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# UNITED STATES 
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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# FORM 20-F

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|o | REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------------

# Or

|x | ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

# For the fiscal year
ended December 31, 2005

# Or

|o | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

# For the transition
period
from                 
to

# Commission File number:

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# POINTER TELOCATION
LIMITED(Exact name of
Registrant as specified in its charter)

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|                             |                               
|---------------------------- | ------------------------------
|
|
|
|
|N/A                          | ISRAEL                        
|(Translation of Registrant's | (Jurisdiction of incorporation
|name into English)           | or organization)              

1 Korazin Street
Givatayim 53583, Israel
(Address of principal executive offices)

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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
|None                | None                                     

# Securities
registered or to be registered pursuant to Section 12(g) of the Act:
Ordinary Shares, NIS
3.00 nominal value per share 
(Title of Class)

# Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act:

# None 
(Title of Class)

---

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.

2,479,020

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

Yes  o    No   x



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

Yes  o    No   x

NoteChecking
the box above will not relieve any registrant required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations
under those Sections.

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

Yes  x    No   o

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

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

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

Item 17  o    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  o    No  x

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This Annual Report on Form 20-F
contains 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.The use of the words projects, expects,
may, plans or intends, or words of similar import,
identifies a statement as forward-looking. The forward-looking statements
included herein are based on current expectations that involve a number of risks and
uncertainties. These forward-looking statements are based on the assumption that Pointer
Telocation Limited (we or the Company or Pointer) will
not lose a significant customer or customers or experience increased fluctuations of
demand or rescheduling of purchase orders, that our markets will grow, that our products
will remain accepted within their respective markets and will not be replaced by new
technology, that competitive conditions within our markets will not change materially or
adversely, that we will retain key technical and management personnel, that our forecasts
will accurately anticipate market demand, and that there will be no material adverse
change in our operations or business. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic, competitive and market
conditions, and future business decisions, all of which are difficult or impossible to
predict accurately and many of which are beyond our control. In addition, our business and
operations are subject to substantial risks which increase the uncertainty inherent in the
forward-looking statements. In light of the significant uncertainties inherent in the
forward-looking information included herein, the inclusion of such information should not
be regarded as a representation by us or any other person that our objectives or plans
will be achieved. Factors that could cause actual results to differ from our expectations
or projections include the risks and uncertainties relating to our business described in
this annual report at Item 3.Risk Factors.

On August 10, 2005 a 100 to 1
reverse stock split of our ordinary shares was effected. As a result of the reverse stock
split, each one hundred shares of our ordinary shares with par value NIS 0.03 were
converted into one ordinary share NIS 3.00. All share numbers in this annual report
reflect this reverse split.

2

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|                                                               |                                           |   
|-------------------------------------------------------------- | ----------------------------------------- | --
|
|
|
|
|PART I                                                         |                                           | 5 
|ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS | 5                                        
|ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE               | 5                                        
|ITEM 3.  KEY INFORMATION                                       | 5                                        
|A.                                                             | SELECTED FINANCIAL DATA                   | 5 
|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                            | 13                                       
|A.                                                             | HISTORY AND DEVELOPMENT OF THE COMPANY    | 13
|B.                                                             | BUSINESS OVERVIEW                         | 17
|C.                                                             | ORGANIZATIONAL STRUCTURE                  | 23
|D.                                                             | PROPERTY, PLANTS AND EQUIPMENT            | 23
|ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS          | 24                                       
|A.                                                             | OPERATING RESULTS                         | 24
|B.                                                             | LIQUIDITY AND CAPITAL RESOURCES           | 33
|C.                                                             | RESEARCH AND DEVELOPMENT                  | 34
|D.                                                             | TREND INFORMATION                         | 36
|E.                                                             | OFF BALANCE SHEET ARRANGEMENTS            | 37
|F.                                                             | CONTRACTUAL OBLIGATIONS                   | 37
|ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES            | 38                                       
|A.                                                             | DIRECTORS AND SENIOR MANAGEMENT           | 38
|B.                                                             | COMPENSATION                              | 39
|C.                                                             | BOARD PRACTICES                           | 39
|D.                                                             | EMPLOYEES                                 | 42
|E.                                                             | SHARE OWNERSHIP                           | 43
|ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS     | 43                                       
|A.                                                             | MAJOR SHAREHOLDERS                        | 43
|B.                                                             | RELATED PARTY TRANSACTIONS                | 44
|C.                                                             | INTERESTS OF EXPERTS AND COUNSEL          | 46

3

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|                                                                                      |                                                         |   
|------------------------------------------------------------------------------------- | ------------------------------------------------------- | --
|
|
|
|
|                                                                                      |                                                         |   
|ITEM 8.  FINANCIAL INFORMATION                                                        | 47                                                     
|A.                                                                                    | CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION | 47
|B.                                                                                    | SIGNIFICANT CHANGES                                     | 48
|ITEM 9.  THE OFFER AND LISTING                                                        | 48                                                     
|A.                                                                                    | OFFER AND LISTING DETAILS                               | 48
|B.                                                                                    | PLAN OF DISTRIBUTION                                    | 49
|C.                                                                                    | MARKETS                                                 | 49
|D.                                                                                    | SELLING SHAREHOLDERS                                    | 49
|E.                                                                                    | DILUTION                                                | 49
|F.                                                                                    | EXPENSES OF THE ISSUE                                   | 49
|ITEM 10. ADDITIONAL INFORMATION                                                       | 49                                                     
|A.                                                                                    | SHARE CAPITAL                                           | 49
|B.                                                                                    | MEMORANDUM AND ARTICLES OF ASSOCIATION                  | 49
|C.                                                                                    | MATERIAL CONTRACTS                                      | 54
|D.                                                                                    | EXCHANGE CONTROLS                                       | 56
|E.                                                                                    | TAXATION AND GOVERNMENT PROGRAMS                        | 56
|F.                                                                                    | DIVIDENDS AND PAYING AGENTS                             | 58
|G.                                                                                    | STATEMENT BY EXPERTS                                    | 58
|H.                                                                                    | DOCUMENTS ON DISPLAY                                    | 59
|I.                                                                                    | SUBSIDIARY INFORMATION                                  | 59
|ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 59                                                     
|ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 60                                                     
|PART II                                                                               | 60                                                     
|ITEM 13. DEFAULTS, DIVIDEND AVERAGES AND DELINQUENCIES                                | 60                                                     
|ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 60                                                     
|ITEM 15. CONTROLS AND PROCEDURES                                                      | 60                                                     
|ITEM 16. [RESERVED]                                                                   | 61                                                     
|ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT                                             | 61                                                     
|ITEM 16B CODE OF ETHICS                                                               | 61                                                     
|ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 61                                                     
|ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 62                                                     
|ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 62                                                     
|PART III                                                                              |                                                         | 62
|ITEM 17. FINANCIAL STATEMENTS                                                         | 62                                                     
|ITEM 18. FINANCIAL STATEMENTS                                                         | 62                                                     
|ITEM 19. EXHIBITS                                                                     | 62                                                     

4

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# PART I.

|ITEM 1. | IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|------- | -----------------------------------------------------

# Not applicable.

|ITEM 2. | OFFER
STATISTICS AND EXPECTED TIMETABLE
|------- | ---------------------------------------

# Not applicable.

|ITEM 3. | KEY
INFORMATION
|------- | ---------------

| | A. | SELECTED
FINANCIAL DATA
| | -- | -----------------------

The selected financial data is
incorporated by reference to Item 5. of this annual report and should be read in
conjunction with our consolidated financial statements and the notes thereto, which are
set forth in Item 18  Financial Statements and are incorporated by
reference, and the other financial information appearing in Item 5 of this annual report.

| | B. | CAPITALIZATION
AND INDEBTEDNESS
| | -- | -------------------------------

# Not applicable.

| | C. | REASONS
FOR THE OFFER AND USE OF PROCEEDS
| | -- | -----------------------------------------

# Not applicable.

| | D. | RISK
FACTORS
| | -- | ------------

Our
business, operating results and financial condition could be seriously harmed due to any
of the following risks, among others. If we do not successfully address the risks to which
we are subject, we could experience a material adverse effect on our business, results of
operations and financial condition and our share price may decline. We cannot assure you
that we will successfully address any of these risks

General
Risks Factors Relating to Our Company

This
annual report and statements that we may make from time to time may contain
forward-looking information. There can be no assurance that actual results will not differ
materially from our expectations, statements or projections. Factors that could cause
actual results to differ from our expectations, statements or projections include the
risks and uncertainties relating to our business described below.

We
have a history of net losses.

With
the exception of 2003, we have incurred a net loss in each year of our existence. While in
2003, we had net income of $5.3 million, this resulted from a one-time non-cash capital
gain of $8.5 million from the disposal of discontinued operations, offset by a $3.3
million loss from continuing operations. As of December 2005, our accumulated deficit was
approximately $90.4 million. Prior to 2004, Shagrir had never recorded net profits and had
at the time of the acquisition and continues to have a working capital deficiency.
Although Shagrir is currently profitable, mainly due to the effect of the acquisition of
the business activities of Shagrir Towing Services , we may continue to sustain net losses
for the foreseeable future, mainly as a result of the amortization of intangible assets
acquired in connection with the acquisition of Shagrir and the acquisition of the
activities and assets of Shagrir Towing Services, as well as the increased financial
burden associated with such acquisitions, including the increase in working capital
deficiency (see Item 4 Recent Developments) and other business initiatives in
Israel and abroad. As a part of our strategy, we are focusing on the development of new
businesses and services, both in the territories in which we currently operate as well as
in new territories. Investing in such new businesses may result in an increase in short
term losses. If we continue to sustain prolonged net losses or losses from continuing
operations, we may have to cease our operations.

5

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The
majority of our business operations are based in Israel

Due
to our purchase of Shagrir in 2004 and the acquisition of the business activities of
Shagrir Towing Services acquired by Shagrir in February 2005, a large majority of our
operations are located in Israel, and Shagrir accounts for the majority of our revenues.
Consequently, certain events in Israel which may or may not be directly connected with our
business may have a disproportionate effect on our operations. For instance, major public
transportation projects, changes in vehicle related taxes, a proposed increase in the
imputed value of vehicles provided as a part of employee compensation and other
macroeconomic changes in Israel may reduce the number of vehicle owners. Although to date
we have not seen a drop in private vehicle users as a result of such factors, current
projects including high-speed rail systems could lead to such a drop in the future,
thereby reducing the volume of our operations in Israel. We also rely on the renewal and
retention of several operating licenses issued by certain Israeli regulatory authorities.
Should such authorities fail to renew any of these licenses, suspend existing licenses, or
require additional licenses, we may be forced to suspend or cease certain services that we
provide. Additionally, a sustained downturn in the Israeli economy could have a
significant impact on our business.

Our
future operations depend on our ability to obtain additional financing.

We
have historically financed our operations through public and private placements of equity
and debt securities, cash generated from the sales of our systems, grants for research and
development projects and bank credit lines. Pursuant to a series of investments from March
through October 2003, we issued a number of our ordinary shares and warrants with an
aggregate value equal to approximately 53.2% of our then issued and outstanding capital,
on a fully diluted basis. In June 2004, we purchased all of the securities of Shagrir not
already held by the Company at such time, in consideration for the issuance of a number of
ordinary shares and warrants with an aggregate value equal to approximately 28.2% of our
then issued and outstanding share capital, on a fully diluted basis. In February 2005, we
raised $6 million additional capital among others in order to partly finance our
acquisition of the road-side assistance and towing services of Shagrir Towing Services,
and accordingly issued 714,285 of our ordinary shares and warrants to purchase up to
157,142 of our ordinary shares to various investors constituting 19.2% of our then issued
and outstanding share capital (assuming the exercise of all of the warrants). Also in
February 2005, our subsidiary Shagrir was loaned approximately NIS 200 million in loans
and convertible debt as part of Shagrirs acquisition of the road-side assistance and
towing services of Shagrir Towing Services. Pursuant to these transactions we registered
for resale our ordinary shares issued to our investors, our ordinary shares issuable to
our investors pursuant to the exercise of warrants and our ordinary shares issuable to
lenders pursuant to the conversion of the convertible debt. As a result, we currently have
outstanding effective registration statements covering 4,068,330 of our securities
(excluding 180,000 of our ordinary shares underlying registered options) (for further
information regarding agreements relating to the acquisition of the road-side assistance
and towing services of Shagrir Towing Services, see Item 4  Recent Developmentsand Item 10  Material Contracts). We believe that our current assets,
together with anticipated cash generated from operations and outstanding bank credit
lines, will sufficiently allow us to continue our operations as a going concern for the
foreseeable future. We cannot assure you that if we are required to raise additional
financing in the future that we will be able to obtain such financing on satisfactory
terms, if at all, and if we are able to raise financing through the issuance of shares,
this may result in the dilution of the interests of our current shareholders. As a result
of the registration statements that we currently have outstanding, many or all of our
investors who recently purchased our securities may elect to sell some or all of our
securities. Should such sales be significant in volume or take place over a short period
of time, our share price may decline significantly, and we may find it difficult to raise
additional funding through the issuance of equity or convertible debt securities. If our
future capital requirements are greater than the cash we obtain from our business and
available financing, if any, we may, among other things, be required to significantly
reduce our research, development, product commercialization, marketing or other activities
or even cease operations.

6

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Over
recent years, the securities markets in general have experienced increased volatility,
which has particularly affected the securities and operations of many companies, including
companies that have a significant presence in Israel. Although the volatility of these
companies securities has often been unrelated to the operating performance of these
companies, they may experience difficulties in raising additional financing required to
effectively operate and grow their businesses. Such failure and the volatility of the
securities markets in general may affect our ability to obtain additional financing at
favorable terms.

Shagrir
has significant loans which it is required to repay in accordance with a strict schedule

In
order to finance Shagrirs acquisition of the road-side assistance and towing
services of Shagrir Towing Services, it received a NIS 100 million credit facility from
Bank Hapoalim, a NIS 40 million loan from Shagrir Towing Services and approximately NIS 50
million was loaned to it from a group of investors led by Gandyr Investments Ltd. and
Egged Holdings Ltd. In November 2005, a group of our shareholders led by Gandyr
Investments Ltd., converted NIS 29.1 million of loans into Shagrirs ordinary shares.
However, Shagrir still has substantial outstanding loans. Should Shagrir fail to repay the
loans in accordance with the repayment schedule pertaining to each loan and should a
lender refuse to amend the relevant repayment schedule, such lender may realize certain
liens that were created in its favor by Shagrir. This could result in Shagrir having to
divest itself of parts of its business and may result in the cessation of its operations.
This may have a material adverse affect on our financial condition. For further
information on these loans, see Item 4  Recent Developments and Item 10
 Material Contracts.

We
may not be able to successfully compete in the extremely competitive markets for our
products and services.

We
face intense competition in the markets in which we operate.

In Israel,
our primary competitors are Europe Assistance Israel, Shlomo-SIXT and MEMSI, all of which
mainly compete with us in providing road-side assistance and towing services although we
currently are the leading road-side assistance and towing service provider in Israel.
Ituran is our main direct competitor in the stolen vehicle retrieval services market.

In
other countries in which we intend to provide road-side assistance, towing and other
services, our main competition is from local companies as well as large international
corporations with local operations. Our primary competitors in the other geographical
markets in which we currently provide our location based services are mainly Lo-Jack
globally, Ituran in Argentina and other local service providers in each country. Such
competitors use different technologies which include a similar solution to ours, other
radio technologies, GPS/cellular technologies and other technologies.

Should
any of our competitors in Israel or globally successfully provide a broader, more
efficient or attractive combination of services to insurance companies and automobile
owners, our business results could be materially adversely affected.

Many
of our competitors have substantially greater capital resources and significant research
and development staffs, facilities, marketing and distribution networks, name recognition
and extensive customer bases. While we plan to continue to improve our services and
maintain our marketing efforts, we cannot guarantee that we will grow or even maintain our
customer base or we may need to invest more in our efforts to do so.

We
depend on a small number of customers.

We
depend on a small number of customers and our future depends on our ability to maintain
our existing customers and attract new customers. As a result of our acquisition of the
activities of Shagrir Towing Services, the customers which account for the majority of our
revenues in future years are Israeli insurance companies, which offer our road-side
assistance and towing services as part of their vehicle insurance policy packages which
they sell to their customers. Although no one customer currently comprises over 10% of our
revenues, since our business model relies on a relatively low number of customers the loss
of even a small number of customers could materially affect our financial condition.

7

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We
rely on operators to provide services for our Location Based Solution systems.

In
certain countries we rely on third party operators to provide our stolen vehicle retrieval
services. This requires us to maintain good relationships with these third party operators
to ensure that they continue to work with us and provide a good service to our customers.
Since we do not own these operators, we have little or no control over their effectiveness
or methods of operation. The implementation of the operators business plans depends
mainly on factors unrelated to our interests such as their marketing strategies, their
financial stability and the specific requirements and circumstances in their territories.
Our consecutive end unit sales, future system upgrades, future infrastructure extensions
and revenues from other sources, where applicable, from such territories is dependent on
their penetration rate and successful sale growth as well as on the operators
continuous success and their continuous decision to offer these services and products in
their respective territories. Should we fail to maintain relationships with these third
party operators, or these operators fail to successfully market and service our products,
our business would be adversely affected.

We
use fixed price contracts with our customers

Our
road-side services in Israel are sold through annual fixed price contracts, according to
which we are paid a fixed price by insurance companies for each of their customers who
subscribe to receive our services. Should operational expenses rise due to factors such as
a rise in the price of gasoline or any other materials necessary for our operations, our
profit margins could suffer as a result. Since it is often difficult to predict future
price rises in the cost of raw materials, our fixed price contracts may not adequately
cover our future outlays. Additionally, the frequency by which vehicle users may take
advantage of our road-side services can vary unpredictably. Sustained adverse weather
conditions, increased regional hostilities or acts of terrorism, and poor road maintenance
may increase customer usage of our services in any given year, thus reducing profit
margins.

We
rely on a single-source supplier to manufacture end units for our Locations Based
Solution systems.

We
do not have manufacturing facilities for our location based products, or LBS end unit
devices. Most of the components of our LBS end unit devices are manufactured for us by
independent manufacturers abroad and are assembled by a turn-key subcontractor located in
Israel, and there is no certainty that this subcontractor will be able to continue to
provide us with manufacturing and assembly services in the future. Our reliance on
independent contractors, especially those located in foreign countries, involves a number
of risks, including:

| |  | reduced
control over delivery schedules, quality assurance, manufacturing yields and cost;
| | - | ------------------------------------------------------------------------------------------

| |  | reduced
manufacturing flexibility due to last moment quantity changes;
| | - | ----------------------------------------------------------------------

| |  | transportation
delays;
| | - | ----------------------

| |  | political
and economic disruptions;
| | - | -----------------------------------

| |  | the
imposition of tariffs and export controls on such products;
| | - | ---------------------------------------------------------------

| |  | work
stoppages;
| | - | ---------------

| |  | changes
in government policies; and
| | - | -----------------------------------

| |  | the
loss of molds and tooling in the event of a dispute with a manufacturer.
| | - | ----------------------------------------------------------------------------

Our
agreements with our suppliers are generally short-term in nature and may be terminated
with little or no notice. If a supplier of ours were to terminate its relationship with
us, we may be compelled to seek additional sources to manufacture certain of the
components of our systems or even to change the design of our products. Although we
believe that most of the components of our systems may be readily acquired from numerous
suppliers, we cannot assure you that we would be successful in entering into arrangements
with other suitable independent manufacturers without significantly impairing our sales in
the interim period.

8

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We
are subject to several risks as a result of our international sales

Systems
based on our products and systems are currently installed in Israel, Argentina,
Venezuela, Mexico, Russia, Chile and China. We are subject to the risks inherent in
international business activities, including changes in the political and economic
environment, unexpected changes in regulatory requirements, foreign exchange controls,
tariffs and other trade barriers and burdens of complying with a wide variety of foreign
laws and regulations. In addition, if for any reason exchange, price controls or other
restrictions on conversion of foreign currencies were to be imposed, the above business
could be negatively impacted. Moreover, certain of these international operations have
experienced the following difficulties:

| |  | A severe and rapid currency
devaluation in Argentina adversely affected Pointer Localizacion Y Asistencia S.A., or
Pointer Argentina, US dollar results during 2002. This was mainly due to Pointer
Argentinas inability to increase its Argentinian Peso-denominated prices to its
customers, while its major costs of inventory and infrastructure are denominated in US
dollars.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Due
to political instability in Venezuela, the Venezuelan government has imposed foreign
exchange controls, which have effectively led to the cessation of purchase orders of our
SVR products and services from our main customer in Venezuela during 2003.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
technology and standards in the stolen vehicle retrieval industry in which we operate
change rapidly and the introduction of products using new technology and the emergence of
new industry standards and practices could negatively impact our business.

The
wireless communications industry is characterized by rapid technological changes. The
introduction of products using new technology and the emergence of new industry standards
and practices could make our products less competitive and cause us to reduce the prices
of our products. There are several wireless communications technologies, including
cellular telephone, personal communications services, specialized mobile radio and mobile
satellite services which have been or may be implemented in the future for applications
competitive with the applications we provide. Future implementation and technological
improvements could lead to the production of systems which are competitive with, or
superior to ours.

We
cannot assure you that we will timely or successfully introduce or develop new or enhanced
products, which will effectively compete with such potential new products. Our business
will be negatively impacted if we do not introduce or develop technologically competitive
products that respond to customer needs and are priced competitively.

Our
Location Based Solution products employ proprietary technology, which is difficult to
protect and which may infringe on the intellectual property rights of third parties.

Our
success and our ability to compete in the LBS sector depend on our proprietary technology.
We rely on a combination of patent and trade secret laws, together with non-disclosure
agreements and licensing arrangements to establish and protect proprietary rights in our
products. We were granted certain patents in the United States and elsewhere; however, we
have not invested significant resources to constantly update and maintain our proprietary
technology. We cannot assure you that these efforts will successfully protect our
technology because:

| |  | the
laws of some foreign countries may not protect our proprietary rights as fully as do
         the laws of the United States;
| | - | --------------------------------------------------------------------------------------------------------------------------------

| |  | if
a competitor were to infringe on our proprietary rights, enforcing our rights may be
         time consuming and costly, diverting management's attention and our resources;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | measures
like entering into non-disclosure agreements afford only limited protection;
| | - | -------------------------------------------------------------------------------------

| |  | unauthorized
parties may attempt to copy aspects of our products and develop similar          products
or to obtain and use information that we regard as proprietary; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | our
competitors may independently develop or patent technologies that are substantially
equivalent or superior to our technology, duplicate our technologies or design around our
intellectual property rights.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

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In
addition, others may assert infringement claims against us. The cost of responding to
infringement claims could be significant, regardless of whether the claims are valid.

The
use of our Location Based Solution systems is subject to international regulations.

The
use of our LBS systems is subject to regulatory approvals of government agencies in each
of the countries in which our systems are operated, including the State of Israel. We thus
obtained in 2001 a regulatory acceptance from the FCC for our vehicular end-unit device
(RMU) and for our SVR receiving base station. Our operators typically must obtain
authorization from each country in which these systems are installed. While, in general,
applicants have not experienced problems in obtaining regulatory approvals to date, the
regulatory schemes in each country are different and may change from time to time. We
cannot guarantee that approvals, which our operators have obtained, are or will remain
sufficient in the view of regulatory authorities. In addition, we cannot assure you that
operators of our systems will obtain licenses and approvals on a timely basis in all
jurisdictions in which we wish to sell our systems or that restrictions on the use of our
systems will not be unduly burdensome.

We
may not be able to retain or attract key managerial, technical and research and
development personnel that we need to succeed.

Our
success has largely depended and will depend in the future on our skilled professional and
technical employees, substantially all of whom have written employment agreements. 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.

Our
major shareholders have a controlling stake in our company.

Pursuant
to the share purchase agreement of March 2003 wherein DBSI Investments Ltd., or DBSI and
other investors invested approximately $2.6 million in our company, the investments
completed in second half of 2003, wherein DBSI and other investors invested approximately
$1.2 million, the share purchase agreement consummated in February 2005 in which DBSI
invested a further $1 million, the exercise of warrants during March and April 2006 and
the purchase of our shares by DBSI from IDB Holdings in April 2006,
DBSI currently owns approximately 39.4%, of our issued and outstanding shares or 33.8% on
a fully diluted basis. Pursuant to the Shareholders Agreement between DBSI and Egged
Holdings Ltd., or Egged, DBSI also has the right to appoint four out of our seven
directors on our Board of Directors, and thus effectively controls our Board of Directors.
In addition, under the Shareholders Agreement with Egged, DBSI will vote its shares
in favor of one director nominated by Egged. According to the terms of the
Shareholders Agreement, Egged and DBSI will also vote their shares against certain
resolutions brought to our shareholders for a resolution, such as new share issuances,
increases in our share capital and certain transactions, unless they agree to vote
otherwise. As a result, DBSI and Egged have the ability to control material decisions
requiring the approval of our shareholders. For further information on the
Shareholders Agreement between DBSI and Egged, see Item 10  Material
Contracts.

Risk Factors Relating to
our Ordinary Shares

We
do not expect to distribute cash dividends.

We
do not anticipate paying cash dividends in the foreseeable future. Our Board of Directors
will decide whether to declare any cash dividends in the future based on the conditions
then existing, including our earnings and financial condition. According to the Israeli
Companies Law, a company may distribute dividends out of its profits, so long as the
company reasonably believes that such dividend distribution will not prevent the company
from paying all its current and future debts. Profits, for purposes of the Companies Law,
means the greater of retained earnings or earnings accumulated during the preceding two
years.

The
market price of our ordinary shares has been, and may continue to be, very volatile.

The
market prices of our ordinary shares have fluctuated widely. The following factors, among
others, may significantly impact the market price of our ordinary shares:

10

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| |  | macro
changes and changes in market share in the markets in which we provide services and
         products;
| | - | ------------------------------------------------------------------------------------------------------------

| |  | announcements
of technological innovations or new products by us or our competitors;
| | - | ------------------------------------------------------------------------------------

| |  | developments
or disputes concerning patents or proprietary rights;
| | - | ------------------------------------------------------------------

| |  | publicity
regarding actual or potential results relating to services rendered by us or our
         competitors;
| | - | ----------------------------------------------------------------------------------------------------------------

| |  | regulatory
development in the United States, Israel and other countries;
| | - | ------------------------------------------------------------------------

| |  | events
or announcements relating to our collaborative relationship with others;
| | - | -------------------------------------------------------------------------------

| |  | economic,
political and other external factors;
| | - | -----------------------------------------------

| |  | period-to-period
fluctuations in our operating results; and
| | - | -----------------------------------------------------------

| |  | substantial
sales by significant shareholders of our ordinary shares which are currently or
         are in the process of being registered.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

In
addition, the securities markets in general have experienced volatility, which has
particularly affected the market prices of equity securities of many companies and
companies that have a significant presence in Israel. This volatility has often been
unrelated to the operating performance of such companies.

Our
ordinary shares may be affected by limited trading volume and may fluctuate significantly
in price.

Our
ordinary shares are traded on the Nasdaq Capital Market. Trading in our ordinary shares
has been limited and there can be no assurance that an active trading market for our
ordinary shares will develop. As a result, this could adversely affect our
shareholders ability to sell our ordinary shares in short time periods, or possibly
at all. Thinly traded ordinary shares can be more volatile than ordinary shares traded in
an active public market. The average daily trading volume of our ordinary shares in May
2006 was 1,541 shares. The high and low bid price of our ordinary shares for the last two
years has been $65 and $4.9, respectively. Our ordinary shares have experienced, and are
likely to experience in the future, significant price and volume fluctuations, which could
adversely affect the market price of our ordinary shares without regard to our operating
performance.

Corporate
governance scandals and new legislation could increase the cost of our operations.

As
a result of recent corporate governance scandals and the legislative and litigation
environment resulting from those scandals, the costs of being a public company in general
have increased and may continue to increase in the near future. Legislation, such as the
Sarbanes-Oxley Act of 2002, has had and may continue to have the effect of increasing the
burdens and potential liabilities of being a public reporting company. This and other
proposed legislation may increase the fees of our professional advisors and our insurance
premiums.

