seller and arising from products
sold or occurrences on or prior to the Closing Date, and Seller agrees to
indemnify and hold harmless Buyer with respect to any such claims as provided in
Section 10.06.

                                     - 37 -

                                    ARTICLE X

                             POST-CLOSING COVENANTS

            10.01 FURTHER ASSURANCES. Subject to the terms and conditions of
this Agreement, each of the parties hereto will use its best efforts to take, or
cause to be taken, all action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the sale of the Purchased Assets, the Assumed
Liabilities and the other transactions contemplated by this Agreement and the
Related Agreements. From time to time after the date hereof (including after the
Closing Date if requested), Seller and its affiliates will, at their own expense
and without further consideration, execute and deliver such instruments and
documents to Buyer as Buyer may reasonably request in order more effectively to
vest in Buyer good title to the Purchased Assets and to more effectively
consummate the transactions contemplated by this Agreement and the Related
Agreements. From time to time after the date hereof, including after the Closing
Date if requested, Buyer will, at its expense and without further consideration,
execute and deliver such instruments and documents to Seller as Seller may
reasonably request in order to more effectively transfer to Buyer the Assumed
Liabilities and to more effectively consummate the transactions contemplated
hereby and the Related Agreements.

            10.02 COMMISSIONS AND FEES. Except for PASCO Business Trust d.b.a
Peter A. Sokoloff & Co., a limited liability organization and Oberon Securities,
LLC, Seller, Principal Stockholders and Buyer each represent and warrant to
the other that no broker, finder, financial adviser or other person is entitled
to any brokerage fees, commissions or finder's fees in connection with the
transactions contemplated hereby by reason of any action taken by the party
making such representation. Seller on the one hand, and Buyer, on the other
hand, will pay to the other or otherwise discharge, and will jointly and
severally indemnify and hold the other harmless from and against, any and all
claims or liabilities for all brokerage fees, commissions and finder's fees
(other than as described above) incurred by reason of any action taken by such
party.

            10.03 SALES, TRANSFER AND USE TAXES. All sales, transfer and use
taxes incurred in connection with this Agreement and the Related Agreements and
the transactions contemplated hereby and thereby will be borne by Seller, and
Seller will, at its own expense, file all necessary tax returns and other
documentation with respect to all such sales, transfer and use taxes, and, if
required by applicable law, Buyer will join in the execution of any such tax
returns or other documentation.

                                     - 38 -

            10.04 NONDISCLOSURE; NONCOMPETITION.

            (a)   Seller and Principal Stockholders agree not to use or
      disclose at any time after consummation of the transactions contemplated
      hereby, except with the prior written consent of an officer authorized to
      act in the matter by the Board of Directors of Buyer, any trade secrets,
      proprietary information or other information relating to the Business that
      Buyer considers confidential relating to suppliers, operations, marketing,
      cost and pricing data, master files or customer lists utilized by Seller
      prior to the Closing or by Buyer or any of its affiliates (the "Buyer
      Group"), or the skills, abilities and compensation of the Buyer Group's
      employees, and all other similar information material to the conduct of
      the Buyer Group's business, which is not presently generally known to the
      public; PROVIDED, HOWEVER, that this provision shall not preclude Seller
      or Principal Stockholders from (i) the use or disclosure of such
      information which presently is known generally to the public or which
      subsequently comes into the public domain, other than by way of disclosure
      in violation of this Agreement or in any other unauthorized fashion, or
      (ii) disclosure of such information required by law or court order,
      provided that prior to such disclosure required by law or court order
      Seller or Principal Stockholders will give Buyer three business days'
      written notice (or, if disclosure is required to be made in less than
      three business days, then such notice shall be given as promptly as
      practicable after determination that disclosure may be required) of the
      nature of the law or order requiring disclosure and the disclosure to be
      made in accordance therewith.

            (b)   For a period of four years from the Closing Date, Seller,
      Principal Stockholders and their affiliates (defined to include (i) any
      entity (x) controlled by Seller or Principal Stockholders, (y) controlling
      (i.e. owning beneficially more than 50% of) Seller or Principal
      Stockholders or (z) under common control with Seller or Principal
      Stockholders; or (ii) any executive officer, director or 5% or greater
      holder of the voting equity of Seller who is not employed by the Buyer or
      its subsidiaries immediately after the Closing or any entity controlled by
      such person; PROVIDED, HOWEVER, notwithstanding the foregoing, that
      ownership of less than 5% of the total voting equity of a publicly held
      company which competes with the Business shall not be a violation of this
      Section 10.04(b) (collectively, the "Seller Group")) shall not, without
      the written consent of an officer authorized to act in the matter by the
      Board of Directors of Buyer, directly or indirectly: (i) own, manage,
      operate, join, control, participate in, invest in, or otherwise be
      connected with, in any manner, whether as an officer, director, employee,
      partner, investor, consultant, lender or otherwise, any business entity
      which is engaged in, or is in any way related to or competitive with, the
      business currently conducted by Seller; or (ii) on behalf of anyone else
      engaged in any such line of business (x) persuade or attempt to persuade
      any employee of any member of the Buyer Group or any individual who was an
      employee of any member of the Buyer Group during the one year prior to the
      date of this Agreement, to leave the employ of any member of the Buyer
      Group or to become employed by any person other than the members of the
      Buyer Group or hire any such employee; (y) persuade or attempt to persuade
      any current client or former customer of any member of the Buyer Group to
      cease doing business with, or to reduce the amount of business it does or
      intends or anticipates doing with, Buyer (or any successor to Buyer's
      business); or (z) solicit the business of any of such customer or former
      customer with respect to the business conducted by Seller.

                                     - 39 -

            10.05 INDEMNIFICATION

            (a)   INDEMNIFICATION BY SELLER PRINCIPALS. Seller Principals
      jointly and severally agree to save, defend and indemnify Buyer and its
      officers, directors, agents and employees, subsidiaries, directors and
      employees of subsidiaries, and each person, if any, who controls or may
      control Buyer within the meaning of the Securities Act (each of the
      foregoing, a "Buyer Indemnified Party") against and hold it harmless from
      any and all claims, liabilities, losses, damages, deficiencies, costs and
      expenses, of every kind, nature and description, fixed or contingent
      (including, without limitation, interest, penalties and counsel's fees and
      expenses in connection with any action, claim or proceeding relating
      thereto or seeking enforcement of a party's obligations hereunder)
      ("Losses"), asserted against, resulting to, imposed upon or incurred by a
      Buyer Indemnified Party, directly or indirectly, arising out of (i) any
      breach of any representation, warranty, covenant or agreement made by
      Seller and/or Principal Stockholders under this Agreement, or (ii) any
      Retained Liability, or (iii) any Environmental Claim; PROVIDED, HOWEVER,
      that (A) Seller Principals shall not have any obligation to indemnify a
      Buyer Indemnified Party from and against any Losses with respect to
      breaches described in (i) above until a Buyer Indemnified Party has
      suffered aggregate Losses by reason of all such breaches (excluding de
      Minimis Claims as hereinafter defined) in excess of $15,000, in which
      event a Buyer Indemnified Party shall be entitled to indemnification for
      the full amount of its aggregate Losses, (B) in no event shall the
      aggregate of Seller Principals' indemnification payments with respect to
      breaches described in (i) above exceed 50% of the Purchase Price plus the
      Contingent Payment paid by Buyer hereunder other than with respect to
      fraud by any of the Seller Principals, in which case a Buyer Indemnified
      Party may recover all of its Losses from the relevant Seller Principal
      without limitation, and (C) indemnification claims with respect to the
      representations and warranties contained in Article III and Article IIIA
      hereof must be made by a Buyer Indemnified Party within the survival
      period therefor specified in Section 11.06 hereof. The foregoing
      limitations shall not apply with respect to any Losses arising out of any
      Retained Liability or any third party claim. For purposes hereof, "de
      Minimis Claims" shall mean any indemnification claim for which the amount
      of Losses claimed is less than $1,000 (providing that any series of claims
      arising from the same or substantially similar facts or circumstances
      shall be treated as one claim for such determination).