11

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Risk Factors Relating to
Our Operations in Israel

Political
and Military Conditions in Israel affect our operations.

We
are incorporated under the laws of the State of Israel. Our headquarters, the headquarters
of Shagrir, our operations and the operations of Shagrir, are located in Israel. We are
directly affected by the political, economic and military conditions affecting Israel. Any
major hostilities involving Israel or the interruption or curtailment of trade between
Israel and its present trading partners could materially adversely affect our business,
financial condition and results of operations. Israels economy has been subject to
numerous destabilizing factors, including a period of rampant inflation in the early to
mid-1980s, low foreign exchange reserves, fluctuations in world commodity prices,
military conflicts and civil unrest. Since the establishment of the State of Israel in
1948, hostility has existed, varying in degree and intensity, between Israel and the Arab
countries. In addition, Israel and companies doing business with Israel have been subject
to an economic boycott by the Arab countries. Although Israel has entered into agreements
with some Arab countries and the Palestinian Authority, and various declarations have been
signed in connection with efforts to resolve some of the economic and political problems
in the Middle East, there has been a significant increase in violence since September 2000
which continued with varying levels of severity through 2004. Since the death of Yasser
Arafat in 2004, low-level negotiations between Israel and Palestinian representatives have
been renewed. Nevertheless, the political and security situation in Israel may result in
certain parties with whom we have contracts claiming that they are not obligated to
perform their commitments under those agreements pursuant to force majeure provisions. In
addition, the election of representatives of the Hamas militant group in January 2006 to a
majority of seats in the Palestinian Legislative Council may create additional unrest and
uncertainty in the region. Any hostilities involving Israel or the interruption or
curtailment of trade between Israel and its present trading partners could adversely
affect our operations and could make it more difficult for us to raise capital.
Furthermore, many of our employees and subcontractors are located in Israel, which could
still face a renewal of civil unrest, terrorist activity and military action. Since we do
not have a detailed disaster recovery plan that would allow us to quickly resume business
activity, we could experience serious disruptions if acts associated with this conflict
result in any serious damage to our facilities. Our business interruption insurance may
not adequately compensate us for losses that may occur and any losses or damages incurred
by us could have a material adverse effect on our business. We cannot give any assurance
that security and political conditions will not have such an effect in the future. Any
future armed conflicts or political instability in the region would likely negatively
affect business conditions and harm our results of operations.

Furthermore,
all non-exempt male adult permanent residents of Israel especially under the age of 40,
including some of our office holders and employees, are obligated to perform military
reserve duty and may be called to active duty under emergency circumstances. In the past
there have been significant call ups of military reservists, and it is possible that there
will be additional call-ups in the future. While we have operated effectively despite
these conditions in the past, we cannot assess the impact these conditions may have on us
in the future, particularly if emergency circumstances occur. 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 our other employees due to military service.
Any disruption in our operations would harm our business.

The
Israeli rate of inflation may negatively impact our costs if it exceeds the rate of
devaluation of the New Israeli Shekel against the U.S. dollar.

A
large part of our costs in Israel is not denominated in dollars and may be influenced by
the rate of devaluation of the New Israeli Shekel. Should inflation in Israel impact our
costs at a rate that exceeds the rate of devaluation of the New Israeli Shekel against the
U.S. dollar our dollar costs in Israel will increase, thus reducing our profitability. In
the twelve months ended December 31, 2005, the Israeli economy recorded inflation of
approximately 2.39% and the U.S. dollar devalued against the NIS by approximately 6.85%.
However, in the last 15 years the Israeli economy recorded inflation of approximately
154.1% and the U.S. dollar devalued against the NIS by approximately 124.8%. For further
discussion of such devaluation, see Item 5, Impact of Exchange Rate Fluctuations on
Results of Operations, Liabilities and Assets and Item 11, Quantitative and
Qualitative Disclosures About Market Risk. There can be no assurance that we will
not incur losses from such fluctuations in the future.

We
may not be eligible to receive grants or programs provided to us from our participation
in research and development, investments and other programs or we may be restricted from
manufacturing products or transferring our intellectual property outside of Israel.

We
have received certain grants and programs from the Israeli Government. Some of these
programs may restrict our right to manufacture products or transfer our intellectual
property outside of Israel. If we do not meet certain conditions in the future, we may
have to refund payments previously received under these programs or pay fines.

12

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Service
and enforcement of legal process.

Service
of process upon directors and officers of our company and the Israeli experts named
herein, all of who reside outside the United States, may be difficult to effect within the
United States. Furthermore, since the majority of our assets are located outside the
United States, any judgment obtained against us in the United States may not be
enforceable within the United States. We have been informed by our legal counsel in
Israel, Yigal Arnon & Co., that there is doubt as to the enforceability of civil
liabilities under the Securities Act and the Exchange Act in original actions instituted
in Israel. However, subject to certain time limitations, Israeli courts may enforce United
States final executory judgments for liquidated amounts in civil matters obtained after
due trial before a court of competent jurisdiction (according to the rules of private
international law currently prevailing in Israel) which enforces similar Israeli
judgments, provided that: (i) due service of process has been effected; (ii) such
judgments or the enforcement thereof are not contrary to the law, public policy, security
or sovereignty of the State of Israel; (iii) such judgments were not obtained by fraud and
do not conflict with any other valid judgment in the same matter between the same parties;
and (iv) an action between the same parties in the same matter is not pending in any
Israeli court at the time the lawsuit is instituted in the foreign court.

|ITEM 4. | INFORMATION
ON THE COMPANY
|------- | --------------------------

| | A. | HISTORY
AND DEVELOPMENT OF THE COMPANY
| | -- | --------------------------------------

Until
2003, our business focused primarily on the development, manufacture and sale of location
based services and stolen vehicle retrieval services. In April 2003, our management
decided to strategically focus on providing a range of services to automobile owners and
insurance companies.

Our
new strategy was implemented through two acquisitions in Israel and the establishment of a
subsidiary in Mexico.

In
June 2004 we purchased all of the outstanding and issued share capital of Shagrir not
already held by us. Shagrir was our local Israeli operator and service provider, which
mainly provided stolen vehicle retrieval and other security value-added services mainly
for vehicle owners through a communication network based on our technology.

In
June 2004, we also incorporated a Mexican company, Pointer SA, to serve as our local
Mexican operator and service provider, which would provide stolen vehicle retrieval and
road-side assistance services for vehicle owners using a communication network based on
our technology.

In
February 2005, our subsidiary, Shagrir, purchased the assets and activities of Shagrir
Towing Services, an Israeli company which provided road-side assistance and towing
services, in Israel.

As
a result of the implementation of our strategy, we currently provide a range of services
to automobile owners and insurance companies.

As
a result of the two acquisitions we made in Israel, Shagrir, is currently the most
significant operation we have, and is expected to account for the majority of our business
and revenues in the foreseeable future. In Israel we currently provide all the range of
our services.

Pointer
was founded in 1991 by BVR Technologies Ltd. At that time, we began developing specialized
long-range wireless solutions for location and messaging applications, using Frequency
Hopping Spread Spectrum technology. Our legal and commercial name is Pointer Telocation
Ltd. Through December 1997 we operated under the name Nexus Telecommunication Systems,
Ltd. and through January 2006 we operated under the name Nexus Telocation Systems Ltd. We
operate under the Israel Companies Law  1999. Our shares are publicly traded on the
Nasdaq Capital Market under the symbol PNTR. Our executive offices and research and
development main facilities are located in 1 Korazin Street, Givatayim, 53583, Israel,
telephone number 972-3-572-3111. The headquarters of our subsidiary, Shagrir, are located
in Holon, Israel. The headquarters of our subsidiary, Pointer Argentina, are located in Buenos
Aires, Argentina. The headquarters of our subsidiary, Pointer SA, are located in Mexico
City, Mexico. In January 2005, our subsidiary, Pointer (Eden Telecom Group) Ltd., was
renamed Shagrir Motor Vehicle Systems Ltd. Our Web site is www.pointer.com. Information on
our web site is not incorporated by reference in this annual report.

13

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# Recent Developments

Since
January 1, 2005, the following important events have occurred to us:

Agreement with Latin
American customer

On
May 26, 2006 we entered into an agreement with a Latin American customer pursuant to which
we received, after payment of related expenses, a net amount of approximately $1.4
million. Additionally, a new service level agreement is being negotiated with this
customer, which will govern our future cooperation. However, we can not guarantee that
this agreement will in fact be completed.

Name Change

At
the annual meeting of our shareholders held on January 17, 2006, our shareholders voted to
change our name from Nexus Telocation Systems Ltd. to Pointer Telocation Ltd. Subsequent
to this change, our shares began trading under the symbol PNTR as of February 21, 2006.

Return to NASDAQ Capital
Market.

On
November 16, 2005, following three years of trading on the Over-The-Counter Bulletin
Board, our shares were relisted on the NASDAQ Capital Market.

The conversion of a loan
by a group of investors led by Gandyr Investments Ltd.

Shagrir
Motor Vehicle Systems funded the Shagrir transaction through a credit line of NIS 100
million, made available by Bank Hapoalim B.M., a loan of NIS 40 million provided by
Shagrir Towing Services, a loan of approximately NIS 50 million provided by a group of
investors led by Gandyr Investments Ltd. and Egged Holdings Ltd. and a loan of NIS 10
million provided by the Company and the investors.

On
May 1,  2006,  Shagrir  Motor  Vehicle  Systems  repaid a $2  million convertible loan.
to Egged Holdings Ltd.

On
November 30, 2005, the group of investors, led by Gandyr Investments Ltd., exercised their
options to convert their loan, of approximately NIS 29.1 million, into 43.44% of the
shares of Shagrir Motor Vehicle Systems. As a result, the Company recorded a gain from the
decrease in holdings of Shagrir Motor Vehicle Systems of $359,000 in 2005.

Reverse Stock Split

In
August 2005, a 100 to 1 reverse stock split of the Companys Ordinary shares was
effected. As a result of the reverse stock split, each one hundred shares of the
Companys Ordinary shares with par value of NIS 0.03 each were converted into one
Ordinary share of NIS 3.00 par value.

Employment Agreement with
our Chief Executive Officer

In
May 2005, our Board of Directors approved an agreement with Mr. Danny Stern to serve as
our chief executive officer. Pursuant to the agreement, Mr. Stern was granted options to
purchase 40,000 of our ordinary shares at an exercise price of $10.60 per share, pursuant
to our 2003 option plan. Such options can be exercised in full after 48 months of
continuous service, with 25% of the options vesting after each 12 month-period of
continuous service. In addition, at the end of his first six months period of employment,
we have agreed to determine an annual bonus mechanism.

14

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The Purchase of Certain
of the Activities of Shagrir Towing Services by our subsidiary, Shagrir

On
February 28, 2005 pursuant to an Asset Purchase Agreement, Shagrir, our fully-owned
subsidiary completed the purchase of the road-side assistance and towing services of
Shagrir Towing Services, in consideration for approximately NIS 200 million. NIS 100
million was funded by a loan from Bank Hapoalim B.M, NIS 40 million was funded by a loan
provided by Shagrir Towing Services and approximately NIS 50 million was loaned by a group
of our shareholders led by Gandyr Investments Ltd. and Egged Holdings Ltd. of which NIS
29.1 million has been converted. In addition we invested an amount of NIS 4,550,000 in the
share capital of Shagrir and provided it with a loan of NIS 5,000,000. As part of the
transaction, we granted Bank Hapoalim B.M a two year warrant to purchase up to 100,000 of
our ordinary shares, at a price per share of $18.00; and granted Shagrir Towing Services a
two year warrant to purchase up to 250,000 of our ordinary shares, at a price per share of
$18.00. Part of the remaining balance of loans provided by Egged Holdings Ltd. may be
converted into our shares and/or the shares of our subsidiary, Shagrir. For further
information relating to the purchase of the activities and assets of Shagrir Towing
Services, see Item 10  Material Contracts.

$6 million Investment

On
February 28, 2005, a group of investors, including our controlling shareholder DBSI
Investments Ltd, or DBSI, completed a $6 million investment in our share capital. Pursuant
to the investment agreements, we issued (i) 714,285 of our ordinary shares at a price per
share of $8.40 (of which 309,524 were issued to Egged Holdings Ltd., or Egged) and (ii)
warrants to purchase up to 157,143 of our ordinary shares at the same exercise price (of
which warrants to purchase up to 68,095 of our ordinary shares were issued to Egged),
constituting approximately 19.23% of our then issued and outstanding share capital on a
fully-diluted basis. Under the terms of the agreements, the warrants were exercisable
until the earlier of: (a) April 6, 2006; or (b) our merger or the acquisition of
substantially all of our assets. As a result the warrant has terminated. The transaction
was approved by our shareholders at their annual meeting held on February 1, 2005. In
addition, on March 13, 2005, we entered into a joinder agreement with the general manager
of Shagrir, Mr. Ofer Lior pursuant to which in consideration for $69,735 we issued Mr.
Lior (i) 8,302 of our ordinary shares at a price per share of $8.40 and (ii) a warrant to
purchase up to 1,826 of our ordinary shares at the same exercise price, constituting
approximately 0.22% of our then issued and outstanding share capital on a fully-diluted
basis. This warrant was exercisable by Mr. Lior until the earlier of: (a) April 6, 2006;
or (b) our merger or the acquisition of substantially all of our assets and consequently
has since terminated.

As
part of the investment, DBSI and the major new investor, Egged consummated a shareholders
agreement, pursuant to which they agreed to vote their shares jointly in respect of
certain matters relating to our company and Shagrir. For further information on the
Shareholders Agreement, see Item 10  Material Contracts.

Exercise of warrants by
Bank Hapoalim and other minority investors

From
January 1, 2005 through May 31, 2006, 603,041 warrants and 68,500 employee options were
exercised into our ordinary shares, par value NIS 3.00 each. Of these, warrants to
purchase 7,000 of our ordinary shares were exercised by a cashless exercise into 3,491
ordinary shares, and another 664,541warrants were exercised into ordinary shares, for
approximately $2.9 million (of which DBSI exercised 318,182 warrants in consideration of
approximately $1.4 million).

Incorporation of Local
Mexican Operator

On
June 17, 2004 we incorporated a local Mexican operator and service provider, Pointer SA,
jointly held by us and our Mexican local partners, 96.5% and 3.5% respectively. On
December 2004 and on January 25, 2005 we sold to our local partners 28.5% of our holdings
in Pointer SA in consideration for its par value and thus we currently hold 68%. Pointer
SA offers a broad scope of services, based on our technology and know-how relating to
location based services, stolen vehicle retrieval and other value-added services targeting
Mexican corporations. Pointer SA commenced operations in February 2005 and is currently in
its development phase.

15

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Legal
Claim

On
November 26, 2002, we filed a claim with the Tel-Aviv Magistrates Court for a
permanent injunction against Bank Hapoalim B.M and the China National Electronics Import
Export Beijing Company, or CEIEC. In the claim we requested that the court injunct Bank
Hapoalim from paying CEIEC any sums pursuant to a guarantee in the amount of $300,000 in
favor of CEIEC provided to it in the framework of a previous transaction, and to injunct
CEIEC from requesting Bank Hapoalim to pay it any sums pursuant to the guarantee. We
requested the injunction as a result of unlawful requests made by CEIEC that Bank Hapoalim
pay it the guarantee. Following a hearing in which CEIEC did not attend, the Tel-Aviv
Magistrates Court ruled in our favor on December 31, 2002, granting a permanent injunction
prohibiting Bank Hapoalim from paying any funds to CEIEC pursuant to the guarantee and
injuncting CEIEC from requesting Bank Hapoalim to pay it any funds pursuant to the
guarantee. We understand that sometime in 2003 CEIEC commenced proceedings in China to
which we have not been joined as a party, for payment of the guarantee plus interest at a
rate of 0.5% commencing March 2002, and has since received interim judgments in the
matter, the exact nature of which are not currently clear to us. In August 2004, Bank
Hapoalim informed us, that it may pay CEIEC the guaranteed sum plus interest, and in such
an event will request that we indemnify it for the amount paid. In light of the permanent
injunction ordered in our favor in 2002, and without our knowledge of the exact nature of
the legal proceedings underway between the Bank and CEIEC, since we are not a party to
these proceedings, based on our legal advisors opinion, we have a good defense
against Bank Hapoalims claim for indemnification.

In
March, 2005 we filed a claim against CEIEC and a third party with the China International
Economic and Trade Arbitration Commission in Beijing, China (CIETAC) for
approximately $558,000 representing the damages caused to us by the breach of the contract
between us, CEIEC and the third party pursuant to which contract, the guarantee mentioned
in the paragraph above was given.

In
June, 2005 CEIEC and the third party filed a counter claim with the CIETAC for repayment
of $300,000 relating to the same transaction, plus weekly interest of 0.5% (compounded
from February 2002). The counter claim related to the same amount that CEIEC had claimed
from Bank Hapoalim B.M pursuant to the guarantee discussed above. However, in July 2005,
the counterclaim was withdrawn and in January 2006, CIETAC provided a final ruling in our
favor, pursuant to which CEIEC and the third party shall pay us $557,000 representing most
of the damages caused to us plus interest rate of 6% per annum from April 2003 plus
additional costs incurred by us.

In
February, 2006 the third party petitioned the Beijing No. 2 Intermediate Peoples
Court to overturn the ruling of the arbitrator. In their petition they claimed that
normative arbitration procedures were not followed, that the decision of the arbitrators
was outside the scope of the jurisdiction granted to them, and that the arbitrators ruled
on certain matters in which they lacked jurisdiction. We have not yet officially received
this petition due to the inability of our legal counsel in Beijing to receive documents in
connection with this petition in the absence of an explicit power of attorney to do so. We
recently completed the necessary documentation granting them power of attorney in this
matter, and expect that the petition will be delivered to us soon, giving us an
opportunity to respond to the claims made by CEIEC. Based on our legal advisors
opinion, it is unlikely that the petition to overturn the arbitrators ruling will be
successful.

Grant of Options to
Employees

In
May 2005, our Board of Directors approved an agreement with Mr. Danny Stern to serve as
our chief executive officer. Pursuant to the agreement, Mr. Stern was granted options to
purchase 40,000 of our ordinary shares at an exercise price of $10.60 per share, pursuant
to our 2003 option plan. Such options can be exercised in full after 48 months of
continuous service, with 25% of the options vesting after each 12 month-period of
continuous service.

During
2005, four senior employees of Shagrir Motor Vehicle Systems were granted options to
purchase up to 2,656 shares of Shagrir Motor Vehicle Systems at an exercise price of $160
per share. The options vest over a period of 48 months. The exercise price is subject to
adjustments in the event of dividend distributions or any other amounts that may be paid
to shareholders of Shagrir Motor Vehicle Systems. On July 28, 2005, 1,753 options granted
to one of the senior employees were cancelled.

16

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On
November 22, 2005 we granted the former CEO of Pointer Mexico an option to purchase from
us 1,000 shares of Pointer Mexico at a total exercise price of $ 30 (with no option to
partial exercise). This option is fully vested and will terminate on June 30, 2006.

On
November 23, 2005, our board of directors resolved to issue to our employees options to
purchase 59,000 of our ordinary shares, pursuant to our 2003 Employee Share Option Plan,
at an exercise price of $9.50 per share. Such options can be exercised in full after 48
months of continuous service, with 25% of the options vesting after each 12 month-period
of continuous service.

On
January 17, 2006, our shareholders resolved to issue to 4 directors options to purchase
12,000 of our ordinary shares, pursuant to our 2003 Employee Share Option Plan, at an
exercise price of $7.60 per share. Such options can be exercised in full after 36 months
of continuous service, with 33.3% of the options vesting after each 12 month-period of
continuous service.

| | B. | BUSINESS
OVERVIEW
| | -- | -----------------

General

We
are a service provider of a range of value added services to insurance companies and
automobile owners, including road-side assistance, vehicle towing, stolen vehicle
retrieval as well as certain other services to automobile owners. We provide our services,
for the most part, in Israel, through our subsidiary, Shagrir (which recently acquired the
assets and activities of Shagrir Towing Services), and in Argentina and Mexico through our
subsidiaries Pointer Argentina and Pointer SA respectively. In addition, we continue to develop and
manufacture our location based information system the Nexusphere for the use of our
subsidiaries and for marketing it to other third party local operators through which they
provide location based and security services.

As
a result of the implementation of our strategy, we currently provide the following range
of services to insurance companies and, to a lesser extent, other corporate and individual
customers:

| | (i) | Road-side
assistance  these services may include towing services, mobile
               automobile repair services, vehicle replacement services, the sale of
               spare-parts or connecting the driver to other service providers. Such
services                are currently provided mainly in Israel. In order to provide such
services, we                use our own fleet and employees as well as sub-contractors.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | Vehicle
retrieval and other location based services  these include stolen
               vehicle retrieval services, fleet management and web-location, which are
based                on the systems we use, develop and sell. Stolen Vehicle retrieval
services                includes both preventing the cars from being stolen as well as
retrieving them                in co-operation with law enforcement and private security
agencies.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
currently provide such services mainly in Israel and in addition, but to a lesser extent,
in Argentina and Mexico through subsidiaries in each country: Pointer Argentina (we currently hold
approximately 86.5% of the issued share capital of Pointer Argentina) and Pointer SA (we currently
hold 68% of the issued share capital of Pointer SA), respectively.

In
addition, there are currently other operators in Venezuela, Russia, China and Chile using
our Nexusphere communication and location and system and technology, to which we continue
to market our products, systems and technical support.

The Nexusphere Network

| | Our
Nexusphere network is based on spread spectrum technology (SPSP) intended for wide area
networks (WAN).
| | -----------------------------------------------------------------------------------------------------------

The
following are some of the available applications of Nexusphere:

17

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| |  | Stolen
Vehicles Recovery (SVR)  The Nexusphere system comprises unique features for
SVR solutions, including (i) inclusion of communication & location (ii) concealed
terminal (iii) resistance to jamming (iv) indoor positioning (v) alarm system
adaptability (vi) remote command (vii) accuracy (viii) back-up power supply, and (ix)
24x7 redundant command and control center (CCC).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Fleet
Management & Telematics  Nexusphere provides certain Fleet Management
capabilities, which ensure better utilization of vehicles and other mobile resources. The
end-unit can connect to various sensors by RS-422 or RS-232 standards, or by discrete (on
or off) wirelines. The sensors monitor various vehicle operating systems, and the end
unit will report the results to the fleet owners and managers. We also use end units
based on GPS and Cellular technologies which are connected to our system in order to
provide advanced fleet management as well as telematics services.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Wireless
Remote Monitoring & Control Security and Industrial Applications  The
Nexusphere system offers a total remote monitoring and control solution. Connecting the
end-units to remote generators, fire systems and home alarm systems provides a link to
safety and security command & control centers that is difficult to jam or interfere
with.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Assets
Surveillance & Protection  As part of our Nexusphere System, we were
previously involved in developing applications to provide solutions in the field of
Assets Surveillance & Protection (ASAP). ASAP is based on an end-unit, which is
attached to the asset and a terrestrial communication & location system. ASAP systems
are most commonly employed by transportation companies, insurance companies,
manufacturers and users of assets and crude materials. ASAP systems can provide instant
warning and location in the event of hazardous chemical leakage or road accidents.
Pointer led a two-year project with a consortium of eight European companies, consisting
of technology developers and transportation companies, which was established in December
2001 to develop and test an ASAP solution. The solution was tested in the third quarter
of 2003 and demonstrated its advanced technologies over other alternatives.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
system is comprised of three major parts:

| |  | Command
& Control Center (CCC)  The CCC includes databases, as well as other
software modules required for the execution of our operations. It also includes monitors
on which location and other data collected from the end units is displayed and analyzed
in order to determine the location of the end unit. Commands can be down-linked to the
end units from the CCC using either a commercial paging system (while using the
Nexusphere network) or through cellular networks.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Base
stations  These stations are dispersed throughout a specific territory and
connected to an existing communications infrastructure. Each base station is equipped
with antennae which receive the end-units signal and measure the angle from which
the signal arrived. These measurements, together with additional data received from the
end-units, are then converted into digital data and sent to the Command & Control
Center.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | End-units  Each end unit consists of a transceiver (RF or cellular modem with inputs and
outputs) which is installed in a vehicle or any remote object to be monitored. The
end-units inputs are connected to sensors in the vehicle or object, while the
outputs send commands (which they receive from the CCC) to the object.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18

---

---

The
design of our Nexusphere system allows for seamless integration with existing
infrastructures, low-cost expansion, development of multiple applications, and access to
the internet and public switched telephone network gateways.

|A. | Our
Operations in Israel
|-- | ------------------------

As
a result of our two acquisitions in Israel, our operation in Israel, Shagrir, is currently
the most significant operation we have and is expected to account for the majority of our
business and revenues in the foreseeable future. In Israel we currently provide all the
range of our services, including road-side assistance, towing, stolen vehicle retrieval
and other value added services.

Services and Operations

| | Road-side
Assistance and Towing Services
|- | ----------------------------------------

Shagrir
is the leader in Israel in providing road-side assistance and towing services. Shagrir
provides services to approximately 685,000 subscribers throughout Israel and its fleet of
vehicles includes approximately 114 service cars, mobile garages and towing vehicles,
which are dispatched by the control center to the vehicle requiring assistance, through a
sophisticated management and monitoring software application, connected via remote
terminals used in the service cars, mobile garages and towing vehicles.

Subscribers
for road side assistance and towing services are mainly referred to Shagrir by Israeli
insurance companies, which are our customers. To a lesser extent, additional subscribers
are comprised of fleet vehicle customers and private customers. A subscription entitles a
subscriber during the subscription period (which is usually one year), to certain of our
road-side assistance services, which are usually available to the subscriber twenty-four
hours a day, every day of the year depending on the type of insurance policy purchased and
the service contract with Shagrir.

A
subscription is personal and non-transferable. A subscriber may, however, change the
vehicle that is the subject of the subscription at any time. The price of a subscription
is based, among other things, on the type of subscription, the type of vehicle (private or
commercial), and the frequency in which the subscriber uses the services.

Under
the service contracts, Shagrir is responsible for a vehicle from the time Shagrir begins
rendering services and until such time as the vehicle is delivered to its destination.
Similarly, Shagrir undertakes to compensate the subscriber for any direct damage caused to
his/her car as a result of the provision of the services, subject to the rules of the
Israeli Civil Wrongs Ordinance.

| | Stolen
Vehicle Retreival (SVR) Services and Value Added Location Based Services
|- | -------------------------------------------------------------------------------

Shagrir
is a leading provider of SVR and value added location based services in Israel for
automobile owners, including the provision of location based services for vehicles using
our Nexusphere Network and other sophisticated systems for the protection and location of
vehicles. Using sensors located in a vehicle our system may be alerted as to the progress
of a theft by the transmission of information to our twenty-four hour manned command and
control center. Once received by the center, the necessary steps to recover the vehicle
are taken. Our value added location based services also include the provision of a
distress button, using which a person can alert our command and control center, which
locates the vehicle and immediately sends the required service as well as the location of
vehicles through the Internet, by inserting a personal code, at any given time.

Equipment, Subcontractors
and Supplies

As
of May 2006, Shagrir had 114 service cars, mobile garages and towing vehicles and a number
of replacement vehicles which currently number approximately 67.

19

---

---

The
general policy of Shagrir is to replace its towing vehicles, towing equipment and mobile
garages approximately every five years, and replacement vehicles approximately every two
years, all depending on prevailing economic conditions.

The
majority of the road-side assistance and towing services are carried out by employees of
Shagrir. During peak demand periods, Shagrir calls on the services of certain independent
contractors who render road-side assistance and towing services on behalf of Shagrir.
Shagrir has entered into agreements with these independent contractors. Independent
contractors are also often used in the provision of services by Shagrir as per operating
requirements in peak and non-peak periods.

Of
the replacement vehicles held by Shagrir, on average 60% are rented from various rental
companies in Israel. Shagrir purchases the spare parts it uses in the provision of
road-side assistance from various suppliers in Israel.