            (b)   BY BUYER. Buyer agrees to save, defend and indemnify Seller
      and Principal Stockholders against and hold them harmless from any and all
      Losses arising out of any breach of any representation, warranty, covenant
      or agreement made by Buyer under this Agreement; PROVIDED, HOWEVER, that
      (A) Buyer shall not have any obligation to indemnify Seller or Principal
      Stockholders from and against any Losses with respect to breaches
      described in (i) above until Seller and Principal Stockholders have
      suffered aggregate Losses by reason of all such breaches (excluding de
      Minimis Claims) in excess of $15,000, in which event Seller and Principal
      Stockholders shall be entitled to indemnification for the full amount of
      their aggregate Losses, and (B) in no event shall the aggregate of Buyer's
      indemnification payments with respect to breaches described in (i) above
      exceed 50% of the Purchase Price plus the Contingent Payment paid by Buyer
      hereunder other than with respect to fraud by the Buyer, in which case
      Seller and Principal Stockholders may recover all of their Losses from the
      Buyer without limitation, and (C) indemnification claims with respect to
      the representations and warranties contained in Article IV hereof must be
      made by Seller or Shareholders within the survival period therefor
      specified in Section 11.06 hereof. The foregoing limitations shall not
      apply with respect to any Losses arising out of any Assumed Liability or
      any third party claim.

                                     - 40 -

            10.06 DEFENSE OF CLAIMS.

            (a)   Should any claim, action or proceeding by or involving a third
      party arise after the Closing Date for which any party (the "Indemnifying
      Party") is liable for indemnification under the terms of this Agreement,
      the other party (the "Indemnified Party") shall notify the Indemnifying
      Party within a reasonable time after such claim, action or proceeding
      arises and is known to the Indemnified Party (provided that the failure to
      give timely notice shall not affect the right to indemnification hereunder
      except to the extent that the Indemnifying Party is actually damaged or
      prejudiced by such delay), and if the Indemnifying Party shall admit in
      writing its potential indemnification obligation in respect thereof, the
      Indemnified Party shall give the Indemnifying Party a reasonable
      opportunity:

                  (i)   to take part in any examination of the books and
      records;

                  (ii)  to conduct any proceedings or negotiations in connection
      therewith and necessary or appropriate to defend the Indemnified Party or
      prosecute any claim, action, counterclaim or other proceeding with respect
      thereto;

                  (iii) to take all other required steps or proceedings to
      settle or defend any such claim, action or proceeding; and

                  (iv)  to employ counsel to contest any such claim, action or
      proceeding in the name of the Indemnified Party or otherwise.

            The expenses of all proceedings, contests or lawsuits with respect
      to such claims or actions shall be borne by the Indemnifying Party. If the
      Indemnifying Party wishes to assume the defense and/or settlement of any
      such claim or action, it shall give written notice to the Indemnified
      Party admitting the possibility of its indemnification obligation in
      respect thereof and stating that it intends to assume such defense within
      fifteen days after notice from the Indemnified Party of such claim or
      action (unless the claim or action reasonably requires a response in less
      than fifteen days after notice thereof is given to the Indemnifying Party,
      in which event it shall notify the Indemnified Party at least five days
      prior to such reasonably required response date), and the Indemnifying
      Party shall thereafter assume the defense of such claim or action, through
      counsel reasonably satisfactory to the Indemnified Party; provided that
      the Indemnified Party may participate in any such defense at its own
      expense. The Indemnified Party shall afford the Indemnifying Party's
      counsel and other authorized representatives reasonable access during
      normal business hours to all books, records, offices and other facilities
      and properties of the Indemnified Party, and to the personnel of the
      Indemnified Party, and shall otherwise use all reasonable efforts to
      cooperate with the Indemnifying Party, such counsel and such other
      authorized representatives in connection with the exercise of the rights
      of the Indemnifying Party pursuant to this Section 10.07; PROVIDED,
      HOWEVER, that prior to the Indemnifying Party entering into any settlement
      arrangement it must first acknowledge its obligation to indemnify the
      Indemnified Party.

                                     - 41 -

            (b)   If the Indemnifying Party shall not assume the defense of, or
      if after so assuming it shall fail to actively defend, any such claim or
      action, the Indemnified Party may defend against any such claim or action
      in such manner as it may deem appropriate, and the Indemnified Party may
      settle such claim or action on such terms as it may deem appropriate, and
      the Indemnifying Party promptly shall reimburse the Indemnified Party for
      the amount of such settlement and for all expenses, legal and otherwise,
      reasonably and necessarily incurred by the Indemnified Party in connection
      with the defense against and settlement of such claim or action. If no
      settlement of such claim or action is made, the Indemnifying Party shall
      satisfy any judgment rendered with respect to such claim or in such
      action, before the Indemnified Party is required to do so, and pay all
      expenses, legal or otherwise, reasonably and necessarily incurred by the
      Indemnified Party in the defense against such claim or action.

            (c)   If a judgment is rendered against the Indemnified Party in any
      action covered by the indemnification hereunder, or any lien attaches to
      any of the assets of the Indemnified Party, the Indemnifying Party
      immediately upon such entry or attachment shall pay such judgment in full
      or discharge such lien unless, at the Indemnifying Party's expense and
      direction, an appeal is taken under which the execution of the judgment or
      satisfaction of the lien is stayed. If and when a final judgment is
      rendered in any such action, the Indemnifying Party shall forthwith pay
      such judgment before the Indemnified Party is compelled to do so.

            10.07 MTS INTEGRATRAK GUARANTEE. MTS IntegraTRAK unconditionally and
irrevocably herby guarantees to Seller and Principal Stockholders that if Buyer
fails to make any payment pursuant to this Agreement, including, without
limitation, any Initial Contingent Payment, Subsequent Contingent Payment or
indemnification payment, MTS IntegraTRAK shall make such payment(s), subject to
any and all limitations and defenses available to Buyer. The foregoing guarantee
of MTS IntegraTRAK shall not be construed to impose upon MTS IntegraTRAK any
obligations greater than, in addition to, or other than, the Buyer's express
obligations under this Agreement. The guarantee of MTS IntegraTRAK under this
Section 10.07 shall continue in effect until the date on which Buyer has
fulfilled all of its financial obligations pursuant to the terms and conditions
of this Agreement.

      MTS IntegraTRAK hereby represents and warrants to Seller and Principal
Stockholders that: (a) MTS IntegraTRAK is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware; (b) MTS
IntegraTRAK has the full corporate power and authority, and has taken all
necessary corporate action to authorize, execute, deliver and perform this
Agreement; (c) this Agreement has been duly executed and delivered by MTS
IntegraTRAK and is a valid and binding obligation of MTS IntegraTRAK enforceable
against MTS IntegraTRAK in accordance with its terms.

                                     - 42 -

            10.08 NAME. Seller will grant to Buyer all necessary consents to
enable Buyer to change its corporate name to "MTS TelSoft, Inc." in its State of
incorporation and to qualify its business with the name "MTS TelSoft, Inc."
After the Closing, Seller will abstain from using the name "TelSoft Solutions,
Inc.," except as required by law, and within five days of the Closing Date will
change its name by removing the words "TelSoft Solutions" to a name reasonably
not to be deemed similar to "TelSoft Solutions, Inc."

            10.09 EXPENSES. Except as otherwise provided herein, Seller,
Principal Stockholders and Buyer shall each bear their own costs and expenses
incurred in connection with this Agreement, the Related Agreements and the
transactions contemplated hereby and thereby. Buyer shall be responsible for the
fees, commissions, expenses and reimbursements incurred by or required to be
paid to its and Buyer's professional advisors, and Seller and Principal
Stockholders shall be responsible for the fees, commissions, expenses and
reimbursements incurred by or required to be paid to Seller's or Principal
Stockholders' professional advisors.

                                   ARTICLE XI

                                  MISCELLANEOUS

            11.01 BINDING EFFECT. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
permitted assigns.

            11.02 NO ASSIGNMENT. This Agreement may not be assigned by any party
hereto without the prior written consent of the other parties, PROVIDED,
HOWEVER, that each party may assign its rights, but not its obligations,
hereunder, in whole or in part, to any corporation or other entity controlled
by, controlling or under common control with such party, and such party or its
assignee may assign their rights hereunder, in whole or in part, to any
purchaser of substantially all of the assets or business of such party or such
assignee. Any attempted or purported assignment by either party other than in
accordance with this Section 11.02 shall be null and void. Nothing herein is
intended to prohibit Seller from assigning the proceeds of the sale hereunder to
a third party.