For
SVR and location based services, Shagrir mainly use the Nexusphere system and products,
and to a lesser extent end units based on cellular/GPS technology, mainly for fleet
management applications. In order to retrieve the stolen cars Shagrir uses its own forces
as well as law enforcement and various subcontractors.

Sales and Marketing

For
the provision of its road-side assistance and towing services, Shagrir sales and marketing
team directs its sales and marketing efforts to promoting its subscriptions mainly to
Israeli insurance companies, and to lesser extent fleet vehicle customers and private
customers. Our SVR services are marketed primarily through vehicle importers and to a
lesser extent fleet vehicle operators, leasing companies and private individuals. Other
value added location based services are marketed directly to fleet vehicle operators and
private individuals who have already installed our products. We employ an in house sales
and marketing force and also direct the sale of our safety products and car units for
installment to private customers, business customers and vehicle fleets either directly or
through our network of approximately 90 authorized installers across Israel.

In
addition, the Shagrir sales team captures and analyzes sales data from various sources
including insurance companies and agents, fleet vehicle customers and private customers
which it then uses to formulate future sales and marketing strategies.

Patent and Licenses

We
are not dependant on any patent or licenses, which are material; to our business or
profitability, with the exception of the licenses described below in Item 4. "Government
Regulations.

Government Regulations

Shagrir
has the following licenses:

| |  | a
business license to render towing and retrieval/extrication services under the Control of
Commodities and Services (Vehicle Towing and Extrication) Order, 5734-1974, which is
valid until December 31, 2006;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
license for the operation of mobile garages under the Control of Commodities and Services
(Vehicle Garages and Factories) Order, 5730-1970, which is valid until December 31, 2006;
and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
license to rent self-drive vehicles under the Control of Commodities and Services (Tour
Transport, Special Transport and Vehicle Rental) Order, 5745-1995, which is valid until
December 31, 2006.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20

---

---

The
use of products incorporating our Nexusphere technology in the State of Israel requires a
license from the Israel Ministry of Communications. In May 1996, Shagrir was granted an
operational license to operate our wireless messaging system over 2 MHz in the 966 to
968MHz radio spectrum band. Since 1999, this license has been renewed on a regular basis.

Competition

In
Israel, our primary competitors are Europe Assistance Israel, Shlomo-SIXT and MEMSI, all
of which mainly compete with us in providing road-side assistance and towing services
although we currently are the leading road-side assistance and towing service provider in
Israel. In addition, other companies which provide assistance services through insurance
companies may attempt to compete with us. Ituran is our main direct competitor in the
stolen vehicle retrieval services market.

Seasonality

The
demand for road-side assistance, towing services and replacement vehicles is greatly
influenced by weather conditions, with Shagrir usually receiving more service calls on
winter and summer days and less service calls on spring and fall days.

Furthermore,
the demand for replacement vehicle services is greatly influenced by the number of
vehicles being stolen in Israel at a given time, with Shagrir receiving more calls for
replacement vehicles where the number of vehicles being stolen in Israel is high.

The
location based services market is not seasonal.

|B. | Our
Operations in Argentina and Mexico
|-- | --------------------------------------

Our
subsidiaries, Pointer Argentina (we currently hold approximately 86.5% of the issued share capital
of Pointer Argentina) and Pointer SA (we currently hold 68% of the issued share capital of Pointer
SA), currently provide mainly stolen vehicle retrieval services in Argentina and Mexico
respectively. Pointer Argentina and Pointer SA, provide similar services based on our Nexusphere
system as are provided by Shagrir.

In
these territories, we operate the command and control center from which we dispatch
external security forces employed by us to retrieve the stolen vehicles or provide
assistance as required by the driver. Installations and de-installations of end units in
the vehicles are done either by our in-house employees, or by subcontractors mainly in
designated installation centers.

Sales and Marketing

In
order to execute their sales and marketing initiatives, Pointer Argentina and Pointer SA employ an
in house sales and marketing force whose efforts are focused on sales and marketing to
insurance companies, and vehicle owners, directly, or indirectly through insurance agents,
vehicle distributors and vehicle financing corporations in their respective designated
territories.

Patent and Licenses

Pointer Argentina
and Pointer SA are not dependant on any patent or licenses which are material to their
business or profitability, with the exception of the licenses described below in Item 4.  Government
Regulations.

Government Regulations

Products
that are based on our technology require the use of spread spectrum devices in the
800-1000 MHz band. The FCC first authorized the unlicensed use of spread spectrum devices
in the 902 to 928 MHz band in 1985. As an incentive for the increased development of
spread spectrum technology, the FCC subsequently amended its rules to allow the unlicensed
use of higher power spread spectrum systems within the 902 to 928 MHz band than had
originally been authorized for the ISM (industrial, scientific and medical) band. While
the FCC has in the past encouraged the development of new spread spectrum devices for
unlicensed services, there can be no assurance that the FCC will not require licensing at
some time in the future for the ISM band.

21

---

---

Most
Latin American countries have dedicated a part of their radio spectrums for the ISM band
for unlicensed services, however, the local operator is required to obtain a specific
license for its operations. Pointer Argentina and Pointer S.A. have been required to obtain domestic
licenses for the deployment of our Nexusphere systems in Argentina and Mexico.

Competition

Our
primary competitors in the stolen vehicle retrieval services market in Argentina and
Mexico are Lo-Jack and Ituran (in Argentina only).

Some
competitors in the stolen vehicle retrieval services market offer a similar solution to
ours and others, like Lo-Jack, use a VHF based messaging unit, without a wide area
network, which is sold to customers and is connected via radio to local law enforcement
communication networks.

In
addition, in these markets and also some other potential markets, some primary location
based service providers who directly or indirectly compete with us employ other
technologies, such as a combination of GPS (satellite-based location technology) over
cellular-like systems. These systems use commonly existing infrastructure, which offer
location based services, which conform with the recent FCC ruling, requiring mobile phones
to be equipped with either relatively accurate 911 capabilities (using GPS or differential
time of arrival technologies), or less accurate 911 capabilities (using cell-id.
technology).

Seasonality

Our
business provided in Latin America is not materially seasonal.

|C. | Our
Operations in Russia, Venezuela, China and Chile
|-- | ----------------------------------------------------

We
also sell our Nexusphere sub-systems and products to third party local operators primarily
in Russia, Venezuela and to a lesser extent China and Chile, who, like our subsidiaries,
Shagrir, Pointer Argentina and Pointer SA, provide mainly stolen vehicle retrieval or other services
using our Nexusphere system and technology.

The
third party domestic operators are responsible for the commercialization of their
services, which are based on our systems and products in their designated territories and
in their licensed coverage area. They control the sales and marketing of the end user
devices as well as services to their final customers according to their business focus and
business plans. In order to provide these services our domestic operators purchased from
us, and deployed, the CCC and sufficient base stations to cover their respective
territories.

Our
sales and marketing efforts in this respect are executed by our internal marketing and
customer support employees, focusing on being attentive to needs of these customers, in
order to provide them with the solutions they require.

22

---

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# Geographical breakdown
of our revenues:

The
following is a breakdown of our revenues by geographic region, including the percentage of
our total consolidated sales for each period:

|              | 2005 | 2004 | 2003
|------------- | ---- | ---- | ----
|
|
|
|
|Israel        |      |      |     
|              |      |     
|Latin America |      |      |     
|              |      |     
|Other         |      |      |     
|              |      |      |     
|              |      |     
|Total         |      |      |     
|              |      |      |     

| | C. | ORGANIZATIONAL
STRUCTURE
| | -- | ------------------------

The
legal and commercial name of our company is Pointer Telocation Ltd. We were incorporated
under the laws of the State of Israel in 1991 under the name Nexus Telecommunications
Systems Ltd. In 1997 we changed our name to Nexus Telocation Systems Ltd. In 2006 we
changed our name again to Pointer Telocation Ltd.

The
following is a list of our currently active subsidiaries and their countries of
incorporation:

|NAME OF SUBSIDIARY    | JURISDICTION OF INCORPORATION
|--------------------- | -----------------------------
|Pointer Argentina (1) | Argentina                    
|Shagrir               | Israel                       
|Pointer SA (2)        | Mexico                       

| | (1) | We
hold 86.45% of the issued and outstanding shares of Pointer Argentina.
| | --- | -------------------------------------------------------------------------

| | (2) | We
hold 68% of the issued and outstanding shares of Pointer SA.
| | --- | ---------------------------------------------------------------

| | D. | PROPERTY,
PLANTS AND EQUIPMENT
| | -- | ------------------------------

Our
executive offices, research and development and laboratory facilities are located in
Givatayim, Israel (a suburb of Tel Aviv). We currently lease approximately 609 square
meters and our annual lease payments are approximately $68,000. Pointer Argentina offices and
operations facility are located in Buenos Aires. Pointer Argentina currently leases 1,771 square
meters (including 1,051 square meters used by its installation centers) with an annual
lease payment of $87,000. Shagrirs offices and main operations facility are located
in Holon, Israel. Shagrir currently leases 5,320 square meters in Holon with annual rental
fees of approximately $125,000. In addition, Shagrir purchased from Shagrir (1985) its
Haifa property (2,100 square meters) for approximately $389,000; and leases an additional
property in Jerusalem, Israel (approximately 606 square meters) with annual rental fees of
approximately $34,000. Pointer SAs offices and operations facility are located in
Mexico City, Mexico. Pointer SA currently leases 480 square meters with an annual lease
payment of $78,000. For further information, see Note 10c of our consolidated financial
statements.

23

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|ITEM 5. | OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
|------- | --------------------------------------------

| | A. | OPERATING
RESULTS
| | -- | -----------------

The
following discussion and analysis should be read in conjunction with our consolidated
audited financial statements and the notes thereto, included hereinafter in this annual
report.

# Overview

Until
2003, our business focused primarily on the development, manufacture and sale of location
based services and stolen vehicle retrieval services. In April 2003, our management
decided to strategically focus on providing a range of services to insurance companies and
automobile owners.

Our
new strategy was implemented through two acquisitions in Israel and the establishment of a
subsidiary in Mexico.

In
June 2004 we purchased all of the outstanding and issued share capital of Shagrir not
already held by us. Shagrir was our local Israeli operator and service provider, which
mainly provided stolen vehicle retrieval and other security value-added services mainly
for vehicle owners through a communication network based on our technology.

In
June 2004, we also incorporated a Mexican company, Pointer SA, to serve as our local
Mexican operator and service provider, which would provide stolen vehicle retrieval and
road-side assistance services for vehicle owners using a communication network based on
our technology. Pointer SA commenced operations in February 2005 and is currently in its
development phase.

In
February 2005, our subsidiary, Shagrir, purchased the assets and activities of Shagrir
Towing Services, an Israeli company which provided road-side assistance and towing
services, in Israel.

As
a result of the implementation of our strategy, we currently provide a range of services
to insurance companies and automobile owners.

As
a result of the two acquisitions we made in Israel, Shagrir, is currently the most
significant operation we have, and is expected to account for the majority of our business
and revenues in the foreseeable future. In Israel we currently provide all the range of
our services.

# Critical Accounting
Policies

The
consolidated financial statements include Pointer and the accounts of our subsidiaries.
Intercompany transactions and balances are eliminated in consolidation. Management is
required, in certain instances, to use estimates and assumptions that affect the amounts
reported in the consolidated financial statements and the notes thereto. The actual
results could differ from those estimates. Our accounting policies are described in note 2
to the consolidated financial statements included herein at Item 18. A critical
accounting policy is one that is both important to the portrayal of our financial
condition and results of operations and requires managements most difficult,
subjective and complex judgments, often as a result of the need to make estimates about
the effect of matters that are inherently uncertain. The significant accounting policies
and estimates, which we believe to be the most critical in understanding and evaluating
our reported financial position and results of operations, include:

Revenue recognition

We
and our subsidiaries generate revenues primarily from the provision of services,
subscriber fees and sales of systems and products, mainly in the areas of road-side
assistance services, automobile repair and towing services, stolen vehicle recovery and
other value added services. To a lesser extent, revenues are also derived from technical
support services that we provide. We and our subsidiaries sell our systems primarily
through a direct sales force as well as through resellers. Sales consummated by our sales
forces and sales to resellers are considered sales to end-users.

24

---

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Revenues
from the sale of systems and products are recognized in accordance with Staff Accounting
Bulletin (SAB) No. 104, Revenue Recognition (SAB No.
104), when delivery has occurred, persuasive evidence of an agreement exists, the
vendors fee is fixed or determinable, no further obligation exists and
collectability is probable.

Service
revenues including subscriber fees are recognized as services are performed, over the term
of the agreement.

Revenues
from Stolen Vehicle Recovery services are recognized upon success, when the related stolen
vehicle is recovered, and such recovery is approved by the customer or ratably over the
term of the agreement.

In
accordance with Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables (EITF 00-21), revenue from certain arrangements may include
multiple elements within a single contract. Our accounting policy complies with the
requirements set forth in EITF 00-21, relating to the separation of multiple deliverables
into individual accounting units with determinable fair values. We consider the sale of
products and subscriber fees to be separate units of accounting.

Revenues generated from technical support services, installation and
de-installation are recognized when such services are rendered.

Certain
agreements include revenues from installation of products as well as revenues from sales
of Stolen Vehicle Recovery services or subscriber fees that are considered to be one unit
of accounting. In those cases revenues from installation are deferred and recognized over
the estimated duration of the service contracts.

Generally,
we do not grant rights of return. We follow SFAS No. 48, Revenue Recognition when
Right of Return Exists. Based on our experience, no provision for returns has been
recorded.

Accounts Receivable

We
depend on a small number of customers located mainly in Israel and South America. If the
creditworthiness or the financial strength of the customers were to decline, there could
be an adverse effect on our operating results and cash flows. Should geopolitical
situations change in the countries where our customers operate, there could be additional
credit risks.

In
cases where our customer is the operator (not owned by us), we use several methods in
order to assure collectibility. In most cases, we demand financial guarantees such as a
Letter of Credit or payments before delivery. To a lesser extent we assess collectibility,
by assessing the credit history for each customer on a case-by-case basis and
investigating the financial capabilities of our customers by receiving on-going
information on their business status. However, we cannot be certain that our estimations
will prove correct as to any one of our customers.

Inventory

Inventories
are stated at the lower of cost or market value. Cost is determined using the moving
average method. Inventory write-offs are provided to cover risks arising from
slow-moving items, technological obsolescence, excess inventories, and for market prices
lower than cost.

Valuation of Long-Lived
Assets, Intangibles and Goodwill:

Goodwill
reflects the excess of the purchase price of the acquired business or subsidiary over the
fair value of net assets acquired. Pursuant to FAS 142, Goodwill and Other
Assets, goodwill is not amortized but rather tested for impairment at least
annually. As of December 31, 2005, we have determined that no impairment with respect to
goodwill exists.

Intangible
assets consist of the acquired patents, customer list and brand name. Intangible assets
are amortized over their useful life using a method of amortization that reflects the
pattern in which the economic benefits of the intangible assets are consumed or otherwise
used up. Intangible assets are stated at amortization cost.

25

---

---

Patents
are amortized over an eight-year period.

The
customer lists are amortized over five-year and eight-year periods. The brand names are
amortized over two-year and eight-year periods.

Our
long lived assets are reviewed for impairment in accordance with SFAS No.144,
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
No.144) whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the assets 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. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell. No
impairment losses have been identified as of December 31, 2005.

Share based compensation

On
December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123
(revised 2004), Share-Based Payment (SFAS 123(R)), which is a
revision of SFAS 123. Generally, the approach in SFAS 123(R) is similar to the approach
described in SFAS 123. However, SFAS 123 permitted, but did not require share-based
payments to employees to be recognized based on their fair values while SFAS 123(R)
requires all share-based payments to employees to be recognized based on their fair
values. SFAS 123(R) also revises, clarifies and expands guidance in several areas,
including measuring fair value, classifying an award as equity or as a liability and
attributing compensation cost to reporting periods. We have adopted SFAS 123(R) on January
1, 2006.

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

| |  | The
modified prospective method, in which compensation cost is recognized
commencing with the effective date (i) based on the requirements of SFAS 123(R) for all
share-based payments granted after the effective date and (ii) based on the requirements
of SFAS 123 for all awards granted to employees prior to the effective date of SFAS
123(R) that remain unvested at the effective date.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
modified retrospective method, which includes the requirements of the
modified prospective method described above, but also permits entities to restate based
on the amounts previously recognized under SFAS 123, for purposes of pro forma
disclosures all prior periods presented.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
permitted by SFAS 123, as of December 2005 we accounted for share-based payments to
employees using APB 25, the intrinsic value method. Accordingly, the adoption of the SFAS 123(R)
fair value method will have an impact on our results of operations, although it will have
no impact on our overall financial position. The impact of the adoption of SFAS 123(R)
cannot be predicted at this time, as it depends on levels of share-based payments for
future grant. However, had we adopted SFAS 123(R) in prior periods, the impact of that
Standard would have approximated the impact of SFAS 123, as described in the disclosure of
the pro forma information on note 2p to our Financial Statements.

In
March 2005, the SEC Staff issued Staff Accounting Bulletin No. 107 (SAB 107) to give
guidance on implementation of SFAS 123(R).

26

---

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# Significant Expenses

Cost of Revenues.

Cost
of revenues consists primarily of the operational costs of our subsidiaries, which mainly
include salaries and employee benefits, costs related to towing and mobile automobile
repair vehicles and replacement vehicles, subcontractors, system maintenance, end-unit
installation, system communications, security and recovery, and the depreciation of fixed
assets. In addition, cost of revenues includes expenses related to the cost of purchasing
or manufacturing systems and products, including salaries and employee benefits,
subcontractors and consulting, raw materials and components.

Research and Development
Expenses.

Research
and development expenses consist primarily of salaries and employee benefits,
subcontractors and consulting, less grants and participation.

Selling & Marketing
Expenses.

Selling
& Marketing expenses consist primarily of expenses for salaries and employee benefits,
sales commissions and other selling and marketing activities.

General and
Administrative Expenses.

General
and Administrative expenses consist primarily of salaries and employee benefits for
executive, accounting, administrative personnel, professional fees, provisions for
doubtful accounts, and other general corporate expenses.

Amortization of deferred
stock compensation.

We
have elected to follow Accounting Principles Board Statement No. 25, Accounting for
Stock Options Issued to Employees (APB No. 25) and FASB Interpretation
No. 44 Accounting for Certain Transactions Involving Stock Compensation
(FIN No. 44) in accounting for our employee stock option plans. Under APB No.
25, when the exercise price of an employee stock option is equivalent to or above the
market price of the underlying stock on the date of grant, no compensation expense is
recognized.

We
adopted the disclosure provisions of SFAS No. 148, Accounting for Stock-Based
Compensation  transition and disclosure (SFAS No. 148), which
amended certain provisions of SFAS 123 Accounting for Stock-Based Compensation
(SFAS No. 123). We continue to apply the provisions of APB No. 25, in
accounting for stock-based compensation.

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

Amortization of
intangible assets.

Intangible
assets consist of the acquired patents, customer list and brand name. Intangible assets
are amortized over their useful life using a method of amortization that reflects the
pattern in which the economic benefits of the intangible assets are consumed or otherwise
used up.

27

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Financial Income
(Expenses), Net.

Financial
expenses consist mainly of bank charges and interest expenses, foreign currency
translation adjustments, amortizations of compensation related to warrants issued to a
bank and others and also from one time cashless expense resulting from the induced
conversion of a convertible debenture. Financial income consists of interest on short-term
bank deposits.

Other Expenses, Net.

Other
expenses, net relate primarily to items of income or expenses outside our ordinary course
of business.

# Selected Financial Data

We
derived the following selected consolidated financial data presented below for each of the
years ended December 31, 2003, 2004 and 2005 from our consolidated financial
statements and related notes included in this annual report. The selected consolidated
financial data (including balance sheet data) for the years ended December 31, 2001
and 2002 have been derived from audited financial statements not included in this annual
report.

Pursuant
to the sale of all our holdings in NexusData, the assets, liabilities, operating results
and cash flows attributed to NexusData have been deemed to be discontinued operations (see
Note1d to our consolidated financial statements); accordingly, our comparative financial
data has been reclassified for all periods presented in this annual report.

The financial data set forth below
should be read in conjunction with our consolidated financial statements and the notes
thereto and the other financial information appearing elsewhere in this annual report.

|                                    | 2005 | 2004(*) | 2003 | 2002    | 2001
|----------------------------------- | ---- | ------- | ---- | ------- | ----
|
|
|
|
|Statement of Income Data:           |      |         |      |         |     
|Revenues, products                  |      |         |      | 8,856   |     
|Revenues, services                  |      |         |      | 28,108  |     
|Total Revenues                      |      |         |      | 36,964  |     
|                                    |      |        
|Cost of revenues, sales             |      |         |      | 5,727   |     
|                                    |      |        
|Cost of revenues, services          |      |         |      | 17,587  |     
|Total Cost of Revenues              |      |         |      | 23,314  |     
|Gross profit (loss)                 |      |         |      | 13,650  |     
|Research and development costs,     |      |        
|net                                 |      |         |      | 892     |     
|Selling, general and administrative |      |        
|expenses                            |      |         |      | 9,211   |     
|Amortization of deferred stock      |      |        
|based compensation                  |      |         |      | 126     |     
|Amortization of intangible assets   |      |         |      | 2,462   |     
|Operating income (loss)             |      |         |      | 959     |     
|Financial expenses                  |      |         |      | 4,027   |     
|Other income (expenses)             |      |         |      | 341     |     
|                                    |      |        
|Loss from continuing operations     |      |        
|before                              |      |        
|minority interest                   |      |         |      | 2,727   |     
|Minority interest in losses of a    |      |        
|subsidiary                          |      |         |      | -       |     
|Loss from continuing operations     |      |         |      | 2,727   |     
|Gain(Loss) from discontinued        |      |        
|operations                          |      |         |      | -       |     
|                                    |      |        
|Income (loss) before taxes on       |      |        
|income                              |      |         |      | (2,727  | )   
|Income taxes                        |      |         |      | -       |     
|Net income (loss)                   |      |         |      | (2,727  | )   
|Basic and diluted net earning       |      |        
|(loss) per share from               |      |        
|continuing operations               |      |         |      | (1.17   | )   
|Basic and diluted net earning       |      |        
|(loss) per                          |      |        
|share                               |      |         |      | (1.17   | )   
|                                    |      |        
|Weighted average number of shares   |      |        
|outstanding (in thousands)          |      |         |      | 2,339   |     
|                                    |      |        
|Balance Sheet Data:                 |      |        
|Total assets                        |      |         |      | 67,214  |     
|Net assets (liabilities) of         |      |        
|continuing operations               |      |         |      | 10,805  |     
|Working capital (deficit)           |      |         |      | (13,999 | )   
|Convertible debentures              |      |         |      | -       |     
|Shareholders' equity (deficiency)   |      |         |      | 10,805  |     
|Share capital                       |      |         |      | 1,680   |     
|Additional paid-in capital          |      |         |      | 100,707 |     

(*) Reclassified

28

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# Operating Results

Twelve Months Ended
December 31, 2005 Compared with Twelve Months Ended December 31, 2004

Revenues.Revenues sharply increased by $26 million, or 237% from $11.0
          million in 2004 to $37 million in 2005. The major increase in revenues in 2005
          resulted from the increase in our operations in Israel derived from the
          consolidation of Shagrirs annual results as compared to the consolidation
          in 2004 of Shagrirs results only from the second half of that year, and
          due the impact of Shagrirs acquisition of the road side assistance and
          towing activities of Shagrir Towing Services on February 28, 2006. To a lesser
          extent, revenues increased also due to a 25% increase in revenues from our
          international business.

Cost of
Revenues. Our cost of revenues increased to $23.3 million for the twelve
months ended December 31, 2005 as compared to $7.6 million for the same period in 2004.
This increase was associated mainly with the consolidation of Shagrirs annual
results as compared to the consolidation in 2004 of Shagrirs results only from the
second half of that year, and due the impact of Shagrirs acquisition of the road
side assistance and towing activities of Shagrir Towing Services on February 28, 2006. To
a lesser extent, cost of revenues increased also due to our operations in Mexico, which
became operational in March 2005.

Gross Profit.
Our gross profit increased by $10.3 million from $3.4 million in 2004 to $13.7 million in
2005, mainly as a result of the foregoing.

Research and Development
Costs. Net research and development expenses in 2005 increased by $410,000
from $482,000 in 2004 to $892,000 in 2005 mainly as a result of grants in the amount of
$516,000 which were deducted in 2004 from research and development expenses. Such grants
were from the European Union for the Assets Surveillance and Protection project which has
since been concluded.

29

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Selling and Marketing
Expenses. Selling and marketing costs increased by 125% to $3.7 million in
2005 from $1.6 million in 2004. The major increase in 2005 resulted from the consolidation
of Shagrirs annual results as compared to the consolidation in 2004 of
Shagrirs results only from the second half of that year, and due the impact of
Shagrirs acquisition of the road side assistance and towing activities of Shagrir
Towing Services on February 28, 2006. To a lesser extent, selling and marketing costs
increased also due to increased marketing efforts in our subsidiaries abroad, including
our operations in Mexico.

General and Administrative
Expenses. General and administrative expenses increased by approximately
99% from $ 2.8 million in 2004 to $5.5 million in 2005. The major increase in 2005
resulted from the consolidation of Shagrirs annual results as compared to the
consolidation in 2004 of Shagrirs results only from the second half of that year,
the impact of Shagrirs acquisition of the road side assistance and towing activities
of Shagrir Towing Services on February 28, 2006 and one-time charges associated with the
same acquisition.

Amortization of deferred share
option compensation.Amortization of deferredstock
based compensation decreased from $465,000 in 2004 to $126,000 in 2005 as a result of
reduced amortization of deferred share option compensation from 2003.

Amortization of intangible
assetsAmortization of intangible assets increased by $1.6 million from
$0.9 million in 2004 to $2.5 million in 2005 mainly due to an increase in additional
intangible assets recorded in 2005 pursuant to the acquisition by Shagrir of the
activities and assets of Shagrir Towing Services on February 28, 2005, and an increase in
amortizations related to intangible assets recorded in the acquisition of Shagrir in 2004
due to the 12 month consolidation in 2005 as compared to 6 month consolidation in 2004.

Operating Profit
(Loss). As a result of the foregoing, we recorded in 2005 a $959,000
operating profit, compared to an operating loss of $2.9 million in 2004.

Financial Expenses
(Net). Financial expenses increased from $0.8 Million in 2004 to $4.0
million in 2005 mainly due to the effect of the leveraged acquisition by Shagrir of the
activities and assets of Shagrir Towing Services and the effect of consolidation of
Shagrirs annual results as compared to the consolidation in 2004 of Shagrirs
results only from the second half of that year.

Net Income
(Loss). In 2005, we had net loss of $2.7 million compared to a net loss of
$3.8 million in 2004.

Twelve Months Ended
December 31, 2004 Compared with Twelve Months Ended December 31, 2003

Revenues.Revenues sharply increased by $5.8 million, or 113%, from $5.2
          million in 2003 to $11.0 million in 2004. The major increase in revenues in 2004
          resulted from the consolidation of Shagrirs results in the second half of
          2004 into our consolidated financial statements since we increased our holdings
          from approximately 14% to 100% at the end of June 2004. We expect in 2005 to
          consolidate Shagrirs results for the whole year and therefore to increase
          our revenues. To a lesser extent, although the economic situation in Venezuela
          remained unstable and the imposition of foreign currency restrictions also
          remained, revenues from our customer in Venezuela increased. This increase was
          nevertheless offset in part by the decrease in revenues of our SVR services in
          Argentina.

Cost of
Revenues. Our cost of revenues increased to $7.6 million for the twelve
months ended December 31, 2004 as compared to $4.2 million for the same period in 2003.
This increase was associated mainly with the consolidation of Shagrirs results in
the second half of 2004 into our consolidated financial statements as explained above. To
a lesser extent, our cost of revenues increased due to increased volume of end unit sales
mainly to our customer in Venezuela, which was partially offset by a decrease in cost of
revenues of our SVR services in Argentina.