            11.03 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and by any party on separate counterparts, each of which as so
executed and delivered shall be deemed an original but all of which together
shall constitute one and the same instrument, and it shall not be necessary in
making proof of this Agreement as to any party hereto to produce or account for
more than one such counterpart executed and delivered by such party. Execution
by facsimile signature shall be deemed to be, and shall have the same effect as,
execution by original signature.

                                     - 43 -

            11.04 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal substantive laws of the State of
California (without regard to conflict of law principles) as to all matters,
including but not limited to matters of validity, construction, effect,
performance and remedies.

            11.05 ARBITRATION. The parties hereto agree that any dispute or
claim arising out of or relating in any way to this Agreement or the Related
Agreements or the transactions contemplated hereby and thereby, shall be settled
by arbitration administered by the American Arbitration Association under its
Commercial Arbitration Rules. Unless the parties otherwise agree in writing, the
arbitration shall be held in Los Angeles, California. Judgment on the award
rendered by the arbitrator(s) may be entered in any court having jurisdiction
thereof.

            11.06 SURVIVAL. The representations, warranties, indemnities and
agreements of the parties to this Agreement contained herein or in any document
delivered pursuant to or in connection herewith shall survive the Closing for
fifteen (15) months and shall survive any investigation by any party hereto;
PROVIDED, HOWEVER, that the representations and warranties of Seller contained
in Sections 3.05, 3.09 and 3.20 shall survive until the expiration of the
relevant statute of limitations. The covenants contained in Section 5.05 and
Article X shall survive the Closing indefinitely, except as otherwise provided
therein.

            11.07 NOTICES. All notices required to be given under the terms of
this Agreement or which any of the parties desires to give hereunder shall be in
writing and personally delivered or sent by registered or certified mail, return
receipt requested, or sent by overnight courier, or sent by fax addressed as
follows:

            (a)   TO BUYER. If to Buyer addressed to:

                  MTS Acquisition Corp.
                  c/o MTS IntegraTRAK Inc.
                  12600 S.E. 38th. Street
                  Suite 250
                  Bellevue, WA 98006
                  Fax: 425-401-1700
                  Attn: President

            With copies to:

                  Mer Telemanagement Solutions Ltd.
                  22 Zarhin Street
                  Ra'anana 43662, Israel
                  Fax: +972-9-746-6596
                  Attn: Chief Financial Officer

                                     - 44 -

                  Carter Ledyard & Milburn LLP
                  2 Wall Street
                  New York, New York 10005
                  Fax: 212-732-3232
                  Attn: Steven J. Glusband, Esq.

            (b)   TO MTS INTEGRATRAK. If to MTS IntegraTRAK addressed to:

                  MTS IntegraTRAK Inc.
                  12600 S.E. 38th. Street
                  Suite 250
                  Bellevue, WA 98006
                  Fax: 425-401-1700
                  Attn: President

            With copies to:

                  Mer Telemanagement Solutions Ltd.
                  22 Zarhin Street
                  Ra'anana 43662, Israel
                  Fax: +972-9-746-6596
                  Attn: Chief Financial Officer

                  Carter Ledyard & Milburn LLP
                  2 Wall Street
                  New York, New York 10005
                  Fax: 212-732-3232
                  Attn: Steven J. Glusband, Esq.

            (c)   TO SELLER OR PRINCIPAL STOCKHOLDERS. If to Seller or Principal
      Stockholders addressed to:

                  TelSoft Solutions, Inc.
                  100 N. Brand Blvd., Suite 400
                  Glendale, CA 91203
                  Fax: 818-545-9704
                  Attn: Donald Simons

            Any such notice shall be deemed to have been duly given or made and
to have become effective (a) if delivered by hand to an officer of the party to
which it is directed at the time of the receipt thereof by such officer, (b) if
sent by recognized overnight carrier or by registered or certified first-class
mail, postage pre-paid, upon the date of first attempted delivery, as shown on
the return receipt therefore or the returned item itself; and (c) if sent by
facsimile at the time of dispatch thereof which machine generated confirmation
of transmission, if in normal business hours in the country of receipt, or
otherwise at the opening of business on the following business day.

                                     - 45 -

            Any party may designate a change of address at any time by giving
written notice thereof to the other parties.

            11.08 AMENDMENT AND MODIFICATION. This Agreement may be amended,
modified or supplemented only by a written instrument executed by all of the
parties hereto.

            11.09 WAIVER OF COMPLIANCE. Except as otherwise provided in this
Agreement, any failure of any of the parties to comply with any obligation,
covenant, agreement or condition herein may be waived by the party or parties
entitled to the benefits thereof only by a written instrument signed by the
party or parties granting such waiver, but any such waiver or the failure to
insist upon strict compliance with any obligation, covenant, agreement or
condition herein, shall not operate as a waiver of, or estoppel with respect to,
any subsequent or other failure or breach.

            11.10 INTERPRETATION. The table of contents and the article and
section headings contained in this Agreement are solely for the purpose of
reference, are not part of the agreement of the parties and shall not in any way
affect the meaning or interpretation of this Agreement. As used in this
Agreement, the term "person" shall mean and include an individual, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization or a governmental entity or any department or agency thereof. As
used in this Agreement, the term "subsidiary," when used in reference to any
other person, shall mean any corporation of which outstanding securities having
ordinary voting power to elect a majority of the Board of Directors of such
corporation are owned directly or indirectly by such other person. As used in
this Agreement, the term "generally accepted accounting principles" means
generally accepted accounting principles as in effect and as applied in the
United States. As used in this Agreement, the term "affiliate" shall have the
meaning set forth in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934. When used herein, the masculine, feminine or
neuter gender and the singular or plural number shall each be deemed to include
the others whenever the context so indicates or permits.

            11.11 ENTIRE AGREEMENT. This Agreement and the Related Agreements,
including the schedules, exhibits, documents, certificates and instruments
referred to herein and therein, embody the entire agreement and understanding of
the parties hereto in respect of any transactions contemplated by this Agreement
and the Related Agreements and supersede all prior agreements, representations
and understandings among the parties with respect thereto or with respect to the
transactions contemplated hereby.

                                     - 46 -

            11.12 SPECIFIC PERFORMANCE.

            (a)   Seller and Principal Stockholders acknowledge that, in view of
      the uniqueness of the Business of Seller and the transactions contemplated
      hereby, Buyer may not have an adequate remedy at law for money damages in
      the event that this Agreement with respect to the sale of the Purchased
      Assets has not been performed in accordance with its terms by Seller or
      Principal Stockholders and therefore Seller and Principal Stockholders
      agree that Buyer shall be entitled to specific enforcement of the terms
      hereof with respect to the sale of the Purchased Assets and the other
      transactions contemplated hereby in the event of breach by Seller or
      Principal Stockholders in addition to any other remedy to which Buyer may
      be entitled, at law or in equity, for such breach.

            (b)   In the event of a breach or threatened breach by the Seller
      Group of their covenants under Section 10.05 hereof, Seller and Principal
      Stockholders acknowledge that Buyer may not have an adequate remedy at law
      for money damages. Accordingly, in the event of such breach or threatened
      breach, Buyer will be entitled to such equitable and injunctive relief as
      may be available to restrain the Seller Group from the violation of the
      provisions of said Section 10.05 in addition to any other remedy to which
      Buyer may be entitled, at law or in equity, for such breach or threatened
      breach.

            11.13 SEVERABILITY OF COVENANTS. Seller and Principal Stockholders
acknowledge that the covenants contained in Section 10.04 of this Agreement are
reasonable and necessary for the protection of Buyer and its investment in the
Purchased Assets and that each covenant, and the period or periods of time and
the types and scope of restrictions on the activities specified therein are, and
are intended to be, divisible and shall be deemed a series of separate
covenants, one for each state or jurisdiction to which they are applicable. In
the event that any provision of this Agreement, including any sentence, clause
or part hereof, shall be deemed contrary to law or invalid or unenforceable in
any respect by a court of competent jurisdiction, the remaining provisions shall
remain in full force and effect to the extent that such provisions can still
reasonably be given effect in accordance with the intentions of the parties, and
any invalid and unenforceable provisions shall be deemed, without further action
on the part of the parties, modified, amended and limited solely to the extent
necessary to render the same valid and enforceable.