Gross Profit.
Our gross profit increased by $2.4 million from $1.0 million in 2003 to $3.4 million in
2004, mainly as a result of the purchase of our former customer Shagrir, our service
provider in Israel, which became our subsidiary.

Research and Development Costs. Net research and development expenses in
2004 decreased by $182,000 from $664,000 in 2003 to $482,000 in 2004 mainly as a result of
focusing R&D on SVR and Mid-2003 cost reduction plan. In 2004 and in 2003, research
and development expenses were net of $516,000 and $ 476,000 respectively of grants from
the European Union for the Assets Surveillance And Protection project. Since the project
was completed in October 2003, and final grants approval were delayed to the first half of
2004, we have received no further grants from the European Union and we do not expect to
receive any grants in the foreseeable future.

30

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Selling and Marketing
Expenses. Selling and marketing costs increased by 165% to $1.6 million in
2004 from $621,000 in 2003. The major increase in 2004 resulted from the consolidation of
Shagrirs results in the second half of 2004 into our consolidated financial
statements since we increased our holdings from approximately 14% to 100% at the end of
June 2004. We expect in 2005 to consolidate Shagrirs results for the whole year and
therefore to increase our selling and marketing costs.

General and Administrative
Expenses. General and administrative expenses increased by approximately
107% from $1.3 million in 2003 to $2.8 million in 2004. The major increase in 2004
resulted from the consolidation of Shagrirs results in the second half of 2004 into
our consolidated financial statements since we increased our holdings from approximately
14% to 100% at the end of June 2004 and from an allowance for doubtful accounts of $
326,000 of certain debt owed by one of our customers. We expect in 2005 to consolidate
Shagrirs results for the whole year and therefore to increase our general and
administrative expenses.

Amortization of deferred share
option compensation.Amortization of deferredstock
based compensation increased from $400,000 in 2003 to $465,000 in 2004 as a result of
amortization of additional compensation provided in 2004 offset by reduced amortization of
deferred share option compensation from 2003.

Amortization of intangible
assetsAmortization of intangible assets increased by $865,000 from $67,000
in 2003 to $932,000 in 2004 mainly due to additional intangible assets recorded in 2004
pursuant to the acquisition of Shagrir.

Operating Loss.
As a result of the foregoing, our operating loss in 2004 increased to $2.9 million
compared to an operating loss of $2.1 million in 2003.

Financial Expenses
(Net). Financial expenses decreased from $1.1 in 2003 to $0.8 million in
2004 mainly due to the fact that in 2003, financial expenses included a one time cashless
expense resulting from the induced conversion of a convertible debenture in the amount of
$1 million, offset in part by the affect of the consolidation of Shagrir from the second
half of 2004.

Net Income
(Loss). In 2004, we had net loss of $3.8 million compared to a net income
of $5.3 million in 2003. Our net income in the 2003 period was primarily the result of a
one-time, non-cash capital gain of $8.5 million resulting from the sale in February 2003
of Nexus Data Inc., offset by $3.3 million loss from continuing operations.

# Impact of Exchange Rate
Fluctuations on Results of Operations, Liabilities and Assets

Our
results of operations, liabilities and assets were mainly influenced by the fluctuations
of exchange rates between the US dollar and the New Israeli Shekel (NIS), and
to a lesser extent between the US dollar and the Argentine and Mexican Peso. For a
discussion regarding the functional and reporting currency of each of our subsidiaries see
Note 2b to our financial reports.

Due
to the two acquisitions we made in Israel, our business in Israel currently accounts for
the majority of our business and revenues. The business in Israel, especially the
activities acquired from Shagrir Towing Sevices are mainly denominated in NIS.

For
many years prior to 1986, the Israeli economy was characterized by high rates of inflation
and devaluation of the Israeli currency against the U.S. dollar and other currencies.
However, since the institution by the Israeli government of an economic recovery program
in 1985, inflation, while continuing, has been significantly reduced and the rate of
devaluation has been substantially diminished.

We
believe that inflation in Israel and fluctuations in the U.S. dollar  NIS exchange
rate may have substantial effects on our business, and our net income. Increased inflation
may increase our NIS costs in Israel including among others salaries of our employees in
Israel, costs of communications, subcontractors, financial expenses associated with loans
related to the CPI, and other expenses, which are paid in New Israeli Shekels. On the
other hand, a devaluation of the NIS against the US dollar will reduce our NIS denominated
revenues and expenses in US dollar terms and therefore may increase our consolidated net
losses.

31

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The
exchange rate has fluctuated during 2005 from a high of NIS 4.7410 to the dollar to a low
of NIS 4.2990 to the dollar. The average high and low exchange rates between the NIS and
U.S. dollar during the most recent six months, as published by the Bank of Israel, were as
follows:

|MONTH         | HIGH
1 U.S. dollar = | LOW
1 U.S. dollar =
|------------- | -------------------- | -------------------
|November 2005 | 4.741                | 4.640              
|December 2005 | 4.662                | 4.579              
|January 2006  | 4.658                | 4.577              
|February 2006 | 4.725                | 4.664              
|March 2006    | 4.717                | 4.658              
|April 2006    | 4.671                | 4.503              
|May 2006      | 4.522                | 4.428              

The
average exchange rate, using the average of the exchange rates on the last day of each
month during the period, for each of the five most recent fiscal years, was as follows:

|Period                              | Exchange Rate
|----------------------------------- | -------------
|
|January 1, 2001 - December 31, 2001 | 4.2195 NIS/$1
|January 1, 2002 - December 31, 2002 | 4.7363 NIS/$1
|January 1, 2003 - December 31, 2003 | 4.5124 NIS/$1
|January 1, 2004 - December 31, 2004 | 4.4833 NIS/$1
|January 1, 2005 - December 31, 2005 | 4.5026 NIS/$1

In
2001, the rate of inflation was about 1.4% and the NIS was devalued against the dollar by
9.3%. In 2002, the rate of inflation was about 6.5% and the NIS was devalued
against the dollar by 7.3%. In 2003, the Israeli economy recorded negative inflation of
approximately 1.9% where the U.S. dollar devalued against the NIS by approximately 7.6%.
In 2004, the Israeli economy recorded inflation of approximately 1.4% where the U.S.
dollar devalued against the NIS by approximately 1.6%. As a result of the differential
between the rate of inflation and the rate of valuation of the NIS, we experienced
increases and decreases in the costs of our Israel operations, as expressed in U.S.
dollars in 2004, but they did not materially affect our results of operations in such
periods.In 2005, the Israeli economy recorded inflation of approximately 2.4%
where the NIS devalued against the US. dollar by approximately 6.8%. As a result of the
differential between the rate of deflation and the rate of valuation of the NIS, we
experienced increases and decreases in the costs of our Israel operations, as expressed in
U.S. dollars, in 2005.

Regarding our operation in Argentina,
the fact that most of Pointer Argentinas revenues are not denominated in US dollars,
we believe that inflation in Argentina and fluctuations in the U.S. dollar 
Argentinian Peso exchange rate may have a significant effect on the business and overall
profitability of Pointer Argentina and as a consequence, on the results of our operations.
In 2002, a severe and rapid currency devaluation in Argentina adversely affected Pointer
Argentinas US dollar results. This was mainly due to Pointer Argentinas
inability to increase its Argentinian Peso-denominated prices to its customers, while its
major costs of inventory and infrastructure were denominated in US dollars. In 2004, the
U.S. dollar  Argentinian Peso exchange rate fluctuated between 2.92 and 2.98 Pesos
to the dollar. From January 1, 2004 to December 31, 2004, the value of the Argentinian
Peso increased by approximately 2.02% against the US dollar. This increase had no material
effect on our business during 2004. In 2005 the U.S. dollar  Argentinian Peso
exchange rate fluctuated between 2,979 and 3,032 Pesos to the dollar. From January 1, 2005
to December 31, 2005, the value of the Argentinian Peso increased by approximately 1.78%
against the US dollar. This increase had no material effect on our business during 2005.

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We
are not presently engaged in any hedging or other transactions intended to manage the
risks relating to foreign currency exchange rate or interest rate fluctuations. However,
we may in the future undertake such transactions if management determines that such is
necessary to offset such risks.

Governmental and Fiscal
Policies which May Affect Our Business

In
recent years the market for vehicle leasing in Israel has grown. Employers often provide
vehicles to their employees as benefits mainly through leasing companies. Such benefits
are tax deductible for the employer, while the employee pays taxes on the vehicle based on
a predefined valuation by the income tax authorities. There are indications that the tax
authorities are contemplating a significant increase in the valuation of employee
vehicles. Should such a proposal take effect, it may reduce the affordability of such
vehicles, thereby causing an overall decrease in private vehicle ownership.

Argentinas
ongoing debt crisis since 2001 has caused the government to implement fiscal and monetary
policies, making it extremely difficult to receive credit from the banks. This policy may
also contribute to the volatility of the exchange rate of the US dollar against the
Argentinian Peso. Additionally, the growing success of law enforcement programs in
Argentina has reduced the rate of car theft and may continue to adversely affect our
business.

In
Venezuela, the prevailing foreign currency restrictions imposed by the Venezuelan
government and the economic political situation in Venezuela, which caused our Venezuelan
customer to cease its orders from us in the past, continue to be implemented. Such
continuously implemented policies and the continuous political and economical
uncertainties in Venezuela may continue to affect the success of our operations in
Venezuela in the future.

| | B. | LIQUIDITY
AND CAPITAL RESOURCES
| | -- | -------------------------------

At
December 31, 2005, we had a negative working capital of $14 million, our current assets to
current liabilities ratio was 0.42/1, we had cash and cash equivalents of $1.7 million and
unused credit facility of $3.4million.

Since
our inception, our operations have been funded through capital contributions, bank loans,
private and public placements, research and development grants from the Chief Scientist,
the BIRD Foundation, the European Community and cash flow from operations. We no longer
receive grants from the Office of the Chief Scientist, the BIRD Foundation or the European
Community.

As of December 31, 2005, we had a
long-term credit facility for approximately $34.6 million, of which $31.5 were provided to
our subsidiary Shagrir. $5.7 million are long-term loans in or linked to the US dollar
from banks and others, $8 million are NIS long-term loans from a bank and others. $20.3
million are long-term loans in NIS adjusted to the CPI from banks and others. A $0.6
million loan is in Mexican pesos. For further information of our consolidated long term
loans see notes 9 and 10 to our financial statements.

As
of December 31, 2005, we had a short term credit facility for approximately $8.1 million
of which $7.7 million with Bank Hapoalim. $3.4 million of the short term credit facility
remains as of December 31, 2005 available for our use.

In
2005, net cash provided by our continuing operating activities amounted to $5.8 million as
compared to net cash provided from continuing operating activities of $94 thousand in 2004. In
2005, net cash used in our continuing investing activities was $39.1 million as compared
to $0.8 million net cash used in our continuing investing activities in 2004. In 2005, net
cash provided by financing activities was $34.7 million as compared to $79 thousand
provided by continuing financing activities in 2004.

Current
liabilities increased from $12.6 million in 2004 to $24.2 million at December 31, 2005,
mainly due to the liabilities acquired in connection with the acquisition of the road
side assistance and towing services business and loans provided to finance these
transactions.

Long-term
liabilities increased from $5.8 million in December 31, 2004 to $32.2 million in December
31, 2005 mainly due loans provided to Shagrir to fund the acquisition of the road side
assistance and towing services.

33

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We
anticipate that the impact of the two acquisitions we made in Israel will have a positive
impact on our cashflow from our operating activities, which will be offset by a negative
impact on our cashflow used in financing activities. However we cannot assure, that any
such net positive cashflows, if any, will sufficiently cover negative cashflows expected
to be used for our newly operative Mexican subsidiary, Pointer SA and for the significant
operating expenses, which we expect to incur in connection with the development and
marketing of our systems and products, as well as increased investments in the deployment
of our existing and new networks in different geographical regions around the world.

For
further information relating to the purchase of the activities and assets of Shagrir
Towing Services, see Item 10  Material Contracts.

We
believe that our current assets, together with anticipated cash generated from operations
and the bank credit lines, will be sufficient to allow us to continue our operations as a
going concern. However, we cannot assure you that we will be able to generate sufficient
revenues from the sale of our services and products or succeed to obtain such additional
sources of equity or debt financing. In raising additional funds, we may depend on
receiving financial support from our principal shareholders or other external sources. We
cannot assure you that they will continue to provide us with funds when requested, and
that such funds, if any, will be sufficient to finance our additional cash requirements.

Aside
for the aforementioned long-terms and credit facilities from banks, we have no firm
commitments or arrangements for additional financing, and there can be no assurance that
any such financing will be available on terms satisfactory to us, if at all. To the extent
that our capital requirements exceed cash provided from operations and available financing
(if any), we may, among other things, be required to reduce significantly research &
development, product commercialization, marketing and/or other activities. Under certain
circumstances, our inability to secure additional financing could cause us to cease our
operations. Our business has also been harmed as a result of the current general duress
and difficult economic and political conditions in certain countries in which we operate,
particularly Venezuela and Argentina.

For
a discussion of certain commitments and contingent liabilities of ours, see Note 10 to our
financial statements included herein. For further information regarding information
regarding investments in our Company see Item 4 Recent Developments and Item
10  Material Contracts.

| | C. | RESEARCH
AND DEVELOPMENT
| | -- | ------------------------

We
invest a significant amount of our resources on our internal research and development
operations. We believe that continued and timely development of new applications and
products and enhancements to our existing systems and products are necessary to compete
effectively. We devote a significant portion of our resources (i) to developing new
applications and products to better compete in a rapidly evolving market, (ii) sustaining
and upgrading existing systems, applications and products by improving serviceability and
adding new capabilities and features, (iii) to decreasing the cost of owning and operating
such products, and (iv) to maintaining close relationships with our customers to identify
their product needs.

Future
growth will depend upon our ability to enhance our existing systems and products and to
introduce new products on a timely basis. Since we commenced operations we have conducted
extensive research and development activities and we continue to improve our Nexusphere
network. Our net expenditures for research and development programs during the years ended
December 31, 2005 and December 31, 2004, totaled approximately $892,000 and $482,000
respectively. We expect that we will continue to commit substantial resources to research
and development in the future. As of June, 2006, the Company employed 11 persons in
research and development. Our gross research and development expenses constituted
approximately 2.4% and 9.1% of our revenues, and our net research and development expenses
constituted approximately 2.4% and 4.4 of such sales, in the respective years ended
December 31, 2005 and 2004. For additional information concerning commitments for research
development programs See Note 10 to our financial statements included elsewhere in this
annual report.

34

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The
Government of Israel encourages research and development projects oriented towards
products for export through the Office of the Chief Scientist of the Ministry of Industry
and Commerce of the State of Israel. Under the terms of Israel Government participation, a
royalty of 2% to 5% of the net sales of products developed from a project funded by the
Chief Scientist must be paid, beginning with the commencement of sales of products
developed with grant funds and ending when 100% to 150% of the grant is repaid. The terms
of the Israeli government participation also require that the manufacture of products
developed with government grants be performed in Israel, unless a special approval has
been granted. Separate Israeli government consent is required to transfer to third parties
technologies developed through projects in which the government participates. Such
restrictions do not apply to exports from Israel of products developed with such
technologies. Royalty bearing grants received from the State of Israel for research and
development were offset against our research and development costs.

We
also received funding for certain research and development expenses relating to our joint
venture with API from the Israel-United States Bi-national Industrial Research and
Development Foundation, or BIRD Foundation. Royalties from sales to the BIRD Foundation
amount to 150% of the grant received. As of December 31, 2005, our contingent obligation
to the BIRD Foundation was $2.089 million.

We
currently hold various United States patents relating to the use of Nexusphere
communications technology for various aspects of reverse paging and mobile location. We
have not invested the requisite payment to maintain our patents, and we may lose our
rights to this proprietary technology in the near future.

The
pending patent applications filed by us involve complex legal and factual questions, and
the scope and breadth of claims to be allowed is uncertain. Accordingly, there can be no
assurance that patent applications filed by us will afford protection against competitors
with similar technology. In addition, we cannot assure you that the patents issued to us
will not be infringed, designed around by others or invalidated. Some foreign countries
provide significantly less patent protection than the United States. Patent applications
in the United States are maintained in secrecy until patents issue, and because
publication of discoveries in the scientific or patent literature tends to lag behind
actual discoveries by several months, we cannot be certain that we were the first creator
of inventions covered by pending patent applications or the first to file patent
applications on such inventions. There can also be no assurance that any application of
our technologies will not infringe patents or proprietary rights of others or that
licenses that might be required for our processes or products would be available on
reasonable terms. Furthermore, there can be no assurance that challenges will not be
instituted against the validity or enforceability of any patent owned by us or, if
instituted, that such challenges will not be successful. The cost of litigation to uphold
the validity and prevent infringement of a patent can be substantial.

In
addition to potential patent protection, we rely on the laws of unfair competition and
trade secrets to protect our proprietary rights. We attempt to protect our trade secrets
and other proprietary information by non-disclosure agreements with our employees,
consultants, customers, strategic partners and potential strategic partners. Although we
intend to protect our rights vigorously, there can be no assurance that secrecy
obligations will be honored or that others will not independently develop similar or
superior technologies or trade secrets. We believe that such measures provide only limited
protection of our proprietary information, and there is no assurance that our proprietary
technology will remain a secret or that others will not develop similar technology and use
this technology to compete with us. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. To the extent that consultants, key employees
or other third parties, such as prospective joint venture partners or subcontractors,
apply technological information independently developed by them or by others to our
projects, disputes may arise as to the proprietary rights to such information, which
disputes may not be resolved in our favor.

35

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Our
proprietary technology also includes software. Much of the software algorithms are also
included and claimed in the patent and issued patent applications for Nexusphere
communications technology. Although software protection is currently available in the
United States, there can be no assurance that the software patents will continue to be the
subject of patent protection in the United States. Also, foreign patent protection for
software is generally afforded lesser protection than in the United States.

| | D. | TREND
INFORMATION
| | -- | -----------------

The
following discussion should be read in conjunction with the selected financial data
included above and our consolidated financial statements and the related notes thereto
included in this annual report.

We
now operate predominantly in Israel and Latin America, mainly as a provider of services to
insurance companies and automobile owners.

In
Israel, in June 2004 we acquired Shagrir, our primary customer and operator in Israel. In
February 2005 Shagrir acquired certain of the activities and assets of Shagrir Towing
Services. These two acquisitions expanded our operations and increased our revenues in
Israel such that approximately 90% of our revenues are now derived from the Israeli
market. Such transactions reflect our strategy not only to serve as a technology company
but also as an operator, providing operating services to insurance companies and
automobile owners.

Our
Argentinian subsidiary, Pointer Argentina, has been negatively affected by economic and political
instability in Argentina and from the reduction in car theft rates mainly associated with
success of law enforcement programs.

Due
to continuous political and economic conditions and foreign exchange restrictions in
Venezuela, we cannot be sure whether we will receive any further purchase orders from our
customer in Venezuela or when such orders may arrive.

In
February 2005, our subsidiary, Pointer SA, commenced operations in Greater Mexico City.
Since Pointer SAs operations are in the development phase, we, together with Pointer
SAs other shareholders (we currently hold 68% of the issued and outstanding shares
of Pointer SA), will need to provide it with financing until it has sufficient cash flows
to run its operations.

In
2006 and thereafter, as a result of our diversification into a service provider that
provides a broad range of services mainly to the insurance industry, we foresee that our
revenue channels will continue to be derived from these services.

In
2005 we consolidated our financial reports in order to reflect 100% of Shagrirs
financial results. On November 30, 2005, a group of investors, led by Gandyr Investments
Ltd., exercised their options to convert their loan of approximately NIS 29.1 million into
43.44% of the shares of Shagrir Motor Vehicle Systems. As a result, our holdings in
Shagrir Motor Vehicle Systems were reduced to 56.56%. As long as Shagrir continues to have
a shareholder deficiency, we will continue to consolidate 100% of Shagrirs financial
results. However, as Shagrir is expected to be profitable, we believe that from the second
half of 2006 we may need to consolidate its financial results only for the then existing
holding (by recording minority interest), which may materially negatively affect our net
income (loss) at such periods.

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| | E. | OFF-BALANCE
SHEET ARRANGEMENTS
| | -- | ------------------------------

The company has no off balance
arrangement as described in this section.

| | F. | CONTRACTUAL
OBLIGATIONS
| | -- | -----------------------

|Contractual Obligations
December 31,
2005 (in thousands USD) |  | Total | Less
than 1
Year | 1-3
Years | 3-5
Years | More
than 5
Years
|------------------------------------------------------------ |  | ----- | ---------------- | --------- | --------- | -----------------
|
|
|
|
|Short term debt and other current liabilities                |  |       |                  | 1         |           |                  
|                                                             |  |      
|Long-term loans                                              |  |       |                  | 2         |           |                  
|                                                             |  |      
|Accrued severance pay, net                                   |  |       |                  | 3         |           |                  
|                                                             |  |      
|Management fees to DBSI                                      |  |       |                  | 4         |           |                  
|                                                             |  |      
|Operating lease obligations                                  |  |       |                  | 5         |           |                  
|                                                             |  |      
|Purchase Obligations                                         |  |       |                  |           |           |                  
|                                                             |  |      
|Royalties to BIRD                                            |  |       |                  | 6         |           |                  
|                                                             |  |      
|Total contractual obligations                                |  |       |                  |           |           |                  
|                                                             |  |       |                  |           |           |                  

---

1
          Short term debt and other current liabilities include short term bank credits,
          trade accounts payable for equipment and services that have already been
          supplied and other accrued expenses

2
          Long term loans include principal and interest payments in accordance with the
          terms of the agreements with Banks. For further information please see item 11
           liquidity and capital resources.

3 Accrued severance pay
maturity depends on the date our employees will actually cease being employed. The amount
is net of outstanding severance pay funds.

4 The Company shall pay
annual fees $180,000 in consideration for DBSI management services for the period of three
years commencing April 2003. Such commitment does not include any automatic renewal of the
agreement with DBSI.

5 Operating lease
obligations include rental payments of offices, cars, and other premises and equipment.

6
          Royalties to BIRD include the amount received by BIRD foundation indexed as per
          the agreement, which the Company has undertaken to pay based on sales of a
          specific product.  The Company does not anticipate selling this product and
          therefore, does not anticipate paying these contingent royalties (See Note 11c
          to our Financial Statements).

37

---

---

|ITEM 6. | DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
|------- | ------------------------------------------

| | A. | DIRECTORS
AND SENIOR MANAGEMENT
| | -- | -------------------------------

The
executive officers, directors and key employees of the Company are as follows:

|Name             | Age | Position with Company                             
|---------------- | --- | --------------------------------------------------
|
|
|
|
|Yossi Ben Shalom | 50  | Chairman of Board of Directors                    
|Danny Stern      | 54  | President and CEO                                 
|Alicia Rotbard   | 60  | External Director                                 
|Gov Ben Ami      | 79  | External Director                                 
|Barak Dotan      | 38  | Director                                          
|Ken Lalo         | 49  | Director                                          
|Yoel Rosenthal   | 51  | Director                                          
|Hanoch Yokev     | 58  | Vice President, R&D and Chief Technology Officer  
|Ronen Stein      | 39  | Vice President and Chief Financial Officer        
|Gideon Rossman   | 46  | Vice President, Business Development and Marketing

Yossi Ben Shalom
has served as our Chairman of the Board of Directors since April 2003. Mr. Ben Shalom was
Executive Vice President and Chief Financial Officer of Koor Industries Ltd. (KOR) from
1998 through 2000. Before that, Mr. Ben-Shalom served as Chief Financial Officer of
Tadiran Ltd. Mr. Ben-Shalom was an active director in numerous boards, such as at NICE
Systems (NICE), (computer telephony), Machteshim Agan (chemistry), and Investec Bank,
amongst others. Mr. Ben-Shalom was an active chairman in successful turnaround programs,
such as Eurocar Israel, and American Express Israel. He participated in the creation of
TDA VC fund (a joint venture between Tempelton and Tadiran). He was an active Chairman of
Scopus  a technology company with sales of over $30 million. Yossi is a co-founder
of DBSI Investments Company.

Danny Sternwas
appointed as our President and Chief Executive Officer in May 2005. Mr. Stern was General
Manager of Technoplast Industries Ltd. from 2002 through 2004. Before that, Mr. Stern
served as Co-Founder and Chief Executive Officer of Appilog Inc. Israel and USA from 1999
through 2002 and as Co-Founder and Chief Executive Officer of PICS (Israel) Ltd. and LIMS
Technologies Ltd. from 1990 through 1999. Mr. Stern holds a Bachelor of Arts degree in
Economics from Tel Aviv University

Alicia Rotbardhas served as a director on our Board since 2002. In 1989 she founded DOORS
Informations Systems, Inc. and served as its CEO until 2002. From 1989 she served as
President and CEO of Quality Computers Ltd. From 1980 to 1985 she served as Deputy General
Manager of the Tel-Aviv Stock Exchange, managing its Computer Department and Operations.
Ms. Rotbard holds a B.Sc. in Mathematics and Physics from the Hebrew University,
Jerusalem.

Gov Ben Ami has
served as a director on our Board since 2002. He also serves on the Board of the
Kanfei Zahav Fund, the National Kibbutz Fund and the Technions Research
and Development Organization. From 1990 to 1993 he served in the Presidency of the
Industrial Union. From 1990 to 1992 he served as a special consultant to the Minister of
Industry and Trade on the subject of the European Common Market. From 1987 to 1988 he
served as General Manager of the Ministry of Communication and he also served on the Board
of Directors of Bezeq at this time. Mr. Gov. has served on various boards of directors of
publicly traded companies as well as industrial companies. Mr Gov holds a B.Sc in
Mechanical and Industrial Engineering from the Technion in Haifa as well as an MBA degree.

Barak Dotanwas
appointed a director on our board in April 2003.Mr. Dotan is a co-founder of DBSI
Investments Ltd., a private investment company that has made various investments in
private and public companies. Before establishing DBSI Investments, Mr. Dotan worked as
Product Manager for Jacada [Nasdaq  JCDA], formerly CST, a software company that
provides a complete software infrastructure to transform legacy systems into e-business
and wireless solutions, and thereafter managed private investments in high-tech and other
areas. Mr. Dotan graduated from the Hebrew University of Jerusalem summa cum laude with a
B.Sc. in Computer Science and Business Management.

38

---

---

Ken Lalo was
appointed a director on our Board in April 2003 and serves as the chairman of our audit
committee. Mr. Lalo is the Executive Vice President of Polar Communications Ltd. Beginning
in 2001, he served in various other managerial positions within the Polar Investments
group, including as a member of the Boards of Directors of various affiliates of the
group. Mr. Lalo also serves as the President of Nipson SAS and as a Director of Digital
Printing Systems PLC, Cimatron Ltd. and BVR Systems (1998) Ltd. From 1993 until 2001, he
served as Vice President and General Counsel, Clal Industries and Investments Ltd. and as
a member of the Boards of Directors of various affiliates of Clal, including publicly
traded and private companies. Mr Lalo holds an LL.B. from Tel-Aviv University, an M.C.L
(Master of Comparative Law) degree from Georgetown University and an M.B.A from
Northwestern University/Tel-Aviv University.

Yoel Rosenthalwas appointed a director on our Board in April 2003. He is a veteran
accountant with over 20 years of experience. Prior to joining D.B.S.I. Mr. Rosenthal was a
founder and partner of a private accounting firm in Israel, Bruckner, Rosenthal, Ingber,
He also held the position of Loan Officer for multinational corporations at the Bank of
Montreal in the USA. Mr. Rosenthal received an MBA with honors from the University of
California at Los Angeles and a BA in Economics and Accounting from Tel Aviv University.

Hanoch Yokev,
one of our founders, has served as our Senior Vice President and Chief Technology Officer
since our inception in 1991. From 1979 to 1991, he worked with Elisra, a subsidiary of
Tadiran. At Elisra, he served as a System Engineer in connection with the development of
several electronic warfare systems. His last position at Elisra was Chief Scientist.
Mr. Yokev holds a Bachelor of Science degree in Physics from Tel Aviv
University.

Ronen Steinwas
appointed our Chief Financial Officer in July 2002, one month after joining Pointer From
1998 until 2002, Mr. Stein worked with Rada Electronic Industries (Nasdaq: RADI). He was
appointed the Chief Financial Officer of Rada in 1999 and served as its Chief Financial
Officer until May 2002. Mr. Stein holds a B.Sc. in economics and accounting and an M.B.A
from Tel Aviv University.

Gideon Rossmanwas appointed our Vice President of Business Development in 2005. Prior to
his appointment, Mr. Rossman was Vice President of Distributed Power for Ormat Systems
Ltd. Prior to that, Mr. Rossman was a Business Manager for the Process Diagnostics and
Control division of Applied Materials. From 1992 through 1997 he was employed by Orbot
Instruments as an Electrical Engineer and as a Business Manager. Mr. Rossman holds a BSc
in Electrical and Computer Engineering from the Technion in Haifa. In 1999 he completed
his MBA at Tel-Aviv University.

| | B. | COMPENSATION
| | -- | ------------

The
aggregate direct remuneration paid to all persons as a group who served in the capacity of
director or executive officer during the year ended December 31, 2005, was approximately
$514,000, including amounts expended by us for automobiles made available to our officers,
expenses reimbursed to officers (including professional and business association dues and
expenses) and other fringe benefits commonly reimbursed or paid by companies in Israel,
but excluding amounts set aside or accrued to provide pension, retirement or similar
benefits, which amounted to $60,000.

In
addition, during 2005 a total of 77,000 options were granted to all persons as a group who
served in the capacity of director or executive officer, 40,000 at an exercise price of
$10.6 and 37,000 at an exercise price of $9.5 pursuant to our 2003 Option Plan.

| | C. | BOARD
PRACTICES
| | -- | ---------------

Our
Articles of Association provide for a Board of Directors of not less than two nor more
than eight members. Pursuant to the DBSI investment, our board will consist of seven
directors, four of which will be appointed by DBSI. Each director is elected to serve
until the next annual general meeting of shareholders and until his or her successor has
been elected. Officers serve at the discretion of the board of directors. The Israeli
Companies Law which entered into effect on February 1, 2000 and was amended most recently
in March 2005, requires the board of directors of a public company to determine the number
of directors who shall possess accounting and financial expertise.

39

---

---

Under
the Israeli Companies Law, a person who is already serving as a director will not be
permitted to act as a substitute director. Additionally, the Israeli Companies Law also
prohibits a person from serving as a substitute director for more than one director.
Appointment of a substitute director for a member of a board committee is only permitted
if the substitute is a member of the board of directors and does not regularly serve as a
member of such committee. If the committee member being substituted is an outside
director, the substitute may only be another outside director who possesses accounting and
financial expertise. An outside director may only be substituted in his or her capacity as
a member of a board committee. The term of appointment of a substitute director may be for
one meeting of the board of directors or for a specified period or until notice is given
of the cancellation of the appointment. To our knowledge, no director currently intends to
appoint any other person as a substitute director, except if the director is unable to
attend a meeting of the board of directors.

Under
the Israeli Companies Law, companies registered under the laws of Israel the shares of
which have been offered to the public in or outside of Israel are required to appoint no
less than two outside directors. No person may be appointed as an outside director if such
person or the persons relative, partner, employer or any entity under the
persons control, has or had, on or within the two years preceding the date of the
persons appointment to serve as outside director, any affiliation with the company
or any entity controlling, controlled by or under common control with the company. The
term affiliation includes:

| |  | an
employment relationship;
| | - | ---------------------------

| |  | a
business or professional relationship maintained on a regular basis;
| | - | ----------------------------------------------------------------------

| |  | control;
and
| | - | ------------

| |  | service
as an office holder.
| | - | ----------------------------

A
person shall be qualified to serve as an outside director only if he or she possesses
accounting and financial expertise or professional qualifications. At least one outside
director must posses accounting and financial expertise. The conditions and criteria for
possessing accounting and financial expertise or professional qualifications were recently
determined in regulations promulgated by the Israeli Minister of Justice in consultation
with the Israeli Securities Authority.

Regulations
have been recently promulgated under the Israeli Companies Law which now mandate that in
the future when appointing an external director to the board of directors of a public
company, in addition to the already existing requirements for such external director, such
external director must either have expertise in finance and accounting or be
professionally qualified. Additionally, at least one of the external directors
must have expertise in finance and accounting. These regulations do not appear
to relate to external directors currently serving.

A
person is deemed to have expertise in finance and accounting if his or her
education, experience and qualifications provide him or her with expertise and
understanding in business matters  accounting and financial statements, in a way
that allows him or her to understand, in depth, the companys financial statements
and to encourage discussion about the manner in which the financial data is presented.

The
companys board of directors must evaluate the proposed external directors
expertise in finance and accounting, by considering, among other things, his or her
education, experience and knowledge in the following: (i) accounting and auditing issues
typical to the field in which the company operates and to companies of a size and
complexity similar to such company; (ii) a companys independent public
accountants duties and obligations; (iii) preparing company financial statements and
their approval in accordance with the Companies Law and the Israeli Securities Law.

40

---

---

A
director is deemed to be professionally qualified if he or she meets any of
the following criteria: (i) has an academic degree in any of the following professions:
economics, business administration, accounting, law or public administration; (ii) has a
different academic degree or has completed higher education in a field that is the
companys main field of operations, or a field relevant to his or her position; or
(iii) has at least five years experience in any of the following, or has a total of five
years experience in at least two of the following: (A) a senior position in the business
management of a corporation with significant operations, (B) a senior public position or a
senior position in public service, or (C) a senior position in the companys main
field of operations. The board of directors here too must evaluate the proposed external
directors professional qualification in accordance with the criteria set
forth above.

The
affidavit required by law to be signed by a candidate to serve as an external director
must include a statement by such candidate concerning his or her education and experience,
if relevant, in order that the board of directors may properly evaluate whether such
candidate meets the requirements set forth in the regulations. Additionally, the candidate
should submit documents and certificates that support the statements set forth in the
affidavit.

Additionally,
under the Israel Companies Law, a public companys board of directors must determine
the minimum number of directors who have expertise in finance and accounting
taking into account the type of company, its size, the extent of its activities and the
complexity of the companys operations.

No
person may serve as an outside director if the persons position or other business
activities create, or may create, a conflict of interest with the persons
responsibilities as an outside director or may otherwise interfere with the persons
ability to serve as an outside director. If, at the time outside directors are to be
appointed, all current members of the board of directors are of the same gender, then at
least one outside director must be of the other gender.

Outside
directors are to be elected by a majority vote at a shareholders meeting, provided
that either:

| |  | the
majority of shares voted at the meeting, including at least one-third of the shares held
by non-controlling shareholders voted at the meeting, vote in favor of election of the
director; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
total number of shares held by non-controlling shareholders voted against the election of
the director does not exceed one percent of the aggregate voting rights in the company.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
initial term of an outside director is three years and may be extended for one additional
term of three years. Outside directors may be removed only by the same percentage of
shareholders as is required for their election, or by a court, and then only if the
outside directors cease to meet the statutory qualifications for their appointment,
violate their duty of loyalty to the company or are found by a court to be unable to
perform their duties on a full time basis. Outside directors may also be removed by an
Israeli court if they are found guilty of bribery, fraud, administrative offenses in a
company or use of inside information. Each committee of a companys board of
directors must include at least one outside director.

Ms.
Alicia Rotbard and Mr. Gov Ben Ami have been serving as our outside directors
          since July 9, 2002.

The
Israeli Companies Law requires public companies to appoint an audit committee. The
responsibilities of the audit committee include identifying irregularities in the
management of the companys business and approving related party transactions as
required by law. An audit committee must consist of at least three directors, including
the outside directors of the company. The chairman of the board of directors, any director
employed by or otherwise providing services to the company, and a controlling shareholder
or any relative of a controlling shareholder, may not be a member of the audit committee.

Currently,
Mr. Ken Lalo and our two outside directors, Ms. Alicia Rotbard and Mr. Gov Ben Ami, serve
as members of our audit committee.

41

---

---

Under
the Israeli Companies Law, the board of directors must appoint an internal auditor,
recommended by the audit committee. The role of the internal auditor is to examine, among
other matters, whether the companys actions comply with the law and orderly business
procedure. Under the Israeli Companies Law, the internal auditor may be an employee of the
company but not an office holder (as defined below), or an affiliate, or a relative of an
office holder or affiliate, and he may not be the companys independent accountant or
its representative. Our board of directors appointed Daniel Schapira Certified Public
Accountant (ISR) to be our internal auditor.

We
have not entered into service contracts with any of the members of our board of directors.

| | D. | EMPLOYEES
| | -- | ---------

The
following table sets forth the number of our employees at the end of each of the last
three years:

|                         | Israel | Other | Total
|------------------------ | ------ | ----- | -----
|
|
|
|
|2005                     |        |       |      
|Sales and Marketing      |        |       |      
|Administration           |        |       |      
|Research and Development |        |       |      
|Other                    |        |       |      
|Total                    |        |       |      
|                         |        |       |      

|                                             | Israel | Other | Total
|-------------------------------------------- | ------ | ----- | -----
|
|
|
|
|2004                                         |        |       |      
|Sales and Marketing          (*)             |        |       |      
|Administration                               |        |       |      
|Research and Development                     |        |       |      
|Other                                   (**) |        |       |      
|Total                                        |        |       |      

(*) Represents 42 positions
(**) Represents 44 positions

|                         | Israel | Other | Total
|------------------------ | ------ | ----- | -----
|
|
|
|
|2003                     |        |       |      
|Sales and Marketing      |        |       |      
|Administration           |        |       |      
|Research and Development |        |       |      
|Other                    |        |       |      
|Total                    |        |       |      

42

---

---

We
have entered into employment contracts with substantially all of our employees, all of
which include non-competition, nondisclosure and confidentiality provisions relating to
our proprietary information. We believe that our relations with our employees are
satisfactory. We are not party to any collective bargaining agreements. However, in
Israel, 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 principally the length
of the workday, minimum daily wages for professional workers, insurance for work-related
accidents, procedures for dismissing employees, determination of severance pay, and other
conditions of employment. We generally provide our employees in Israel, with benefits and
working conditions beyond the required minimums.

Israeli
law generally requires severance upon the retirement or death of an employee or
termination of employment without due cause. We currently fund our ongoing severance
obligations by contributing funds on behalf of our senior employees to a fund known as the
Managers Insurance. This fund provides a combination of savings plan,
life insurance and severance pay benefits to the employee, giving the employee a lump sum
of payment upon retirement and securing the severance pay, if legally entitled, upon
termination of employment. We decide whether each employee is entitled to participate in
the plan, and each employee who agrees to participate contributes an amount equal to 5% of
his or her salary and the employer contributes between 13.3% and 15.8% of the
employees salary. In addition, Israeli employees and employers are required to pay
predetermined sums to the National Insurance Institute, an agency, which is similar to the
United States Social Security Administration. Since January 1, 1995, such amounts
also include payments for national health insurance. The payments to the National
Insurance Institute are approximately 14.5% of wages up to a specified amount, of which
the employee contributes approximately 66% and the employer contributes approximately 34%.

| | E. | SHARE
OWNERSHIP
| | -- | ---------------

Some
of our directors and officers own ordinary shares in our company and/or options to
purchase ordinary shares. As of June, 2006, none of our directors and officers,
beneficially owned shares and/or options amounting to 1% or more of the outstanding
Ordinary Shares, excluding Messers. Barak Dotan and Yossi Ben Shalom, who, as office
holders of DBSI, may be considered to be the beneficial holders of the 41.24% of our
issued share capital held by DBSI, and an additional 12.51% of our issued share capital
held by Egged, as a result of certain joint voting rights between Egged and DBSI, pursuant
to a shareholders agreement between them. For further information regarding the
shareholders agreement between Egged and DBSI, see Item 10 Additional
Information  Material Contracts.

For
information concerning option grants to our directors and officers, see as incorporated by
reference in this Item 6 above and Item 7: Major Shareholders and Related Party
Transactions below.

# Employee Share Option
Plans

For information concerning our
employee share option plans, see as incorporated by reference, Note 11c of our
consolidated financial statements.

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

| | A. | MAJOR
SHAREHOLDERS
| | -- | ------------------

For a description of the
Shareholders Agreement between our major shareholders, see Item 10 
Material Contracts.

The
following table and notes thereto set forth certain information as of June 27, 2006
concerning the beneficial ownership (as defined in Rule 13d  3 under the Securities
Exchange Act of 1934) of ordinary shares by each person or entity who, to the best of our
knowledge, beneficially owned more than 5% of our outstanding ordinary shares. The voting
rights of our major shareholders do not differ from the voting rights of holders of all of
our ordinary shares.

43

---

---

|Name of Beneficial Owner     | Number of Shares
Beneficially Owned (1) | Percent of Shares
Beneficially Owned
|---------------------------- | --------------------------------------- | ------------------------------------
|
|
|
|
|DBSI Investment Ltd. (2)(3)  |                                         |                                     
|Egged Holdings Ltd.(5)       |                                         |                                     
|Polar Communications Ltd.    |                                         |                                     
|Pelephone Communications Ltd |                                         |                                     
|M. Vertheim (Holdings) Ltd.  |                                         |                                     
|Adach Holdings Ltd.(9)       |                                         |                                     

|(1) | The
number of ordinary shares issued and outstanding on June 9, 2006 was
               3,095,124. The number of shares beneficially owned by a person includes
ordinary                shares subject to options or warrants held by that person that
are currently                exercisable or exercisable within 60 days. Such shares
issuable pursuant to such                options or warrants are deemed outstanding for
computing the percentage                ownership of the person holding such options but
not deemed outstanding for the                purposes of computing the percentage
ownership of any other person. To our                knowledge, the persons named in this
table have sole voting and investment power                with respect to all ordinary
shares shown as owned by them, except as described                below.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Until
June 2004, DBSI Investment Ltd. held a proxy with respect to all of the
               voting power in the Company held by AMS Electronics Ltd. This proxy was
               terminated. Does not include the shares held by Egged and covered by the
               November 16, 2004, Shareholders Agreement between DBSI and Egged.
For                further information regarding such Agreement see Item 10 Additional
               Information  Material Contracts.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | As
office holders of DBSI, Messrs. Barak Dotan and Yossi Ben Shalom may be
               considered to be the beneficial holders of the 41.24% of our issued share
               capital held by DBSI.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes
95,455 ordinary shares issuable upon the exercise of a currently
               exercisable warrant.
|--- | -------------------------------------------------------------------------------------------------------------

|(5) | As
a result of the shareholders agreement between DBSI and Egged, both DBSI and
               Egged may be deemed controlling shareholders of our company.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Includes
88,889 ordinary shares issuable upon the conversion of loans.
|--- | ----------------------------------------------------------------------

|(7) | Does
not include the shares held by DBSI and covered by the November 16, 2004,
               Shareholders Agreement between Egged and DBSI. For further
information                regarding such Agreement see Item 10 Additional
Information                Material Contracts.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Includes
12,218 ordinary shares issuable upon the exercise of a currently
               exercisable warrant.
|--- | -------------------------------------------------------------------------------------------------------------

|(9) | Formerly
Shagrir Towing Services.
|--- | ---------------------------------

|(10) | Includes
250,000 ordinary shares issuable upon the exercise of a currently
               exercisable warrant.
|---- | --------------------------------------------------------------------------------------------------------------

As of June 12, 2006 there were
approximately 43 record holders of our ordinary shares, including approximately 11 record
holders in the United States (who held approximately 42.25% of our outstanding ordinary
shares).

Changes
in the percentages of ownership held by our various shareholder during the past three
years were primarily results of investments during these years, the conversion of
debentures in March 2003 and our acquisition of Shagrir in 2004. For further information
regarding such investments and acquisition see Item 4. Recent and Investments
and Divestitures.

| | B. | RELATED
PARTY TRANSACTIONS
| | -- | --------------------------

For information on the funding for
and purchase of the assets and activities of Shagrir Towing Services and the $6 million
investment in our securities, see Item -10 Material Contracts

44

---

---

Agreements with Mr. Ofer
Lior and his affiliates

On
March 13, 2005, we entered into a joinder agreement with an individual, Mr. Ofer Lior
pursuant to which in consideration for $69,735 we issued Mr. Lior (i) 8,302 of our
ordinary shares at a price per share of $8.40 and (ii) a warrant to purchase up to 1,826
of our ordinary shares at the same exercise price. This warrant was exercisable by Mr.
Lior until the earlier of: (a) April 6, 2006; or (b) our merger or the acquisition of
substantially all of our assets and subsequently has expired. Mr. Liors shares
constitute approximately 0.21% of our current issued and outstanding share capital on a
fully-diluted basis. This agreement was entered into as part of an investment round in which Mr. Lior participated
on the same terms as the other investors.

In February 2005 Shagrir entered into
a Management Agreement pursuant to which Dekalog Focused Management Ltd., or Dekalog,
shall provide Chief Executive Officer services to Shagrir. In consideration for the
provision of such services, Dekalog is to receive, NIS 120,000 (plus VAT) per month and an
annual bonus equal to the higher of: (a) NIS 800,000; or (b) 2.5% of the consolidated
profits of Shagrir, before tax, plus VAT.

In February 2005 we entered into an
Employment Agreement pursuant to which, Mr. Ofer Lior provided services to Nexus. In
consideration for the provision of such services, Mr. Lior was granted an option to
purchase 1,753 ordinary shares of Pointer (representing, at the date of issuance, 3.5% of
our issued and outstanding share capital), at an exercise price of $280,000 (as adjusted
in accordance with the terms of the agreement). Mr. Liors contract has since
terminated and the options have, therefore, expired.

Agreements with Shagrir

|In
February 2005 we consummated a management services agreement with Shagrir pursuant to
which we will provide Shagrir with management services with respect to its business for a
period of 2 years beginning February 28, 2005, in consideration for a management fee of
NIS 1 million, subject to certain conditions.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In
February 2005 we consummated a loan consolidation agreement with Shagrir the terms and
conditions of which govern NIS 24,525,000 in previous loans made by us to Shagrir.
Interest repayments and repayments of the principal will commence on February 28, 2007,
with NIS 800,000 payable annually on account of the interest and NIS 200,000 payable
annually on account of the principal. Interest under the loan is payable at a rate of 4%
per year.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In
February 2005 we consummated a loan agreement with Shagrir pursuant to which we loaned
Shagrir NIS 3,916,536 in connection with certain infrastructure and equipment expenses.
Interest repayments and repayments of the principal shall be repaid on a pro rata basis
with the loans of Shagrir with its other shareholders, following the repayment of the $2
million convertible loan made from Egged Holdings Ltd. in connection with Shagrirs
purchase of certain of the assets and activities of Shagrir Towing Services. Interest
under the loan is payable at a rate of 4% per year.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In
February 2005, together with Gandyr Investments Ltd., Govli Ltd., Sulam Financial Holdings
and Egged Holdings Ltd., we consummated a NIS 10 million loan agreement with Shagrir, of
which we loaned Shagrir NIS 5 million. Interest repayments and repayments of the principal
will commence on August 28, 2005. Interest under the loan is payable at a rate of 6.5% per
year.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In
February 2005, we invested directly into Shagrir NIS 4,550,000 ($1 million), in
consideration for 27,918 ordinary shares of Shagrir.
|---------------------------------------------------------------------------------------------------------------------------------------

Management Agreement with
DBSI Investments Ltd.

Pursuant
to the share purchase agreement with DBSI Investments Ltd., we entered a management
services agreement with DBSI in April 2003. Pursuant to the management agreement, DBSI
will provide us with management services with respect to our business for a period of
three years, in consideration for a management fee of $180,000 per annum for a period of
three years commencing April 2003, to be paid in equal quarterly installments of $45,000.
At the end of the initial three-year term, and each subsequent term thereafter, the
agreement will be automatically renewed for additional 12 month terms unless terminated by
either of the parties.

45

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---

Additional investments in
our company by DBSI, our former CEO and other investors.

Pursuant to the share purchase
agreement of March 13, 2003, DBSI and other investors invested approximately $2.6 million
in the share capital of the Company. Furthermore, in August and October 2003, DBSI, Mr.
Arik Avni  the Companys former Chief Executive Officer (the Former
CEO) and certain other minority shareholders (the Investors) invested an
aggregate of $1.2 million in the share capital of the Company, under the same terms and
conditions set forth in the share purchase agreement of March 13, 2003 . The amounts
invested were as follows: DBSI invested an aggregate amount of $2,600,000, in
consideration for which it was issued 590,909 shares and 413,637 warrants exercisable at a
price of $4.40 per share, the Former CEO invested an aggregate amount of $44,000, in
consideration for which it was issued 10,000 shares and 7,000 warrants exercisable at a
price of $4.40 per share, and the Investors invested an aggregate amount of $201,400 in
consideration for which they were issued 267,137 of our ordinary shares and 186,995
warrants exercisable at a price of $4.40 per share. In February 2005, DBSI invested a
further $1 million in the share capital of the Company, in consideration for which it was
issued 119,048 shares and 26,190 warrants exercisable at a price of $8.40 per share. DBSI
currently owns approximately 33.8% (on a fully diluted basis), of our issued and
outstanding shares.

Cooperation and Share
Exchange Agreements with Shagrir

On
February 25, 2004, we entered into a cooperation agreement with Shagrir, the operator of
our system in Israel. As part of this agreement Shagrir renewed its commitment to purchase
exclusively from us end units for its stolen vehicle retrieval system. Shagrir undertook
to purchase in 2004 end-units in an amount of $2.3 million and during the following three
years, in a minimum amount of $4.2 million. We undertook to expand Shagrirs
infrastructure network. The term of the agreement is until the end of year 2007.

Subsequently,
on April 25, 2004, we entered into an agreement with the shareholders of Shagrir, to
purchase 100% of the issued share capital of Shagrir. Upon completion of the agreement on
June 29, 2004, we purchased all the outstanding shares and options to purchase shares of
Shagrir, excluding a number of options held by its employees, which were converted into
options of our company, constituting, at the date of conversion, an aggregate of 2.5% of
our share capital on a fully diluted basis. Pursuant to the Agreement, we transferred a
number of our ordinary shares and warrants with an aggregate value equal to, at the date
of transfer, approximately 26% of our issued share capital on a fully diluted basis, post
transaction. For information regarding our agreements with Shagrir see Item 4 Recent
Developments.

Employment of Mr. Gideon
Rossman, Vice President of Business Development and Marketing

In
December 2005, Mr. Gideon Rossman was appointed our Vice President of Business Development
and Marketing. Under the terms of his employment, Mr. Rossman was granted 13,000 options
at an exercise price of $9.50, in accordance with our 2003 option plan. 25% of these
options will vest each year, over the next four years beginning in November 2006 and
ending in November 2009 (provided that he remains employed by us throughout that period).

Granting
of Options to Mr. Danny Stern, President and CEO of the Company.

See
Item 4A - Recent Developments.

| | C. | INTERESTS
OF EXPERTS AND COUNSEL
| | -- | --------------------------------

# Not applicable

46

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|ITEM 8. | FINANCIAL
INFORMATION
|------- | ---------------------

| | A. | CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION
| | -- | -------------------------------------------------------

The
Financial Statements required by this item are found at the end of this annual report,
beginning on page F-1.

# Legal Proceedings

On
November 26, 2002, we filed a claim with the Tel-Aviv Magistrates Court for a
permanent injunction against Bank Hapoalim B.M and the China National Electronics Import
Export Beijing Company, or CEIEC. In the claim we requested that the court injunct Bank
Hapoalim from paying CEIEC any sums pursuant to a guarantee in the amount of $300,000 in
favor of CEIEC provided to it in the framework of a previous transaction, and to injunct
CEIEC from requesting Bank Hapoalim to pay it any sums pursuant to the guarantee. We
requested the injunction as a result of unlawful requests made by CEIEC that Bank Hapoalim
pay it the guarantee. Following a hearing in which CEIEC did not attend, the Tel-Aviv
Magistrates Court ruled in our favor on December 31, 2002, granting a permanent injunction
prohibiting Bank Hapoalim from paying any funds to CEIEC pursuant to the guarantee and
injuncting CEIEC from requesting Bank Hapoalim to pay it any funds pursuant to the
guarantee. We understand that sometime in 2003 CEIEC commenced proceedings in China to
which we have not been joined as a party, for payment of the guarantee plus interest at a
rate of 0.5% commencing March 2002, and has since received interim judgments in the
matter, the exact nature of which are not currently clear to us. In August 2004, Bank
Hapoalim informed us, that it may pay CEIEC the guaranteed sum plus interest, and in such
an event will request that we indemnify it for the amount paid. In light of the permanent
injunction ordered in our favor in 2002, and without our knowledge of the exact nature of
the legal proceedings underway between the bank and CEIEC, since we are not a party to
these proceedings, based on our legal advisors opinion, we have defense claims
rejecting any possible demands by Bank Hapoalim for indemnification.

In
March, 2005 we filed a claim against CEIEC and a third party with the China International
Economic and Trade Arbitration Commission in Beijing, China (CIETAC) for
approximately $558,000 representing the damages caused to us by the breach of the contract
between us, CEIEC and the third party pursuant to which contract, the guarantee mentioned
in the paragraph above was given.

In
June, 2005 CEIEC and the third party filed a counter claim with the CIETAC for repayment
of $300,000 relating to the same transaction, plus weekly interest of 0.5% (compounded
from February 2002). The counter claim related to the same amount that CEIEC had claimed
from Bank Hapoalim B.M pursuant to the guarantee discussed above. However, in July 2005,
the counterclaim was withdrawn and in January 2006, CIETAC provided a final ruling in our
favor, pursuant to which CEIEC and the third party shall pay us $ 557,000 representing
most of the damages caused to us plus interest rate of 6% per annum from April 2003 plus
additional costs incurred by us.

In
February, 2006 the third party petitioned the Beijing No. 2 Intermediate Peoples
Court to overturn the ruling of the arbitrator. In their petition they claimed that
normative arbitration procedures were not followed, that the decision of the arbitrators
was outside the scope of the jurisdiction granted to them, and that the arbitrators ruled
on certain matters in which they lacked jurisdiction. We have not yet officially received
this petition due to the inability of our legal counsel in Beijing to receive documents
in connection with this petition in the absence of an explicit power of attorney to do
so. We recently completed the necessary documentation granting them power of attorney in
this matter, and expect that the petition will be delivered to us soon, giving us an
opportunity to respond to the claims made by CEIEC. Based on our legal advisors
opinion, it is unlikely that the petition to overturn the arbitrators ruling will
be successful.

47

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---

In
September 2000, Pointer Argentina entered into a 30-month contract with a third party.
Pursuant to the contract Pointer Argentina agreed to order from the third party a minimum
number of unit installations. In October 2001 and thereafter, Pointer Argentina ceased to
make minimum payments to the third party. A legal demand was presented against Pointer
Argentina. In October 2003 and August 2004, the Argentinean court ordered a levy in the
aggregate amount of $118,000 on its bank account. In November 2005 Pointer Argentina
reached a private agreement in which it agreed to pay the third party $186,000 plus legal
fees. The levies mentioned above were used to pay the amount resulting from the
agreement. As of December 31, 2005, Pointer Argentina owes costs of the court proceedings
and legal expert fees.

As
of December 31 2005, several claims were filed against Shagrir Motor Vehicle Systems by
customers. The claims are in an amount aggregating to approximately $ 434,000. The
substance of the claims is the malfunction of Shagrir Motor Vehicle Systems products,
which occurred during the ordinary course of business. Management, based on the opinion
of its attorneys, is of the opinion that no material costs will arise to Shagrir Motor
Vehicle Systems in respect to these claims and, therefore, no provision was recorded in
the financial statements in respect of the claims.

Management,
based on the opinion of its attorneys, is of the opinion that no material costs will arise
to Shagrir in respect of these claims and, therefore, no provision was recorded in the
financial statements in respect of these claims.