                                   ARTICLE XII

                           TERMINATION AND ABANDONMENT

            12.01 TERMINATION. This Agreement may be terminated at any time
prior to the Closing:

            (a)   by the written agreement of all of the parties hereto;

            (b)   by Buyer if there has been a material violation or breach by
      Seller or Principal Stockholders of any covenant, agreement,
      representation or warranty contained in this Agreement entitling Buyer not
      to Close under Article VI;

                                     - 47 -

            (c)   by Seller or Principal Stockholders if there has been a
      material violation or breach by Buyer of any covenant, agreement,
      representation or warranty contained in this Agreement entitling Seller
      not to Close under Article VI; or

            (d)   by either Buyer, Seller or Principal Stockholders if the
      Closing of the transactions contemplated by this Agreement shall not have
      been consummated on or before August 1, 2006, PROVIDED, HOWEVER, that
      termination pursuant to this subsection (d) shall not relieve any party of
      the liabilities contemplated by the proviso to the second sentence of
      Section 12.02 hereof, if applicable.

            12.02 PROCEDURE AND EFFECT OF TERMINATION. In the event of
termination of this Agreement and abandonment of the transactions contemplated
hereby by any of the parties pursuant to Section 12.01(b), (c) or (d) of this
Agreement, written notice thereof shall forthwith be given by the terminating
party to the other parties and this Agreement shall terminate and the
transactions contemplated hereby shall be abandoned, without further action by
any of the parties hereto. If this Agreement is properly terminated, none of the
parties hereto nor any of their respective directors, officers or affiliates, as
the case may be, shall have any liability or further obligation to any of the
other parties or any of their respective directors, officers or affiliates, as
the case may be, pursuant to this Agreement; PROVIDED, HOWEVER, that if any such
termination shall result from the breach of a warranty or the failure of a party
to fulfill a condition to the performance of the obligations of the other
parties or to perform a covenant or agreement contained in this Agreement or
from any other willful breach by any party to this Agreement, such party shall
be solely liable for any and all damages, costs and expenses (including, but not
limited to, counsel's fees) sustained or incurred by the other parties as a
result of such failure or breach. The provisions of Sections 5.05, 11.04, 11.05,
11.07, 11.13 and 12.02 shall survive any termination hereof.

                           [SIGNATURE PAGE TO FOLLOW]

                                     - 48 -

            IN WITNESS WHEREOF, the parties have each caused this Agreement to
be executed by their duly authorized officers as of the date first above
written.

                                     MTS ACQUISITION CORP.

                                     By: /s/Eytan Bar
                                         ------------
                                         Name: Eytan Bar
                                         Title: President

                                     MTS INTEGRATRAK INC.

                                     By: /s/Eytan Bar
                                         ------------
                                         Name: Eytan Bar
                                         Title: President

                                     TELSOFT SOLUTIONS, INC.

                                     By: /s/Donald Simons
                                         ----------------
                                         Name: Donald Simons
                                         Title: President

                                     PRINCIPAL STOCKHOLDERS

                                     CONSULTING SCIENCES, INC.

                                     By: /s/Dale Zuehls
                                         --------------
                                         Name: Dale Zuehls
                                         Title: President

                                     DONALD SIMONS

                                     By: /s/Donald Simons
                                         ----------------

                                     DALE ZUEHLS

                                     By: /s/Dale Zuehls
                                         --------------

                   SIGNATURE PAGE TO ASSET PURCHASE AGREEMENT

                                       49

EX-8.1

                                                                     EXHIBIT 8.1

                              LIST OF SUBSIDIARIES

We have the following subsidiaries:

SUBSIDIARY NAME                                                                     JURISDICTION OF INCORPORATION     OWNERSHIP PERCENTAGE
- ---------------                                                                     -----------------------------     --------------------
MTS IntegraTRAK Inc.                                                                           Delaware                        100%
MTS TelSoft Inc. (a subsidiary of MTS IntegraTRAK Inc.)                                        Delaware                        100%
MER Fifth Avenue Realty Inc. (a subsidiary of MTS IntegraTRAK Inc.)                            New York                        100%
MTS Asia Ltd.                                                                                  Hong Kong                       100%
Telegent Ltd.                                                                                  Israel                          100%
Jaraga B.V.                                                                                    The Netherlands                 100%
Verdura B.V. (a subsidiary of Jaraga B.V.)                                                     The Netherlands                 100%
Voltera Technologies V.O.F. (a partnership held 99% by Jaraga B.V. and 1% by Verdura B.V.)     The Netherlands                 100%
Bohera B.V. (a subsidiary of Jaraga B.V.)                                                      The Netherlands                 100%
TABS Brazil Ltd, (a subsidiary of Bohera B.V.)                                                 Brazil                          100%