In
2005 the State of Israel initiated administrative proceedings against Shagrir in the Haifa
municipal court, claiming that they managed a gas station as well as an operation which
purchased towing vehicles, both without a legal permit. Yossi Ben-Shalom and Barak Dotan,
who are members of Shagrirs and our Board of Directors, were named as co-defendants
in the proceedings. The first hearing in the case has been set for October 2006.

| | B. | SIGNIFICANT
CHANGES
| | -- | -------------------

For
a description of significant events, which took place since the year ending December 31,
2004, see as incorporated by reference in Item 4. Information on the
Company  Recent Developments above.

|ITEM 9. | THE
OFFER AND LISTING
|------- | ---------------------

| | A. | OFFER
AND LISTING DETAILS
| | -- | -------------------------

Markets and Share Price
History

Between
June 1994 and April 1997, and commencing again on October 31, 1997 until August 2002, our
Ordinary Shares were quoted on Nasdaq under the symbol NXUS. Between April 17, 1997, and
October 30, 1997, and commencing again as of August 2002 the OTC Bulletin Board reported
trading in the Ordinary Shares under the symbol NXUS and later changed to NXUSF. On
November 16, 2005, our shares resumed trading on the Nasdaq Capital Market under the
symbol NXUS. On February 21, 2006 our shares began trading under a new symbol, PNTR. The
table below sets forth the high and low bid prices of our Ordinary Shares, as reported by
Nasdaq or the OTC Bulletin Board during the indicated periods.

|Period              | High  | Low  
|------------------- | ----- | -----
|
|May 2006            | 8.05  | 6.4  
|April 2006          | 7.1   | 6.35 
|March 2006          | 8.3   | 7    
|February 2006       | 8.38  | 6.6  
|January 2006        | 8.18  | 6.9  
|December 2005       | 9     | 6.75 
|Forth Quarter 2005  | 10.79 | 6.75 
|Third Quarter 2005  | 14    | 4.9  
|Second Quarter 2005 | 17    | 10   
|First Quarter 2005  | 22    | 11   
|Fourth Quarter 2004 | 14    | 8.5  
|Third Quarter 2004  | 17    | 11.5 
|Second Quarter 2004 | 40    | 14   
|First Quarter 2004  | 58    | 20   
|                    |       |      
|2005                | 22    | 4.9  
|2004                | 65    | 8    
|2003                | 33.5  | 6.5  
|2002                | 235   | 0.8  
|2001                | 468.9 | 137.5

48

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| | B. | PLAN
OF DISTRIBUTION
| | -- | --------------------

# Not applicable

| | C. | MARKETS
| | -- | -------

Our shares are listed on the Nasdaq
Capital Market under the symbol PNTR.

| | D. | SELLING
SHAREHOLDERS
| | -- | --------------------

# Not applicable

| | E. | DILUTION
| | -- | --------

# Not applicable

| | F. | EXPENSES
OF THE ISSUE
| | -- | ---------------------

# Not applicable

|ITEM 10. | ADDITIONAL
INFORMATION
|-------- | ----------------------

| | A. | SHARE
CAPITAL
| | -- | -------------

# Not applicable

| | B. | MEMORANDUM
AND ARTICLES OF ASSOCIATION
| | -- | --------------------------------------

Our
registration number at the Israeli registrar of companies is 52-004147-6.

# Articles of Association;
Israeli Companies Law

# Articles of Association

September
2003, we adopted a new Articles of Association in order to comply with the new Israeli
Companies Law. The provisions of our new Articles are substantially the same as the
material provisions of our previous Articles.

The
objective of our company as stated in our Articles and in our Memorandum of Association is
to engage in any lawful activity.

We
have currently outstanding only one class of securities. Pursuant to a one-for-one hundred
reverse stock split of our ordinary shares, effective as of August 2005, each share of our
old Ordinary Shares with a par value of NIS 0.03 each were converted into one Ordinary
Share with a par value of NIS 3.00 per share. Accordingly, all shares and per share data
in this annual report have been retroactively adjusted to reflect the reverse stock split.
No preferred shares are currently authorized.

Holders
of Ordinary Shares have one vote per share, and are entitled to participate equally in the
payment of dividends and share distributions and, in the event of our liquidation, in the
distribution of assets after satisfaction of liabilities to creditors. Our Articles may be
amended by a resolution carried at a General Meeting by 75% of those who voted is
required. The shareholders rights may not be modified in any other way unless otherwise
expressly provided in the terms of issuance of the shares.

49

---

---

Our
Articles require that we hold our annual general meeting of shareholders each year no
later than 15 months from the last annual meeting, at a time and place determined by the
board of directors, upon at least 21 days prior notice to our shareholders. No business
may be commenced until a quorum of two or more shareholders holding at least one-third of
the voting rights are present in person or by proxy. Shareholders may vote in person or by
proxy, and will be required to prove title to their shares as required by the Israeli
Companies Law (the Companies Law) pursuant to procedures established by the
board of directors. Resolutions regarding the following matters must be passed at a
general meeting of shareholders:

| |  | amendments
to our Articles (other than modifications of shareholders rights as mentioned
         above);
| | - | ---------------------------------------------------------------------------------------------------------

| |  | appointment
or termination of our auditors;
| | - | -------------------------------------------

| |  | appointment
and dismissal of directors;
| | - | ---------------------------------------

| |  | approval
of acts and transactions requiring general meeting approval under the Israeli
         Companies Law;
| | - | --------------------------------------------------------------------------------------------------------------

| |  | increase
or reduction of our authorized share capital or the rights of shareholders or a
         class of shareholders- Sections 286 and 287 of the Israeli Companies Law
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | any
merger as provided in section 320 of the Israeli Companies Law; and
| | - | -----------------------------------------------------------------------

| |  | the
exercise of the board of directors powers by a general meeting, if the board of
directors is unable to exercise its powers and the exercise of any of its powers is vital
for our proper management, as provided in section 52(a) of the Israeli Companies Law.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A
special meeting of our shareholders shall be convened by the board, at the request of any
two directors or one quarter of the officiating directors, or by request of one or more
shareholders holding at least 5% of our issued share capital and 1% of the voting rights,
or by request of one or more shareholders holding at least 5% of the voting rights.
Shareholders requesting a special meeting must submit their proposed resolution with their
request. Within 21 days of receipt of the request, the board must convene a special
meeting and send out notices setting forth the date, time and place of the meeting. Such
notice must be given at least 21 days, but not more than 35 days, prior to the special
meeting.

The Israeli Companies Law

The
Israeli Companies Law, as amended most recently in March 2005, codifies the fiduciary
duties that office holders, including directors and executive officers, owe to
a company. An office holder, is defined in the Israeli Companies Law, as a (i) director,
(ii) general manager, (iii) chief business manager, (iv) deputy general manager, (v) vice
general manager, (vi) another manager directly subordinate to the managing director or
(vii) any other person assuming the responsibilities of any of the forgoing positions
without regard to such persons title.

The
Israeli Companies Law requires that an office holder of a company 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 the company. In
addition, if the transaction is an extraordinary transaction, as defined under Israeli
law, 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 is a 5% or greater shareholder, holder of 5% or more of the voting power,
director or general manager or in which he or she has the right to appoint at least one
director or the general manager. An extraordinary transaction is defined as a transaction
not in the ordinary course of business, not on market terms, or that is likely to have a
material impact on the companys profitability, assets or liabilities.

50

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In
the case of a transaction that is not an extraordinary transaction, after the office
holder complies with the above disclosure requirement, only board approval is required
unless the Articles of Association of the company provide otherwise. The transaction must
not be adverse to the companys interest. If the transaction is an extraordinary
transaction, then, in addition to any approval required by the Articles of Association, it
must also be approved by the audit committee and by the board of directors, and, under
specified circumstances, by a meeting of the shareholders.

Subject
to certain exceptions provided for in the regulations to the Israeli Companies Law,
agreements regarding directors terms of employment require the approval of the board
of directors and the audit committee. In all matters in which a director has a personal
interest, including matters of his/her terms of employment, he/she shall not be permitted
to vote on the matter or be present in the meeting in which the matter is considered.
However, should a majority of the audit committee or of the board of directors have a
personal interest in the matter, then:

(a)       
          all of the directors are permitted to vote on the matter and attend the meeting
          in which the matter is considered; and

(b)       
          the matter requires approval of the shareholders at a general meeting.

According
to the Israeli Companies Law, the disclosure requirements discussed above also apply to a
controlling shareholder of a public company. Such requirements also apply to certain
shareholders of a public company, with respect to private placements that will increase
their relative holdings in the company. In general, extraordinary transactions with a
controlling shareholder or in which a controlling shareholder has a personal interest, and
agreements relating to employment and compensation terms of a controlling shareholder
require the approval of the audit committee, the board of directors and the shareholders
of the company. The term controlling shareholder is defined as a shareholder
who has the ability to direct the activities of a company, other than if this power
derives solely from the shareholders position on the board of directors or any other
position with the company. The definition also includes shareholders that hold 25% or more
of the voting rights if no other shareholder owns more than 50% of the voting rights in
the company.

The
shareholder approval must either include at least one-third of the shares held by
disinterested shareholders who actively participate in the voting process (without taking
abstaining votes into account), or, alternatively, the total shareholdings of the
disinterested shareholders who vote against the transaction must not represent more than
one percent of the voting rights in the company.

Private
placements in a public company require approval by a companys board of directors and
shareholders in the following cases:

(a)
          A private placement that meets all of the following conditions:

| | (i) the private placement will increase the relative holdings of a shareholder that
          holds five percent or more of the companys outstanding share capital,
          assuming the exercise of all of the securities convertible into shares held by
          that person, or that will cause any person to become, as a result of the
          issuance, a holder of more than five percent of the companys outstanding
          share capital.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) 20 percent or more of the voting rights in the company prior to such issuance
          are being offered.
| | ---------------------------------------------------------------------------------------------------------------

| | (iii) all or part of the consideration for the offering is not cash or registered
          securities, or the private placement is not being offered at market terms.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

(b)
          A private placement that results in anyone becoming a controlling shareholder
of           the public company.

In
addition, under the Israeli Companies Law, certain transactions or a series of
transactions are considered to be one private placement.

Any
placement of securities that does not fit the above description may be issued at the
discretion of the Board of Directors.

51

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Under
the Israeli Companies Law, a shareholder has a duty to act in good faith towards the
company and other shareholders and refrain from abusing his power in the company,
including, among other things, voting in the general meeting of shareholders on the
following matters:

| |  | any
amendment to the Articles of Association;
| | - | ---------------------------------------------

| |  | an
increase of the company's authorized share capital;
| | - | ------------------------------------------------------

| |  | a
merger; or
| | - | ------------

| |  | approval
of interested party transactions that require shareholder approval.
| | - | ----------------------------------------------------------------------------

In
addition, any controlling shareholder, any shareholder who knows that it possesses power
to determine the outcome of a shareholder vote and any shareholder who has the power to
appoint or prevent the appointment office holder in the company is under a duty to act
with fairness towards the company. The breach of such duty is governed by Israeli contract
law. The Israeli Companies Law does not describe the substance of this duty. The Israeli
Companies Law requires that specified types of transactions, actions and arrangements be
approved as provided for in a companys articles of association and in some
circumstances by the audit committee, by the board of directors and by the shareholders.
The vote required by the audit committee and the board of directors for approval of these
matters, in each case, is a majority of the disinterested directors participating in a
duly convened meeting.

Provisions Restricting
Change in Control of Our Company

Tender
Offer. A person wishing to acquire shares or any class of shares of a publicly traded
Israeli company and who would as a result hold over 90% of the companys issued and
outstanding share capital or of a class of shares which are listed, is required by the
Companies Law to make a tender offer to all of the companys shareholders for the
purchase of all of the issued and outstanding shares of the company. If the shareholders
who do not respond to the offer hold less than 5% of the issued share capital of the
company, all of the shares that the acquirer offered to purchase will be transferred to
the acquirer by operation of law. The Companies Law provides for an exception regarding
the threshold requirement for a shareholder that prior to and following February 2000
holds over 90% of a companys issued and outstanding share capital. However, the
shareholders may petition the court to alter the consideration for the acquisition. If the
dissenting shareholders hold more than 5% of the issued and outstanding share capital of
the company, the acquirer may not acquire additional shares of the company from
shareholders who accepted the tender offer if following such acquisition the acquirer
would then own over 90% of the companys issued and outstanding share capital.

The
Companies Law provides that an acquisition of shares of 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% shareholder of the company. Similarly, the 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 45% or greater shareholder of the
company, if there is no 45% or greater shareholder of the company.

Merger.
          The Companies Law permits merger transactions if approved by each partys
          board of directors and the majority of each partys shares voted on the
          proposed merger at a shareholders meeting called on at least 21 days          prior
notice. Under the Companies Law, merger transactions may be approved by           holders
of a simple majority of our shares present, in person or by proxy, at a           general
meeting and voting on the transaction. In determining whether the           required
majority has approved the merger, if shares of a company are held by           the other
party to the merger, or by any person holding at least 25% of the           outstanding
voting shares or 25% of the means of appointing directors of the           other party to
the merger, then a vote against the merger by holders of the           majority of the
shares present and voting, excluding shares held by the other           party or by such
person, or anyone acting on behalf of either of them, is           sufficient to reject
the merger transaction. If the transaction would have been           approved but for the
exclusion of the votes of certain shareholders as provided           above, a court may
still approve the merger upon the request of holders of at           least 25% of the
voting rights of a company, if the court holds that the merger           is fair and
reasonable, taking into account the value of the parties to the           merger and the
consideration offered to the shareholders. Upon the request of a           creditor of
either party to the proposed merger, the court may delay or prevent           the merger
if it concludes that there exists a reasonable concern that, as a           result of the
merger, the surviving company will be unable to satisfy the           obligations of any
of the parties to the merger. In addition, a merger may not           be executed unless
at least 30 days have passed from the receipt of the           shareholders approval
and 50 days have passed from the time that a           proposal for approval of the
merger has been filed with the Israeli Registrar of           Companies.

52

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Nasdaq Marketplace Rules
and Home Country Practices

In
accordance with Israeli law and practice and subject to the exemption set forth in Rule
4350(a)(1) of the NASD Marketplace Rules, we follow the provisions of the Israeli
Companies Law  1999, rather than the requirements of Marketplace Rule 4350 with
respect to the following requirements:

| |  | Distribution
of annual and quarterly reports to shareholders  Under Israeli law we are not
required to distribute annual and quarterly reports directly to shareholders and the
generally accepted business practice in Israel is not to distribute such reports to
shareholders. We do however make our audited financial statements available to our
shareholders prior to our annual general meeting and file our quarterly and annual
financial results with the Securities Exchange Commission on Form 6-K.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Quorum
 Under Israeli law a company is entitled to determine in its articles of
association the number of shareholders and percentage of holdings required for a quorum
at a shareholders meeting. Our Articles of Association provide that a quorum of two or
more shareholders holding at least 33.3% of the voting rights in person or by proxy is
required for commencement of business at a general meeting. However, the quorum set forth
in our Articles of Association with respect to an adjourned meeting, consists of two or
more shareholders in person or by proxy.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Approval
of Related Party Transactions  All related party transactions are approved in
accordance with the requirements and procedures for approval of interested party acts and
transactions, set forth in sections 268 to 275 of the Israeli Companies Law-1999, and the
Regulations promulgated thereunder. Provided that our executive officers do not serve on
our board, Israeli law does not require nor do we engage in the recommendation to, or
determination by, our board of the compensation of our executive officers. See also Item
10B Additional Information Memorandum and Articles of Association
 The IsraeliCompanies Law, for the definition and
procedures for the approval of, related party transactions.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Shareholder
Approval  We seek shareholder approval for all corporate action requiring such
approval, in accordance with the requirements of the Israeli Companies Law  1999.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Independence
of Directors  our board contains two independent directors in accordance with the
provisions contained in Sections 239-249 of the Israeli Companies Law  1999 and
Rule 10A-3(b) of the general rules and regulations promulgated under the Securities Act
of 1933. Israeli law does not require nor do our independent directors conduct, regularly
scheduled meetings at which only they are present.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Nomination
of our Directors  With the exception of our independent directors, our directors
are elected for terms of one year or until the following annual meeting, by a general
meeting of our shareholders. The nominations for director which are presented to our
shareholders are generally made by our directors but may be made by one or more of our
shareholders holding together at least one percent of the voting power at the general
meeting. Israeli law does not require the adoption of and our board has not adopted a
formal written charter or board resolution addressing the nomination process and related
matters.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Israeli
law does not require and our board has not adopted a formal written audit committee
charter.
| | - | ----------------------------------------------------------------------------------------------------

53

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| |  | Our
audit committee complies with all of the requirements under Israeli law.
| | - | ----------------------------------------------------------------------------

| |  | Israeli
law does not require and we have not adopted a code of conduct applicable to all of our
employees.
| | - | ----------------------------------------------------------------------------------------------------------

Mr.
          Gov Ben Ami and Ms Alicia Rotbard currently serve on our Board of Directors as
          External Directors. Ms. Alicia Rotbard, Mr. Gov Ben Ami and Mr. Ken Lalo
          currently serve on our Audit Committee.

| | C. | MATERIAL
CONTRACTS
| | -- | ------------------

The Purchase of Certain
Activities of Shagrir Towing Services by our subsidiary, Shagrir

On
February 28, 2005 we completed the purchase of the road-side assistance and towing
services of Shagrir Towing Services by our subsidiary, Shagrir, in consideration for
approximately NIS 200 million. NIS 100 million was funded by a credit line made available
by Bank Hapoalim B.M, NIS 40 million was funded by a loan provided by Shagrir Towing
Services and approximately NIS 50 million was funded by a group of investors led by Gandyr
Investments Ltd. and Egged Holdings Ltd. In addition we invested an amount of NIS
4,550,000 in the share capital of Shagrir, and provided it with a loan of NIS 5,000,000.
As part of the transaction, we granted Bank Hapoalim B.M a two year warrant to purchase up
to 100,000 of our ordinary shares, at a price per share of $18.00; and granted Shagrir
Towing Services a two year warrant to purchase up to 250,000 of our ordinary shares, at a
price per share of $18.00. Part of the loans provided by the investors led by Gandyr
Investments Ltd. and Egged Holdings Ltd. may be converted into our shares and/or the
shares of our subsidiary, Shagrir.

| | NIS
100 Million Credit Line from Bank Hapoalim
|- | ----------------------------------------------

| | Pursuant
to the agreement with Bank Hapoalim, we have been provided with an NIS 70 million credit
line until March 1, 2013 and an NIS 30 million credit line until March 31, 2007. The sums
drawn down will be repaid quarterly from June 30, 2006 at a rate of NIS 1,250,000 per
quarter. The interest on the principal sum will be prime +0.5% with respect to the NIS 30
million credit line, and with respect to the NIS 70 million credit line, interest of
7.39% on NIS 35 million and 5.5% and linkage to the Israeli CPI on the remaining NIS 35
million. The interest shall be payable quarterly from June 30, 2005. As security on the
loan, Bank Hapoalim has, in addition to the first degree floating charge it has over all
the assets of Nexus (i) a first ranking fixed charge over all Shagrirs rights under
the Asset Purchase Agreement, consummated in February 2005, pursuant to which Shagrir
purchased certain of the activities and assets of Shagrir Towing Services, (ii) a first
ranking mortgage over a certain property in Haifa, Israel; (iii) a first ranking fixed
charge over a certain NIS 10 million deposit in a certain bank account; and (iv) a first
ranking fixed charge over Nexus shareholdings in Shagrir. We have drawn down NIS
100 million under the credit line.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | NIS
40 million loan by Shagrir Towing Services
|- | ----------------------------------------------

| | Pursuant
to our agreement with Shagrir Towing Services, Shagrir was loaned NIS 40 million,
repayable in twenty quarterly installments commencing February 28, 2006 and with interest
payable at a rate of 6.5% per annum. As security on the loan, Shagrir Towing Services has
a second ranking fixed charge over Shagrirs rights to proceeds from transactions
with Clal Insurance Company Ltd. and The Israel Phoenix Insurance Company Ltd.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

54

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| | NIS
50 million loan by Egged and other Investors
|- | ------------------------------------------------

| | Pursuant
to the agreement with Egged, Egged loaned Shagrir NIS 7,275,000, according to which the
loan would be repaid over 10 years with 4% interest payable during first 2-years and 7.5%
interest payable thereafter. In consideration for the loan Egged was provided with a
24-month option to convert the loan into our ordinary shares or into shares of Shagrir,
at its discretion. The loan may be converted by Egged into up to 9,433 ordinary shares of
Shagrir. Should Egged wish to convert the loan into shares of Shagrir, 60% of the loan
will be converted at price per share of NIS 729, and the remaining 40% will be converted
at a price per share ranging from NIS 729 to NIS 937 (according to a sliding scale, where
the later the conversion, the higher the share price). The loan may also be converted by
Egged into up to 88,889 of our ordinary shares (calculated at a price per our ordinary
shares of $18.00). Should Egged fail to exercise at least 60% of the option by the end of
the 2-year option period, Shagrir has a Put option to force Egged to purchase
such number of shares in Shagrir that represents 60% of the loan amount.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Furthermore,
pursuant to the agreement with Egged, Egged loaned Shagrir $2 million at an interest rate
of LIBOR (3-month) plus 3.5% compounded annually and accrued daily. Interest payments and
principal payments shall become payable from February 28, 2008. This loan is convertible
into the ordinary shares of Shagrir and/or up to 155,039 of our ordinary shares
(calculated at a price per our ordinary shares of $12.90), subject to certain conditions.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, pursuant to an agreement between us, Shagrir and a group of investors, a group
of investors agreed to loan Shagrir NIS 29,100,000 repayable in accordance with an agreed
quarterly repayment schedule over a period of ten years ranging from approximately NIS
650,000 to NIS 1.5 million (including interest accruing at a rate of 4% per annum for the
first two years and 7.5% thereafter). Pursuant to the terms of the agreement, in
consideration for the loan, the shareholders received a two year option to (i) purchase
up to an aggregate of 355,555 of our ordinary shares at a price of $18.00 per share; or
purchase shares of Shagrir according to which 60% of the loan will be converted at price
per share of NIS 729, and the remaining 40% will be converted at a price per share
ranging from NIS 729 to NIS 937 (according to a sliding scale, where the later the
conversion, the higher the share price). Should the investors fail to exercise at least
60% of the option by the end of the two-year option period, Shagrir has a Put option
to force the investors to purchase such number of shares in Shagrir that represents 60%
of the loan amount. Moreover, pursuant to an agreement between us, Gandyr Investments
Ltd., Govli Ltd., Sulam Financial Holdings and Egged, NIS 10 million was loaned to
Shagrir, of which we loaned Shagrir NIS 5 million. Interest repayments and repayments of
the principal will commence on August 28, 2005. Interest under the loan is payable at a
rate of 6.5% per year. Pursuant to this agreement, we agreed that for the duration of our
cooperation agreement with Shagrir, we will place in escrow our design and production
file relating to the design and production of our security products. The file will only
be released from escrow in the event that (i) we become insolvent; (ii) fail to provide
security products to Shagrir, or (iii) Shagrirs revenues from its security business
are 70% or more of our revenues from our security business, for three consecutive
financial quarters. For further information on our cooperation agreement, see Exhibit 4.7
to this Annual Report.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
security on the loans, Egged and other Investors have (i) a second ranking floating
charge over all the property and assets of Shagrir, and (ii) a third ranking fixed charge
over Shagrirs rights to proceeds from transactions with Clal Insurance Company Ltd.
and The Israel Phoenix Insurance Company Ltd.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

$6
million Investment

On
February 28, 2005, a group of investors, including DBSI, completed a $6 million investment
in our share capital. Pursuant to the investment agreements, we issued (i) 714,285 of our
ordinary shares at a price per share of $8.40 (of which 309,524 were issued to Egged and
(ii) warrants to purchase up to 157,143 of our ordinary shares at the same exercise price
(of which warrants to purchase up to 68,095 of our ordinary shares were issued to Egged),
constituting, as of the date thereof, approximately 19.23% of our issued share capital on
a fully-diluted basis. Under the terms of the agreements, the warrants are exercisable
until the earlier of: (a) April 6, 2006; or (b) our merger or the acquisition of
substantially all of our assets. The transaction was approved by our shareholders at their
annual meeting held on February 1, 2005.

55

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Our
Investment in Shagrir

Prior
to the road-side assistance and towing services of Shagrir Towing Services by Shagrir and
the related financing, we invested NIS 4,550,000 ($1 million) directly in Shagrir.

Management
Services Agreement

Pursuant
to the purchase of the operations and activities of Shagrir Towing Services, the NIS55
million loans to Shagrir and our NIS 4.55 million investment in Shagrir, Shagrir entered
into a management services agreement with Gandyr Investments Ltd., Govli Ltd., Sulam
Financial Holdings and Egged Holdings Ltd. pursuant to which Gandyr Investments Ltd.,
Govli Ltd., Sulam Financial Holdings and Egged Holdings Ltd. will provide Shagrir with
management services with respect to its business commencing March 1, 2007,in consideration
for a management fee of NIS 1 million per year, subject to certain conditions.

Shareholders
Agreement

On
November 16, 2004, our two major shareholders DBSI and Egged entered into a
shareholders agreement which included their agreement to vote their shares so that
our Board of Directors shall consist of seven directors of whom: (i) four members will be
nominated by DBSI; (ii) one member will be nominated by Egged; and (iii) two members shall
be external directors as required by the Israeli Companies Law. DBSI and Egged also agreed
that Egged shall have the right to appoint the greater of (i) one director; and (ii) such
number of directors which constitute 20% of our representation on the Board of Directors
of any of our direct or indirect subsidiaries other than Shagrir. Additionally, DBSI and
Egged agreed to vote their shares against any of the following resolutions, unless either
party agrees otherwise in a prior written agreement: (i) any distribution of a dividend of
either more or less than 75% of the profits attributable for distribution under law; (ii)
any increase in our share capital or in the share capital of Shagrir; (iii) entry into or
amendment of any shareholders agreement to which we is a party; (iv) issuance by us
until November 16, 2006 of new shares or other securities convertible into our shares at a
pre-money valuation that is lower than our valuation in the February 2005 investment
excluding issuance of new options to our employees or the employees of our subsidiaries;
(v) approval of certain material transactions such as a merger, sale of at least a
substantial amount of our assets, a reorganization, or a liquidation; and (vi) amendment
of our Articles of Association or those of any of our subsidiaries in such a way which
shall have an adverse effect on the rights of either of the parties.

For
a summary of our other material contracts, see Item 4  ̄ Information on the
Company ̄ Recent Developments and Item 6 Related Party
Transactions.

| | D. | EXCHANGE
CONTROLS
| | -- | -----------------

Under
current Israeli regulations, any dividends or other distributions paid in respect of our
ordinary shares purchased by nonresidents of Israel with certain non-Israeli currencies
(including dollars) and any amounts payable upon the dissolution, liquidation or winding
up of our affairs, as well as the proceeds of any sale in Israel of our securities to an
Israeli resident, will be freely repatriable in such non-Israeli currencies at the rate of
exchange prevailing at the time of conversion pursuant to the general permit issued under
the Israeli Currency Law, 1978, provided that Israeli income tax has been paid on (or
withheld from) such payments. Because exchange rates between the NIS and the U.S. dollar
fluctuate continuously, U.S. shareholders will be subject to any such currency fluctuation
during the period from when such dividend is declared through the date payment is made in
U.S. dollars.  Investments outside Israel by the
Company no longer require specific approval from the Controller of Foreign Currency at the
Bank of Israel.

| | E. | TAXATION
AND GOVERNMENT PROGRAMS
| | -- | --------------------------------

The
following is a summary of some of the current tax law applicable to companies in Israel,
with special reference to its effect on us and our subsidiaries. The following also
contains a discussion of specified Israeli tax consequences to our shareholders and
government programs from which we, and some of our subsidiaries benefit. To the extent
that the discussion is based on tax legislation that has not been subject to judicial or
administrative interpretation, there can be no assurance that the views expressed in the
discussion will be accepted by the tax authorities in question.

56

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The
discussion is not intended, and should not be construed, as legal or professional tax
advice and is not exhaustive of all possible tax considerations.

# General Corporate Tax
Structure

Israeli
companies are generally subject to company tax on their taxable income. The applicable
rate is 34% in 2005, 31% in 2006, 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010
and thereafter.

Under
the Income Tax Law (Adjustment for Inflation) 1985, income for tax purposes is measured in
terms of earnings in NIS adjusted for the increase in the Israeli CPI.

# Tax Benefits and Grants
for Research and Development

Israeli
tax law allows, under certain conditions, a tax deduction in the year incurred for
expenditures (including capital expenditures) in 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 enterprise and is carried out by or on behalf of the company seeking such
deduction. Expenditures not so approved are deductible over a three-year period. However,
expenditures made out of proceeds made available to us through government grants are not
deductible according to Israeli law.

# Law for the
Encouragement of Industry (Taxes), 1969

The
following preferred corporate tax benefits, among others, are available to Industrial
Corporations, which may be applicable to us:

(a)
          Amortization of purchases of know-how and patents over eight years for tax
          purposes.

(b)
          Amortization of expenses incurred in connection with certain public security
          issuances over a three-year period.

(c)
          Tax exemption for shareholders who held shares before a public offering on
          capital gains derived from the sale (as defined by law) of securities, if
          realized after more than five years from the public issuance of additional
          securities of the Company. (As of November 1994, this exemption was repealed,
          however, it applies to our shareholders pursuant to a grand-fathering clause.)
          This exemption applies only to gains that accrued before January 1, 2003.

(d)
          Accelerated depreciation rates on equipment and buildings.

Israeli
Capital Gains Tax

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

On
January 1, 2006 an amendment to the Israeli tax regime became effective (the 2006
Tax Reform). The 2006 Tax Reform significantly changed the tax rates applicable to
income derived from shares.

According
to the 2006 Tax Reform, an individual is subject to a 20% tax rate on real capital gains
derived from the sale of shares, as long as the individual is not a substantial
shareholder (generally a shareholder with 10% or more of the right to profits, right
to nominate a director and voting rights) in the company issuing the shares. The rate on
the gains from publicly traded shares applicable to gains that were realized before
January 1, 2006 was 15%.

57

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A
substantial shareholder will be subject to tax at a rate of 25% in respect of real capital
gains derived from the sale of shares issued by the company in which he or she is a
substantial shareholder. The determination of whether the individual is a substantial
shareholder will be made on the date that the securities are sold. In addition, the
individual will be deemed to be a substantial shareholder if at any time during the 12
months preceding this date he had been a substantial shareholder.

Non-Israeli
residents are exempt from Israeli capital gains tax on any gains derived from the sale of
shares in an Israeli corporation publicly traded on the TASE and/or on a foreign stock
exchange, provided such gains do not derive from a permanent establishment of such
shareholders in Israel and that such shareholders did not acquire their shares prior to
the issuers initial public offering. 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 of or is entitled to 25%
or more of the revenues or profits of such non-Israeli corporation, whether directly or
indirectly .

In
some instances where our shareholders may be liable 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.

Pursuant
to the treaty between the Governments of the United States and Israel with respect to
taxes on income, or the U.S.-Israel tax treaty, the sale, exchange or disposition of our
ordinary shares by a person who qualifies as a resident of the United States under the
treaty and who is entitled to claim the benefits afforded to him by the treaty, will
generally not be subject to Israeli capital gains tax. This exemption shall not apply to a
person who held, directly or indirectly, shares representing 10% or more of the voting
power in our company during any part of the 12 month period preceding the sale, exchange
or disposition, subject to certain conditions. A sale, exchange or disposition of our
shares by a U.S. resident qualified under the treaty, who held, directly or indirectly,
shares representing 10% or more of the voting power in our company at any time during the
preceding 12 month period would be subject to Israeli tax, to the extent applicable;
however, under the treaty, this U.S. resident would be permitted to claim a credit for
these taxes against the U.S. income tax with respect to the sale, exchange or disposition,
subject to the limitations in U.S. laws applicable to foreign tax credits.

# Israeli Tax on Dividend
Income

Israeli
tax at a rate of 20% is generally withheld at source from dividends paid to non-residents;
in general, no withholding tax is imposed on dividends paid to Israeli companies (subject
to the provision of the Israeli Income Tax Ordinance). The applicable rate for dividends
paid out of the profits of an Approved Enterprise is 15%. These rates are subject to the
provisions of any applicable tax treaty.

Under
the US-Israel Tax Treaty, Israeli withholding tax on dividends paid to a US treaty
resident may not in general exceed 25%, or 15% in the case of dividends paid out of the
profits of an Approved Enterprise. Where the recipient is a US corporation owning 10% or
more of the voting stock of the paying corporation and the dividend is not paid from the
profits of an Approved Enterprise, the Israeli tax withheld may not exceed 12.5%, subject
to certain conditions.

| | F. | DIVIDENDS
AND PAYING AGENTS
| | -- | ---------------------------

# Not Applicable

| | G. | STATEMENT
BY EXPERTS
| | -- | --------------------

# Not Applicable

58

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| | H. | DOCUMENTS
ON DISPLAY
| | -- | --------------------

We
are required to file reports and other information with the securities and exchange
commission under the Securities Exchange Act of 1934 and the regulations thereunder
applicable to foreign private issuers. Reports and other information filed by us with the
securities and exchange commission may be inspected and copied at the securities and
exchange commissions public reference facilities described below. As a foreign
private issuer we are not required to file periodic information as frequently or as
promptly as United States companies. Therefore, we publicly announce our year-end results
promptly and file information with the securities and exchange commission under the cover
of Form 6-K as required. As a foreign private issuer, we are also exempt from the rules
under the Exchange Act prescribing the furnishing and content of proxy statements and our
officers, directors and principal shareholders are exempt from the reporting and other
provisions in Section 16 of the Exchange Act.

You
may review a copy of our filings with the SEC, including any exhibits and schedules, at
the SECs public reference facilities in Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the SEC located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
You may also obtain copies of such materials from the Public Reference Section of the SEC,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. You may call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. In addition, such information concerning our company can be inspected and
copied at the offices of the National Association of Securities Dealers, Inc., 9513 Key
West Avenue, Rockville, Maryland 20850 and at the offices of the Israel Securities
Authority at 22 Kanfei Nesharim St., Jerusalem, Israel. As a foreign private issuer, all
documents which were filed after November 4, 2002 on the SECs EDGAR system will be
available for retrieval on the SECs website at www.sec.gov. You may read and copy
any reports, statements or other information that we file with the SEC at the SEC
facilities listed above. These SEC filings are also available to the public from
commercial document retrieval services. We also generally make available on our own web
site (www.pointer.com) all our interim and year-end financial statements as well as other
information.

Any
statement in this annual report about any of our contracts or other documents is not
necessarily complete. If the contract or document is filed as an exhibit to the
registration statement, the contract or document is deemed to modify the description
contained in this annual report. We urge you to review the exhibits themselves for a
complete description of the contract or document.

| | I. | SUBSIDIARY
INFORMATION
| | -- | ----------------------

# Not Applicable

|ITEM 11. | QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

Interest Rate Risks

Our
exposure to market rate risk for changes in interest rates relates primarily to funds
borrowed by us from banks. We have not used interest derivative financial instruments. As
of December 31, 2005, we had financial assets totaling approximately $1.5 million bearing
variable interest rates and total funds borrowed bearing variable interest rates of $6.6
million. The net decrease in our earnings for the next year resulting from an increase of
10% in variable interest rates will be approximately $46,000 assuming all other variables
are constant.

Currency Exchange Rate
Risks

Our
operating and pricing strategies take into account changes in exchange rates over time.
However, there can be no assurance that future fluctuations in the value of foreign
currencies will not have an adverse material effect on our business, operating results or
financial condition.

Market
risk was estimated as the potential change in fair value resulting from a hypothetical 10%
change in the year-end dollar exchange rate.

59

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Regarding
our operations in Israel, as of December 31, 2005 we had net liabilities of $48 million and
net expenses of $4.8 million, denominated in New Israeli Shekels (NIS). A hypothetical 10%
devaluation of the U.S. dollar against the New Israeli Shekel would thus result in
approximately a $5.2 million decrease in our earnings.

Our
revenues and expenses generated by Pointer Argentina are mostly denominated in Argentinian Pesos and
are therefore exposed to exchange rate fluctuations between the Argentinian Peso and the
United States dollar. Assuming an adverse foreign exchange rate fluctuation, we would
experience a reduction in U.S. dollar revenues and net income. As of December 31, 2005 we
had net assets of $12,000 and net expenses of $493,000, denominated in the Argetinian
Peso. A hypothetical 10% devaluation of the US dollar against the Argentinian Peso would
thus result in approximately $48,000 net decrease in our earnings.

Our
revenues and expenses generated by Pointer Recuperación de México are
denominated mainly in Mexican Pesos and are therefore exposed to exchange rate
fluctuations between the Mexican Peso and the U.S. dollar. Assuming an adverse foreign
exchange rate fluctuation, we would experience a reduction in U.S. dollar revenues and net
income. As of December 31, 2005 we had net liabilities of $672,000 and net expenses of
$1.3 million denominated in the Mexican Peso. A hypothetical 10% devaluation of the US
dollar against the Mexican Peso would thus result in approximately $199,000 net decrease
in our earnings.

Expenses in New Israel
Shekels

The
cost of our Israel operations, as expressed in U.S. dollars, 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 U.S. dollar. The inflation
rate in Israel was 2.4%, 1.4%, and negative 1.9% (deflation), in 2005, 2004, and 2003,
respectively. At the same time the NIS devalued against the U.S. Dollar 6.8% in 2005,
while the U.S. dollar devalued against the NIS by approximately 1.6% and 7.6% in 2004 and
2003 respectively.,. For further discussion with respect to the devaluation of the NIS,
see the discussion under the caption Impact of Inflation and Devaluation on Results
of Operations, Liabilities, and Assets in Item 5.

|ITEM 12. | DESCRIPTIONS
OF SECURITIES OTHER THAN EQUITY SECURITIES
|-------- | -------------------------------------------------------

# Not Applicable.

# PART II

|ITEM 13. | DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES
|-------- | -----------------------------------------------

# Not applicable.

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

# Not applicable.

|ITEM 15. | CONTROLS
AND PROCEDURES
|-------- | -----------------------

(a)
Disclosure Controls and Procedures. Our chief executive officer and chief
          financial officer, after evaluating the effectiveness of our disclosure
controls           and procedures (as defined in Exchange Act Rule 13a-15(e)) as of
the end of           the period covered by this annual report, have concluded that, as of
such date,           our disclosure controls and procedures were effective to ensure that
the           information required in the reports that we file or submit under the
Exchange           Act is recorded, processed, summarized and reported, within the time
periods           specified in the SECs rules and forms, and such information is
accumulated           and communicated to our management, including our chief executive
officer and           chief financial officer, as appropriate to allow timely decisions
regarding           required disclosure.

60

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(b)
Managements annual report on internal control over financial reporting.Not
Applicable.

(c)
Attestation report of the registered public accounting firm. Not
          Applicable.

(d)
Changes in Internal Controls over Financial Reporting. There were no
          changes to our internal control over financial reporting that occurred during
          the period covered by this annual report that have materially affected, or are
          reasonably likely to materially affect, our internal control over financial
          reporting.

|ITEM 16. | [RESERVED]
|-------- | ----------

|ITEM 16A. | AUDIT
COMMITTEE FINANCIAL EXPERT.
|--------- | ---------------------------------

Our board of directors has determined
that Mr. Ken Lalo is our audit committee financial expert.

|ITEM 16B. | CODE
OF ETHICS.
|--------- | ---------------

On June 22, 2003 our company adopted
a code of ethics, which applies to all of our employees, officers and directors, including
our chief executive officer, our chief financial officer and our principal accountant.

We shall provide any person with a
copy of our code upon request.

|ITEM 16C. | PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
|--------- | ---------------------------------------

The following table presents fees for
professional audit services rendered by our principal auditors for the audit of the
Companys consolidated annual financial statements for the years ended
December 31, 2005 and 2004.

|                      | 2004 | 2005
|--------------------- | ---- | ----
|
|
|
|
|Audit Fees(1)         |      |     
|Audit-Related Fees(2) |      |     
|Tax Fees(3)           |      |     
|All Other Fees        |      |     

|(1) | Audit
fees consist of fees for professional services rendered for the audit of           the
Companys consolidated financial statements and review of financial
          statements and services normally provided by the independent auditor in
          connection with statutory and regulatory filings or engagements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Audit-related
fees are fees principally for services not provided in Audit Fees,           such as
services provided in connection with the preparation of our registration
          statement on Forms F-3, filed with the SEC in September and October 2004 and
          June 2005 and Form 6K filed with the SEC in November 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Tax
services fees consist of compliance fees for the preparation of original and
          amended tax returns, claims for refunds and tax payments.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------

61

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Pre-Approval Policies and
Procedures

Our
Audit committee has approved all audit and non-audit services rendered by our independent
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 general
pre-approval, as part of the audit committees approval of the scope of the
engagement of our independent auditors, or on an individual basis. Any proposed services
exceeding general pre-approved levels also require specific pre-approval by our audit
committee. The Audit Committee has not approved prohibited non-audit functions defined in
section 201 of the Sarbanes-Oxley Act or the rules of the Securities and Exchange
Committee, and the Audit Committee considers whether proposed services are compatible with
the independence of the public accountants. All the services provided by our independent
accountants in 2005 were approved by our Audit Committee.

|ITEM 16D. | EXEMPTIONS
FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
|--------- | -----------------------------------------------------------

# Not applicable.

|ITEM 16E. | PURCHASES
OF EQUITY SECURITIES BY THE ISSUER ANDAFFILIATED PURCHASERS
|--------- | ---------------------------------------------------------------------

# None.

# PART III

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

# Not Applicable.

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

The
Financial Statements required by this item are found at the end of this Annual Report,
beginning on page F-1.

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

|1.1 |  | Memorandum
of Association filed by us as Exhibit 3.1 to the our Registration Statement on Form F-1,
registration number 33-76576, and incorporated herein by reference.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|1.2 |  | Amended
Articles of Association, adopted August 26, 2003, as amended on May 24, 2004, February 1,
2005, and January 17, 2006.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

|4.1 |  | English
Summary of the Lease Agreement by and between Shagrir (1985) Ltd. and Delek Real Estate
Ltd. dated February 23, 1998, as amended on March 5, 2003 (original language  Hebrew)
filed by us as exhibit 4.1 to our Annual Report on Form 20-F for the year ended December
31, 2004, and incorporated herein by reference.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Manufacturing
and Purchase Agreement, dated as of January 15, 2002, by and among AMS Electronics Ltd.,
Nexus Data Inc., Nexus Data (1993) Ltd and us, filed by us as Exhibit 3.9 to our Annual
Report on Form 20-F for the year ended December 31, 2002, and incorporated herein by
reference.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | Amendment
to Manufacturing and Purchase Agreement, dated March 12, 2003, by and among AMS
Electronics Ltd and us, filed by us as Exhibit 3.11 to our Annual Report on Form 20-F for
the year ended December 31, 2002, and incorporated herein by reference.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | English
summary of the lease agreement by and between Yahalomei Givatayim and us, dated June 15,
2002 (original language  Hebrew), filed by us as Exhibit 4.6 to our Annual Report
on Form 20-F for the year ended December 31, 2003, and incorporated herein by reference.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

62

---

---

|4.5 |  | English
Summary of the Lease Agreement by and between Shagrir and Menasheh Mashiach, Tzion
Mashiach and Eliahu Mashiach, dated July 24, 2002 (original language  Hebrew) filed
by us as exhibit 4.5 to our Annual Report on Form 20-F for the year ended December 31,
2004, and incorporated herein by reference
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.6 |  | Management
Services Agreement by and between DBSI and us, dated August 6, 2003, filed by us as
Exhibit 4.7 to our Annual Report on Form 20-F for the year ended December 31, 2003, and
incorporated herein by reference.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.7 |  | English
Summary of Cooperation Agreement by and between Shagrir and us, dated February 25, 2004
(original language Hebrew) filed by us as exhibit 4.7 to our Annual Report on Form
20-F for the year ended December 31, 2004, and incorporated herein by reference
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.8 |  | Share
Exchange Agreement by and between the Shareholders of Shagrir and us, dated April 25,
2004 filed by us as exhibit 4.8 to our Annual Report on Form 20-F for the year ended
December 31, 2004, and incorporated herein by reference
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.9 |  | English
Summary of the Convertible Loan Agreement by and among Shagrir, Gandyr Investments Ltd.,
Govli Ltd., Sulam Financial Holdings Ltd. and us, dated November 15, 2004 (original
language Hebrew) filed by us as exhibit 4.9 to our Annual Report on Form 20-F for
the year ended December 31, 2004, and incorporated herein by reference
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.10 |  | Registration
Rights Agreement by and among Gandyr Investments Ltd., Govli Ltd., Sulam Financial
Holdings Ltd. and us, dated November 15, 2004 filed by us as exhibit 4.10 to our Annual
Report on Form 20-F for the year ended December 31, 2004, and incorporated herein by
reference
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.11 |  | Share
Purchase Agreement between Egged and us, dated November 16, 2004 (including Joinder
Agreements thereto) filed by us as exhibit 4.11 to our Annual Report on Form 20-F for the
year ended December 31, 2004, and incorporated herein by reference
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.12 |  | English
Summary of the Management Agreement by and among Shagrir, Gandyr Investments Ltd., Govli
Ltd. Sulam Financial Holdings Ltd. and Egged, dated November 16, 2004 (original language
Hebrew) filed by us as exhibit 4.13 to our Annual Report on Form 20-F for the year
ended December 31, 2004, and incorporated herein by reference
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.13 |  | English
Summary of the Management Agreement by and between Shagrir and us, dated November 16,
2004 (original language  Hebrew) filed by us as exhibit 4.14 to our Annual Report
on Form 20-F for the year ended December 31, 2004, and incorporated herein by reference
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.14 |  | English
Summary of the Loan Consolidation Agreement by and between Shagrir and us, dated November
16, 2004 (original language  Hebrew) filed by us as exhibit 4.15 to our Annual
Report on Form 20-F for the year ended December 31, 2004, and incorporated herein by
reference
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.15 |  | English
Summary of the Loan Agreement by and between Shagrir and us, dated November 16, 2004
(original language Hebrew) filed by us as exhibit 4.16 to our Annual Report on Form
20-F for the year ended December 31, 2004, and incorporated herein by reference
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.16 |  | English
Summary of the Loan Agreement by and among Shagrir, Gandyr Investments Ltd., Govli Ltd.,
Sulam Financial Holdings Ltd., Egged and us, dated November 16, 2004 (original language
 Hebrew) filed by us as exhibit 4.17 to our Annual Report on Form 20-F for the year
ended December 31, 2004, and incorporated herein by reference
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.17 |  | English
Summary of the Letter Agreement by and between Shagrir and Bank Hapoalim Ltd., dated
November 16, 2004 (original language  Hebrew) filed by us as exhibit 4.18 to our
Annual Report on Form 20-F for the year ended December 31, 2004, and incorporated herein
by reference
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

63

---

---

|4.18 |  | Shareholders Agreement
by and between DBSI and Egged, dated November 16, 2004 (as amended on January 30, 2005)
filed by us as exhibit 4.19 to our Annual Report on Form 20-F for the year ended December
31, 2004, and incorporated herein by reference
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.19 |  | English
Summary of the Asset Purchase Agreement by and among Shagrir Towing Services and Shagrir,
dated January 3, 2005 (original language  Hebrew) filed by us as exhibit 4.20 to
our Annual Report on Form 20-F for the year ended December 31, 2004, and incorporated
herein by reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.20 |  | English
Summary of the Lease Agreement by and between Shagrir (1985) Ltd. and Shagrir, dated
January 3, 2005 (original language  Hebrew) filed by us as exhibit 4.21 to our
Annual Report on Form 20-F for the year ended December 31, 2004, and incorporated herein
by reference
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.21 |  | English
Summary of the Asset Purchase Agreement by and between Shagrir (1985) Ltd. and Shagrir,
dated January 3, 2005 (original language  Hebrew) filed by us as exhibit 4.22 to
our Annual Report on Form 20-F for the year ended December 31, 2004, and incorporated
herein by reference
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.22 |  | English
Summary of the Assignment Agreements by and among Shagrir Towing Services, Shagrir and
Certain Israeli Insurance Companies, dated January through February 2005 (original
language  Hebrew) filed by us as exhibit 4.23 to our Annual Report on Form 20-F for
the year ended December 31, 2004, and incorporated herein by reference
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.23 |  | English
Summary of the Management Agreement by and between Shagrir and Dekalog Focused Management
Ltd., dated February 28, 2005 (original language  Hebrew) filed by us as exhibit
4.24 to our Annual Report on Form 20-F for the year ended December 31, 2004, and
incorporated herein by reference
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.24 |  | Engilsh
Summary of the Employment Agreement by and between Mr. Offer Lior and us, dated February
28, 2005 (original language  Hebrew) filed by us as exhibit 4.25 to our Annual
Report on Form 20-F for the year ended December 31, 2004, and incorporated herein by
reference
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.25 |  | English
Summary of the Employment Agreement by and between Mr. Danny Stern and us, dated May 23,
2005 (original language  Hebrew) filed by us as exhibit 4.26 to our Annual Report
on Form 20-F for the year ended December 31, 2004, and incorporated herein by reference
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8.1 |  | A
list of our subsidiaries.
|--- |  | ---------------------------

|10.1 |  | Consent
of Kost, Forer,  Gabbay & Kasierer Certified Public Accountants (Israel) .
|---- |  | ----------------------------------------------------------------------------------

|10.2 |  | Consent
of Grant Thornton Argentina S.C. Certified Public Accountants (Argentina) .
|---- |  | -----------------------------------------------------------------------------------

|10.3 |  | Consent
of Salles, Sainz - Grant Thornton, S.C. Certified Public Accountants (Mexico) .
|---- |  | ---------------------------------------------------------------------------------------

|12.1 |  | Certification
by Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
|---- |  | ---------------------------------------------------------------------------------------------------

|12.2 |  | Certification
by Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
|---- |  | ---------------------------------------------------------------------------------------------------

|13.1 |  | Certification
by Chief Executive Officer pursuant to 18 U.S.C., Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

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

64

---

---

SIGNATURE

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.

|POINTER TELOCATION LIMITEDBy: /s/ Yossi Ben Shalom
Yossi Ben ShalomChairman of the Board of Directors |  | 
|------------------------------------------------------------------------------------------------------------------- |  | 

June 27, 2006

65

---

---

# POINTER TELOCATION
LTD. AND ITS SUBSIDIARIES 
(Formerly: Nexus Telocation
Systems Ltd.)

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2005

# IN U.S. DOLLARS

# INDEX

|                                                           | Page      
|---------------------------------------------------------- | ----------
|
|
|
|
|Report of Independent Registered Public Accounting Firm    | F-2       
|                                                          
|Consolidated Balance Sheets                                | F-3 - F-4 
|                                                          
|Consolidated Statements of Operations                      | F-5       
|                                                          
|Statements of Changes in Shareholders' Equity (Deficiency) | F-6       
|                                                          
|Consolidated Statements of Cash Flows                      | F-7 - F-8 
|                                                          
|Notes to Consolidated Financial Statements                 | F-9 - F-45



---

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders of

# POINTER TELOCATION LTD. 
(Formerly: Nexus
Telocation Systems Ltd.)

We
have audited the accompanying consolidated balance sheets of Pointer Telocation Ltd.
(Formerly: Nexus Telocation Systems Ltd.) (the Company) and its subsidiaries
as of December 31, 2005 and 2004 and the related consolidated statements of operations,
changes in shareholders equity (deficiency) and cash flows for each of the three years in the
period ended December 31, 2005. 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 two
subsidiaries, whose financial statements reflect total assets constituting 3.7% and 9.6%
as of December 31, 2005 and 2004, respectively, and total revenues constituting 5.7%,
16.6% and 46.11% of the related consolidated totals for the years ended December 31,
2005, 2004 and 2003, respectively. The financial statements of these companies were
audited by other auditors whose reports have been furnished to us, and our opinion,
insofar as it relates to amounts included for those subsidiaries, 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, as
well as evaluating the overall financial statement presentation. We believe that our
audits and the reports of the 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 2004 and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2005, in conformity with U.S.
generally accepted accounting principles.

|Tel-Aviv, Israel 
March 1, 2006 | KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
|------------------------------- | -------------------------------------------------------------

F - 2

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
   (Formerly: Nexus Telocation Systems Ltd.)
|-----------------------------------------------------------------------------------------
|                                                                                         
|CONSOLIDATED BALANCE SHEETS                                                              
|                                                                                         
|U.S. dollars in thousands                                                                

|                                                                                | December 31,
|------------------------------------------------------------------------------- | ------------
|
|
|
|
|ASSETS                                                                          |             
|                                                                                |             
|CURRENT ASSETS:                                                                 |             
|Cash and cash equivalents                                                       |             
|Short-term investments                                                          |             
|Trade receivables (net of allowance for doubtful accounts of $ 363 and $ 568 at |             
|December 31, 2005 and 2004, respectively)                                       |             
|Other accounts receivable and prepaid expenses (Note 3)                         |             
|Inventories (Note 4)                                                            |             
|                                                                                |             
|                                                                                |             
|Total current assets                                                            |             
|                                                                                |             
|                                                                                |             
|LONG-TERM ASSETS:                                                               |             
|Long-term accounts receivable                                                   |             
|Severance pay fund                                                              |             
|Property and equipment, net (Note 5)                                            |             
|Goodwill                                                                        |             
|Other intangible assets, net (Note 6)                                           |             
|                                                                                |             
|                                                                                |             
|Total long-term assets                                                          |             
|                                                                                |             
|                                                                                |             
|Total assets                                                                    |             
|                                                                                |             

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

F - 3

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
   (Formerly: Nexus Telocation Systems Ltd.)
|-----------------------------------------------------------------------------------------
|                                                                                         
|CONSOLIDATED BALANCE SHEETS                                                              
|                                                                                         
|U.S. dollars in thousands (except share and per share data)                              

|                                                                           | December 31,
|-------------------------------------------------------------------------- | ------------
|
|
|
|
|LIABILITIES AND SHAREHOLDERS' EQUITY                                       |             
|                                                                           |             
|CURRENT LIABILITIES:                                                       |             
|Short-term bank credit and current maturities of long-term loans (Note 7)  |             
|Trade payables                                                             |             
|Deferred revenues and customer advances                                    |             
|Other accounts payable and accrued expenses (Note 8)                       |             
|                                                                           |             
|                                                                           |             
|Total current liabilities                                                  |             
|                                                                           |             
|                                                                           |             
|LONG-TERM LIABILITIES:                                                     |             
|Long-term loans from banks (Note 9)                                        |             
|Long-term loans from shareholders and others (Note 10)                     |             
|Accrued severance pay                                                      |             
|                                                                           |             
|                                                                           |             
|                                                                           |             
|                                                                           |             
|SHAREHOLDERS' EQUITY:                                                      |             
|Share capital (Note 12) -                                                  |             
|Ordinary shares of NIS 3 par value:                                        |             
|Authorized - 8,000,000 and 4,000,000 shares at December 31, 2005 and 2004, |             
|respectively; Issued and outstanding - 2,479,020 and 1,704,505 shares at   |             
|December 31, 2005 and 2004, respectively                                   |             
|Additional paid-in capital                                                 |             
|Deferred stock-based compensation                                          |             
|Accumulated other comprehensive loss                                       |             
|Accumulated deficit                                                        |             
|                                                                           |             
|                                                                           |             
|Total shareholders' equity                                                 |             
|                                                                           |             
|                                                                           |             
|Total liabilities and shareholders' equity                                 |             
|                                                                           |             