We have the following affiliate:

Jusan S.A. (an affiliate of Jaraga B.V.)                                                       Spain                            50%

EX-12.1

                                                                    EXHIBIT 12.1

                            CERTIFICATION PURSUANT TO
                SECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002

I, Eytan Bar, certify that:

1. I have reviewed this annual report on Form 20-F of Mer Telemanagement
Solutions Ltd.;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13(a)-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
Subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;

(b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986]

(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):

(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.

Date: March 30, 2007

/s/ Eytan Bar*
- --------------
Eytan Bar
Chief Executive Officer

     * The originally executed copy of this Certification will be maintained at
the Company's offices and will be made available for inspection upon request.

EX-12.2

                                                                    EXHIBIT 12.2

                            CERTIFICATION PURSUANT TO
                SECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002

I, Shlomi Hagai, certify that:

1. I have reviewed this annual report on Form 20-F of Mer Telemanagement
Solutions Ltd.;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13(a)-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
Subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;

(b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986]

(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the period covered by the annual
report that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):

(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.

Date: March 30, 2007

/s/ Shlomi Hagai*
- -----------------
Shlomi Hagai
Chief Financial Officer

     * The originally executed copy of this Certification will be maintained at
the Company's offices and will be made available for inspection upon request.

EX-13.1

                                                                    EXHIBIT 13.1

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


In connection with the Annual Report of Mer Telemanagement Solutions Ltd. (the
"Company") on Form 20-F for the period ending December 31, 2006 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Eytan Bar, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopteD pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:

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

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


/s/ Eytan Bar*
- --------------
Eytan Bar
Chief Executive Officer

March 30, 2007

     * The originally executed copy of this Certification will be maintained at
the Company's offices and will be made available for inspection upon request.

EX-13.2

                                                                    EXHIBIT 13.2

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

In connection with the Annual Report of Mer Telemanagement Solutions Ltd. (the
"Company") on Form 20-F for the period ending December 31, 2006 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Shlomi Hagai, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, aS adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:

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

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

/s/ Shlomi Hagai*
- -----------------
Shlomi Hagai
Chief Financial Officer

March 30, 2007

     * The originally executed copy of this Certification will be maintained at
the Company's offices and will be made available for inspection upon request.

EX-15.1

                                                                    EXHIBIT 15.1

            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors
MER TELEMANAGEMENT SOLUTIONS LTD.

     We consent to the incorporation by reference in the Registration Statement
on Form F-3 (File No. 333-128225) and Registration Statements on Form S-8 (Files
No. 333-12014 and No. 333-123321) pertaining to MER Telemanagement Solutions
Ltd. of our report dated March 30, 2007 with respect to the consolidated
financial statements of MER Telemanagement Solutions Ltd. included in the Annual
Report on Form 20-F for the year ended December 31, 2006.

                                           /s/ Kost Forer Gabbay & Kasierer
                                           ------------------------------------
Tel-Aviv, Israel                               KOST FORER GABBAY & KASIERER
March 30, 2007                             A Member of Ernst & Young Global

EX-15.2

                                                                    EXHIBIT 15.2

            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                        MER Telemanagement Solutions Ltd.
                     22 Zarhin st., Ra'anana, 43662, Israel

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Files No. 333-12014 and No. 333-123321) and Form F-3
(File No. 333-128225) of Mer Telemanagement Solutions Ltd. of our report dated
January 19, 2007, relating to the financial statements of Jusan, S.A.,
which appears in this Annual Report on Form 20-F.


BDO AUDIBERIA AUDITORES, S.L.

/s/ BDO Anderson
- ----------------

Madrid, Spain, March 28, 2007