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

F - 4

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
   (Formerly: Nexus Telocation Systems Ltd.)
|-----------------------------------------------------------------------------------------
|                                                                                         
|CONSOLIDATED STATEMENTS OF OPERATIONS                                                    
|                                                                                         
|U.S. dollars in thousands (except per share data)                                        

|                                                                  | Year ended December 31,
|----------------------------------------------------------------- | -----------------------
|
|
|
|
|Revenues:                                                         |                        
|Products                                                          |                        
|Services                                                          |                        
|                                                                  |                        
|                                                                  |                        
|Total revenues (Note 16b)                                         |                        
|                                                                  |                        
|                                                                  |                        
|Cost of revenues:                                                 |                        
|Products                                                          |                        
|Services                                                          |                        
|                                                                  |                        
|                                                                  |                        
|Total cost of revenues                                            |                        
|                                                                  |                        
|                                                                  |                        
|Gross profit                                                      |                        
|                                                                  |                        
|                                                                  |                        
|Operating expenses:                                               |                        
|Research and development, net (Note 17a)                          |                        
|Selling and marketing                                             |                        
|General and administrative                                        |                        
|Amortization of deferred stock-based compensation *)              |                        
|Amortization of intangible assets                                 |                        
|                                                                  |                        
|                                                                  |                        
|Total operating expenses                                          |                        
|                                                                  |                        
|                                                                  |                        
|Operating income (loss)                                           |                        
|Financial expenses, net (Note 17b)                                |                        
|Other income (expenses), net (Note 17c)                           |                        
|                                                                  |                        
|                                                                  |                        
|Loss before taxes on income                                       |                        
|Taxes on income                                                   |                        
|                                                                  |                        
|                                                                  |                        
|Loss from continuing operations                                   |                        
|Gain from discontinued operations (Note 1d)                       |                        
|                                                                  |                        
|                                                                  |                        
|Net income (loss)                                                 |                        
|                                                                  |                        
|                                                                  |                        
|Basic and diluted loss per share from continuing operations       |                        
|Basic and diluted earnings per share from discontinued operations |                        
|                                                                  |                        
|                                                                  |                        
|Basic and diluted net earnings (loss) per share (Note 13)         |                        
|                                                                  |                        
|                                                                  |                        
|*) Stock-based compensation relates to the following:             |                        
|Research and development                                          |                        
|General and administrative                                        |                        
|                                                                  |                        
|                                                                  |                        
|Total                                                             |                        
|                                                                  |                        

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

F - 5

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
   (Formerly: Nexus Telocation Systems Ltd.)
|-----------------------------------------------------------------------------------------
|                                                                                         
|STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)                               
|                                                                                         
|U.S. dollars in thousands (except share data)                                            

|                                       | Number of
shares | Share
capital | Additional
paid-in
capital | Deferred
stock-based
compensation | Accumulated
other
comprehensive
loss | Accumulated
deficit | Total
comprehensive
income
(loss) | Total
shareholders'
equity
(deficiency)
|-------------------------------------- | ---------------- | ------------- | -------------------------- | --------------------------------- | ------------------------------------ | ------------------- | --------------------------------- | ---------------------------------------
|
|
|
|
|Balance as of January 1, 2003          |                  |               |                            | 112,899                           |                                      | $                   | 94                                |                                        
|Issuance of shares, net                |                  |               |                            | 868,045                           |                                      |                     | 570                               |                                        
|Conversion of convertible debenture    |                  |               |                            | 164,356                           |                                      |                     | 109                               |                                        
|Deferred stock-based compensation      |                  |               |                            | -                                 |                                      |                     | -                                 |                                        
|Amortization of deferred stock-based   |                  |              
|compensation                           |                  |               |                            | -                                 |                                      |                     | -                                 |                                        
|Induced conversion of convertible      |                  |              
|debenture                              |                  |               |                            | -                                 |                                      |                     | -                                 |                                        
|Issuance of warrants to a bank         |                  |               |                            | -                                 |                                      |                     | -                                 |                                        
|Comprehensive income:                  |                  |              
|Foreign currency translation           |                  |              
|adjustments                            |                  |               |                            | -                                 |                                      |                     | -                                 |                                        
|Net income                             |                  |               |                            | -                                 |                                      |                     | -                                 |                                        
|                                       |                  |               |                            |                                   |                                      |                     |                                   |                                        
|Total comprehensive income             |                  |               |                            |                                   |                                      |                     |                                   |                                        
|                                       |                  |               |                            |                                   |                                      |                     |                                   |                                        
|                                       |                  |              
|Balance as of  December 31, 2003       |                  |               |                            | 1,145,300                         |                                      |                     | 773                               |                                        
|Issuance of shares, warrants and       |                  |              
|options for the acquisition of         |                  |              
|additional interest in a subsidiary,   |                  |              
|net                                    |                  |               |                            | 429,154                           |                                      |                     | 286                               |                                        
|Deferred stock-based compensation      |                  |               |                            | -                                 |                                      |                     | -                                 |                                        
|Amortization of deferred stock-based   |                  |              
|compensation                           |                  |               |                            | -                                 |                                      |                     | -                                 |                                        
|Exercise of warrants and options       |                  |               |                            | 130,051                           |                                      |                     | 86                                |                                        
|Comprehensive loss:                    |                  |              
|Foreign currency translation           |                  |              
|adjustments                            |                  |               |                            | -                                 |                                      |                     | -                                 |                                        
|Net loss                               |                  |               |                            | -                                 |                                      |                     | -                                 |                                        
|                                       |                  |               |                            |                                   |                                      |                     |                                   |                                        
|Total comprehensive loss               |                  |               |                            |                                   |                                      |                     |                                   |                                        
|                                       |                  |               |                            |                                   |                                      |                     |                                   |                                        
|                                       |                  |              
|Balance as of  December 31, 2004       |                  |               |                            | 1,704,505                         |                                      |                     | 1,145                             |                                        
|Issuance of shares and warrants, net   |                  |               |                            | 722,587                           |                                      |                     | 500                               |                                        
|Deferred stock-based compensation      |                  |               |                            | -                                 |                                      |                     | -                                 |                                        
|Amortization of deferred stock-based   |                  |              
|compensation                           |                  |               |                            | -                                 |                                      |                     | -                                 |                                        
|Exercise of warrants and stock options |                  |               |                            | 51,928                            |                                      |                     | 35                                |                                        
|Comprehensive loss:                    |                  |              
|Foreign currency translation           |                  |              
|adjustments                            |                  |               |                            | -                                 |                                      |                     | -                                 |                                        
|Net loss                               |                  |               |                            | -                                 |                                      |                     | -                                 |                                        
|                                       |                  |               |                            |                                   |                                      |                     |                                   |                                        
|Total comprehensive loss               |                  |               |                            |                                   |                                      |                     |                                   |                                        
|                                       |                  |               |                            |                                   |                                      |                     |                                   |                                        
|                                       |                  |              
|Balance as of  December 31, 2005       |                  |               |                            | 2,479,020                         |                                      | $                   | 1,680                             |                                        
|                                       |                  |               |                            |                                   |                                      |                     |                                   |                                        

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

F - 6

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                                 
|                                                                                      
|U.S. dollars in thousands                                                             

|                                                                | Year ended December 31,
|--------------------------------------------------------------- | -----------------------
|
|
|
|
|Cash flows from operating activities:                           |                        
|Net income (loss)                                               |                        
|Adjustments required to reconcile net income (loss) to net cash |                        
|provided by (used in) operating activities:                     |                        
|Gain from discontinued operations                               |                        
|Depreciation and amortization                                   |                        
|Accrued interest and exchange rate changes of convertible       |                        
|debenture and long-term loans                                   |                        
|Accrued severance pay, net                                      |                        
|Loss (gain) from sale of property and equipment, net            |                        
|Gain from realization of investment in subsidiary, net          |                        
|Amortization of deferred stock-based compensation               |                        
|Induced conversion of convertible debenture                     |                        
|Decrease (increase) in trade receivables, net                   |                        
|Decrease in other accounts receivable and prepaid expenses      |                        
|Decrease (increase) in inventories                              |                        
|Write-off of inventories                                        |                        
|Increase in other long-term accounts receivable                 |                        
|Increase (decrease) in trade payables                           |                        
|Decrease in other accounts payable and accrued expenses         |                        
|                                                                |                        
|                                                                |                        
|Net cash provided by (used in) operating activities             |                        
|                                                                |                        
|                                                                |                        
|Cash flows from investing activities:                           |                        
|Purchase of property and equipment                              |                        
|Proceeds from short-term bank deposits                          |                        
|Proceeds from sale of property and equipment                    |                        
|Proceeds from realization of investment in subsidiary           |                        
|Acquisition of additional interest in Shagrir Motor Vehicle     |                        
|Systems, net of cash acquired (a)                               |                        
|Acquisition of activities and assets of Shagrir Towing Services |                        
|Ltd. and Shagrir (1985) Ltd. (b)                                |                        
|                                                                |                        
|                                                                |                        
|Net cash used in investing activities                           |                        
|                                                                |                        
|                                                                |                        
|Cash flows from financing activities:                           |                        
|Receipt of long-term loans from banks                           |                        
|Repayment of long-term loans from banks                         |                        
|Receipt of long-term loans from shareholders and others         |                        
|Repayment of long-term loans from others                        |                        
|Repayment of convertible debenture                              |                        
|Issuance of warrants to a bank                                  |                        
|Proceeds from issuance of shares and exercise of warrants, net  |                        
|Short-term bank credit, net                                     |                        
|                                                                |                        
|                                                                |                        
|Net cash provided by financing activities                       |                        
|                                                                |                        
|                                                                |                        
|Effect of exchange rate on cash and cash equivalents            |                        
|                                                                |                        
|                                                                |                        
|Increase (decrease) in cash and cash equivalents                |                        
|Cash and cash equivalents at the beginning of the year          |                        
|                                                                |                        
|                                                                |                        
|Cash and cash equivalents at the end of the year                |                        
|                                                                |                        
|                                                                |                        
|Supplemental disclosure of cash flow transaction:               |                        
|Cash paid during the year for interest                          |                        
|                                                                |                        

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

F - 7

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                                 
|                                                                                      
|U.S. dollars in thousands                                                             

|    |                                                             | Year ended December 31,
|--- | ----------------------------------------------------------- | -----------------------
|
|
|
|
|(a) | Acquisition of additional interest in Shagrir Motor Vehicle |                        
|    | Systems:                                                    |                        
|    |                                                             |                        
|    | Fair value of assets acquired and liabilities assumed at    |                        
|    | date of acquisition:                                        |                        
|    |                                                             |                        
|    | Working capital                                             |                        
|    | Long-term accounts receivable                               |                        
|    | Property and equipment                                      |                        
|    | Customer list                                               |                        
|    | Brand name                                                  |                        
|    | Goodwill                                                    |                        
|    | Short-term bank credit                                      |                        
|    | Long-term loan                                              |                        
|    | Accrued severance pay, net                                  |                        
|    |                                                             |                        
|    |                                                             |                        
|    |                                                             |                        
|    | Fair value of shares, options and warrants issued           |                        
|    |                                                             |                        
|    |                                                             |                        
|    |                                                             |                        
|    |                                                             |                        
|    |                                                             |                        
|(b) | Acquisition of activities and assets of Shagrir Towing      |                        
|    | Services Ltd. and Shagrir (1985) Ltd.:                      |                        
|    |                                                             |                        
|    | Fair value of assets acquired and liabilities assumed at    |                        
|    | date of acquisition:                                        |                        
|    |                                                             |                        
|    | Working capital                                             |                        
|    | Property and equipment                                      |                        
|    | Customer list                                               |                        
|    | Brand name                                                  |                        
|    | Goodwill                                                    |                        
|    | Long-term loan                                              |                        
|    | Accrued severance pay, net                                  |                        
|    |                                                             |                        
|    |                                                             |                        
|    |                                                             |                        
|    | Fair value of shares and warrants issued                    |                        
|    |                                                             |                        
|    |                                                             |                        
|    |                                                             |                        
|    |                                                             |                        
|    |                                                             |                        
|(c) | Non-cash investing and financing activity:                  |                        
|    |                                                             |                        
|    | Conversion of convertible debenture                         |                        
|    |                                                             |                        

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

F - 8

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands (except share and per share data)                           

|NOTE 1: |  | GENERAL
|------- | - | -------

| | a. | Pointer
Telocation Ltd., (formerly: Nexus Telocation Systems Ltd.) (the           Company)
was incorporated in Israel and commenced operations in July 1991.           The Company
provides a range of services to insurance companies and automobile           owners,
including road-side assistance, vehicle towing, stolen vehicle           retrieval, fleet
management and other value added services. The Company provides           services, for
the most part, in Israel, Argentina and Mexico, through its local           subsidiaries.
Independent operators provide similar services mainly in Russia           and Venezuela
utilizing the Companys technology and operational know-how.           The Companys
shares are traded on on the NASDAQ Capital Market.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | On
June 29, 2004, the Company announced the closing of a definitive agreement           with
the shareholders (the Sellers) of Shagrir Motor Vehicle Systems
          Ltd. (previously known as Pointer (Eden Telecom Group) Ltd.) (Shagrir
          Motor Vehicle Systems) pursuant to which it purchased all of the
          outstanding and issued share capital of Shagrir Motor Vehicle Systems not
          already held by the Company (which, together with the Companys 14% prior
          holdings in Shagrir Motor Vehicle Systems, constitutes 100% of the issued share
          capital of Shagrir Motor Vehicle Systems).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Sellers, who provided loans to Shagrir Motor Vehicle System in the past, assigned these
loans to the Company. The Company also undertook to indemnify the Sellers who provided
Shagrir Motor Vehicle System with guarantees in respect of Shagrir Motor Vehicle Systems
loans from banks in the event the banks will exercise such guarantees. In order to secure
such indemnification undertaking, the Company issued to the Sellers options to purchase,
at no consideration, 328,889 of the Companys Ordinary shares, in the event the
Company does not meet its indemnification obligations. The consideration comprises the
following:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                           | 
| | ----------------------------------------- | 
|
|
|
|
| | Issuance of 429,154 Ordinary shares       | 
| | Issuance of 247,781 warrants              | 
| | Issuance of 75,896 employee stock options | 
| | Direct transaction costs                  | 
| |                                           | 
| |                                           | 
| |                                           | 
| |                                           | 

| | The
warrants are exercisable at an exercise price of $ 4.4 per share and are exercisable
during the period which ends by the earlier of (i) April 6, 2006; or (ii) a merger or
consolidation of the Company into any other corporation or corporations where the Company
is not the surviving entity, or the sale of substantially all of the assets of the
Company, in which the shareholders of the Company hold less than 33% of the outstanding
voting power of the successor or surviving corporation immediately following such
consolidation, merger, sale of assets or reorganization.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 9

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands (except share and per share data)                           

|NOTE1 : |  | GENERAL
(Cont.)
|------- | - | ---------------

| | The
acquisition was accounted for using the purchase method of accounting as determined in
Statement of Financial Accounting Standards (SAFS) No. 141, Business
Combinations (SFAS No. 141) and, accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based on their estimated fair
values at the date of acquisition.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Based
upon a valuation of tangible and intangible assets acquired and liabilities assumed, the
Company allocated the total cost of the acquisition, as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                        | 
| | -------------------------------------- | 
|
|
|
|
| | Current assets                         | 
| | Long-term accounts receivables         | 
| | Inventories                            | 
| | Property and equipment                 | 
| | Customer list (five years useful life) | 
| | Brand name (two years useful life)     | 
| | Goodwill                               | 
| | Current liabilities                    | 
| | Long-term loan                         | 
| | Accrued severance pay, net             | 
| |                                        | 
| |                                        | 
| |                                        | 
| |                                        | 

| | For
estimated amortization expenses related to intangible assets, see Note 6c.
| | ------------------------------------------------------------------------------

| | In
accordance with SFAS No. 142, Goodwill and Other Intangible Asset (SFAS
No. 142), goodwill will not be amortized. In lieu of amortization, the Company is
required to perform an annual impairment review. If the Company will determine, through
the impairment review process, that goodwill has been impaired, it will record the
impairment charge in its statement of operations. The Company will also assess the
impairment of goodwill whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. As of December 31, 2005, the Company has
determined that no impairment with respect to goodwill exists.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with Accounting Principles Board Opinion (APB) No. 18, The
Equity Method of Accounting for Investments in Common Stock the Company
retroactively adopted the equity method of accounting for its initial investment in
Shagrir Motor Vehicle Systems (14%), on the acquisition of its controlling interest in
Shagrir Motor Vehicle Systems. The effect of Shagrir Motor Vehicle Systems prior
period losses has been accounted for as a reduction in shareholders equity in the balance
sheet as of January 1, 2002.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands (except share and per share data)                           

|NOTE 1: |  | GENERAL
(Cont.)
|------- | - | ---------------

| | c. | On
February 28, 2005, the Company announced the closing of the transaction for           the
purchase of the activities, the assets and liabilities of Shagrir Towing
          Services Ltd. and Shagrir (1985) Ltd. (Shagrir transaction) by the
          Companys subsidiary Shagrir Motor Vehicle Systems, in consideration for
          approximately NIS 200,000 thousand. Shagrir Towing Services Ltd. was engaged in
          the field of road side assistance and towing services in Israel.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
consideration comprised of the following:
| | ---------------------------------------------

| |                                                          | 
| | -------------------------------------------------------- | 
|
|
|
|
| | Cash                                                     | 
| | Fair value of the loan from Shagrir Towing Services Ltd. | 
| | Warrants to purchase the Company's shares                | 
| | Transactions costs                                       | 
| |                                                          | 
| |                                                          | 
| | Total consideration - purchase price                     | 
| |                                                          | 

| | The
acquisition was accounted for using the purchase method of accounting as determined in
SFAS No. 141 and accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed, based on their estimated fair value at the date of acquisition.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Based
upon a valuation of assets acquired and liabilities assumed, Shagrir Motor Vehicle
Systems allocated the total cost of the acquisition, as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                         | 
| | --------------------------------------- | 
|
|
|
|
| | Net working capital                     | 
| | Property and equipment and other assets | 
| | Long-term liabilities                   | 
| | Customer list                           | 
| | Brand name                              | 
| | Goodwill                                | 
| |                                         | 
| |                                         | 
| | Total purchase price                    | 
| |                                         | 

| | For
estimated amortization expenses related to intangible assets, see Note 6c.
| | ------------------------------------------------------------------------------

| | Shagrir
Motor Vehicle Systems funded Shagrir transaction through a credit line of NIS 100
million, made available by Bank Hapoalim B.M., a loan of NIS 40 million provided by
Shagrir Towing Services (see Note 10c(4)), a loan of approximately NIS 45 million
provided by a group of investors led by Gandyr Investments Ltd. (Gandyr Group)
(see Note 10c(6)) and Egged Holdings Ltd. (see Note (10c(1-3)), a loan of NIS 10 million
provided by the Company and Gandyr Group and Egged Holdings and NIS 5 million invested by
the Company in equity, which was financed by the Companys issuance of shares and
warrants (see Note 12c(5)).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
November 30, 2005, Gandyr Group exercised its options to convert the loan, of
approximately NIS 29.1 million, into 43.44% of the shares of Shagrir Motor Vehicle
Systems. As a result, the Company recorded in 2005 a gain from the decrease in holdings
of Shagrir Motor Vehicle Systems of $ 359.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands (except share and per share data)                           

|NOTE 1: |  | GENERAL
(Cont.)
|------- | - | ---------------

| | d. | The
unaudited pro forma information below assumes that the acquisition of           Shagrir
Motor Vehicle Systems and Shagrir transaction had been consummated on           January
1, 2004 and 2005 and includes the effect of amortization of intangible           assets
from those dates. This data is presented for information purposes only           and is
not necessarily indicative of the results that would have been achieved           had the
acquisition taken place on those dates. The pro forma information is as
          follows:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                          | Year ended December 31,
| | ------------------------ | -----------------------
|
|
|
|
| | Net revenues             |                        
| |                          |                        
| |                          |                        
| | Net loss                 |                        
| |                          |                        
| |                          |                        
| | Basic net loss per share |                        
| |                          |                        

| | e. | In
2002, the Company decided to discontinue its AMR (Automatic Meter Reading)
          operations carried out by Nexus Data Inc. (ND) a wholly-owned
          subsidiary of the Company. On December 24, 2002, the Company and a third party
          investor signed an agreement, according to which, the investor acquired 100% of
          the outstanding share capital of ND for a consideration of $ 0.001, the Company
          waived 100% of NDs debt to the Company. ND was committed to pay the
          Company a total amount of $ 1,000 after ND would have had four consecutive
          quarters of positive cash flows and net assets of at least $ 10,000. The
          closing took place in February 2003.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result, the Company recorded in 2003 a gain from discontinued operations of $ 8,524,
which represents the excess of NDs liabilities to third parties (other than the
Company) over NDs assets. Operating results and cash flows attributed to ND were
presented as discontinued operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | During
2001, the Company purchased 92.5% of Tracsat S.A.s           (Tracsat)
share capital. Tracsat is the operator of the           Companys systems and
products that provides stolen vehicle recovery           services in Buenos Aires,
Argentina.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2003 and 2004, Tracsat issued 280 and 560 shares to two employees, respectively. As a
result, the Companys holdings in Tracsat were reduced to 86.45%.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands                                                             

|NOTE 1: |  | GENERAL
(Cont.)
|------- | - | ---------------

| | g. | On
June 17, 2004, the Company incorporated a local Mexican operator and service
          provider, Pointer Recuperacion de Mexico S.A. de C.V. (Pointer
          Mexico), jointly held by the Company and its Mexican local partners,
96.5%           and 3.5% respectively.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 2004 and January 25, 2005, the Company sold to its local partners a total of
28.5% of its holdings in Pointer Mexico in consideration of its par value. Pointer Mexico
is providing location, tracking and recovery of stolen vehicles services to its customers
in Mexico.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | The
Company relies on a single-source supplier for the manufacture of its end           units
transceiver (RF modem with inputs and outputs), that is installed within a
          vehicle or may be installed at any remote object. The Company does not have
          manufacturing facilities for its end unit devices. Most of the components of
its           systems are manufactured for the Company by independent manufacturers
outside of           Israel and are assembled by a turn-key subcontractor located in
Israel.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES
|------- | - | -------------------------------

| | The
consolidated financial statements have been prepared in accordance with accounting
principles generally accepted 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 U.S. dollars:
| | -- | -------------------------------------

| | The
majority of the Companys revenues is generated in or linked to U.S. dollars (dollar).
In addition, a substantial portion of the Companys costs is incurred in dollars.
The Companys management believes that the dollar is the currency of the primary
economic environment in which the Company operates. Thus, the functional and reporting
currency of the Company is the dollar.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands                                                             

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | For
Tracsat, whose functional currency has been determined to be its local currency, the
Argentine peso, for Pointer Mexico, whose functional currency has been determined to be
its local currency, the Mexican peso and for Shagrir Motor Vehicle Systems whose
functional currency has been determined to be its local currency, the new Israeli shekel (NIS),
assets and liabilities are translated at year-end exchange rates and statement of
operations items are translated at average exchange rates prevailing during the year.
Such translation adjustments are recorded as a separate component, other comprehensive
income, in shareholders equity (deficiency).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Principles
of consolidation:
| | -- | ----------------------------

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

| | d. | Cash
equivalents:
| | -- | -----------------

| | Cash
equivalents are short-term highly liquid investments that are readily convertible to cash
with maturities of three months or less at the date acquired.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Short-term
investments:
| | -- | -----------------------

| | Short-term
investments in marketable securities are presented at their market price.
| | ------------------------------------------------------------------------------------

| | f. | Inventories:
| | -- | ------------

| | Inventories
are stated at the lower of cost or market value. Cost is determined using the moving
average method. Inventory consists of raw materials and finished products.
Inventory write-offs are provided to cover risks arising from slow-moving items,
technological obsolescence, excess inventories, and for market prices lower than cost. In
2005, 2004 and 2003, the Company and its subsidiaries wrote off approximately $ 199,
$ 479 and $ 111, respectively. The write-offs are included in cost of revenues.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands                                                             

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | g. | Property
and equipment:
| | -- | -----------------------

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

| |                                     | %                         
| | ----------------------------------- | --------------------------
|
|
|
|
| | Installed products                  | 20-33                     
| | Computers and development equipment | 10 - 33 (mainly 33)       
| | Office furniture and equipment      | 6 - 15                    
| | Motor vehicles                      | 15 - 20 (mainly 20)       
| | Network installation                | 10 - 33                   
| | Buildings                           | 6.67                      
| | Leasehold improvements              | Over the term of the lease

| | Changes
of estimated useful life for depreciation:
| | --------------------------------------------------

| | Following
manufacturers policy and based on the experience acquired and competitors
comparison, Tracsat changed the estimated useful lives of certain assets.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | Until
year-end 2004, Tracsat depreciated the sites over a three-year period. At
               the beginning of 2005 Tracsat changed the estimated useful lives for new
Network                installations purchases to a period of ten years.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Since
October 2004 Tracsat started importing a new version of tracking units.
               Prior versions were depreciated over a three-year period although units
               installed at the beginning of year 2000 are still working without any
special                maintenance. As such, Tracsat determined that the estimated useful
lives of new                tracking units is five years.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | Goodwill
and other intangible assets:
| | -- | -------------------------------------

| | Goodwill
reflects the excess of the purchase price of the acquired subsidiary or activities over
the fair value of net assets acquired. Pursuant to SFAS 142, Goodwill and Other
Intangible Assets, goodwill is not amortized but rather tested for impairment at
least annually. As of December 31, 2005, the Company has determined that no
impairment with respect to goodwill exists. The  amount of  goodwill  included  in the  computation  of the gain from the  decrease in holdings of
Shagrir Motor Vehicle Systems (see Note 1c) is $ 5,279.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Intangible
assets consist of the acquired patents, customer list and brand name. Intangible assets
are amortized over their useful life using a method of amortization that reflects the
pattern in which the economic benefits of the intangible assets are consumed or otherwise
used up. Intangible assets are stated at amortized cost.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands                                                             

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Patents
are amortized over an eight-year period. The customer lists are amortized over a
five-year and an eight year periods. The brand names are amortized over an eight year
period and a two-year period (two thirds in the first year, and one third in the second
year).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | i. | Impairment
of long-lived assets:
| | -- | --------------------------------

| | The
Companys long-lived assets other than goodwill are reviewed for impairment in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS No. 144)
whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets 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. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell. No impairment losses have
been identified as of December 31, 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | j. | Provision
for warranty:
| | -- | -----------------------

| | The
Company and its subsidiaries generally grant a one-year to three-year warranty for their
products. The Company and its subsidiaries estimate the costs that may be incurred under
its basic limited warranty and records a liability in the amount of such costs at the
time which product revenue is recognized. Factors that affect the warranty liability
include the number of installed units, historical and anticipated rates of warranty
claims and cost per claim. The Company and its subsidiaries periodically assess the
adequacy of its recorded warranty liabilities and adjust the amounts as necessary.
Changes in the Companys and its subsidiaries product liabilities during 2005
are as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                         | 
| | --------------------------------------- | 
|
|
|
|
| | Balance, beginning of the year          | 
| | Warranties issued during the year       | 
| | Settlements made during the year        | 
| | Expirations                             | 
| | Foreign currency translation adjustment | 
| |                                         | 
| |                                         | 
| | Balance, end of year                    | 
| |                                         | 

| | k. | Revenue
recognition:
| | -- | --------------------

| | The
Company and its subsidiaries generate revenues mainly from the provision of services,
subscriber fees and sales of systems and products, mainly in respect of road-side
assistance services, automobile repair and towing services, stolen vehicle recovery and
other value added services. To a lesser extent, revenues are also derived from technical
support services. The Company and its subsidiaries sells its systems primarily through
its direct sales force and indirectly through resellers. Sales consummated by the Companys
sales forces and sales to resellers are considered sales to end-users.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands                                                             

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Revenues
from the sale of systems and products are recognized in accordance with Staff Accounting
Bulletin (SAB) No. 104, Revenue Recognition (SAB No. 104),
when delivery has occurred, persuasive evidence of an agreement exists, the vendors
fee is fixed or determinable, no further obligation exists and collectability is probable.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Service
revenues including subscriber fees are recognized as services are performed, over the
term of the agreement.
| | --------------------------------------------------------------------------------------------------------------------

| | Revenues
from Stolen Vehicle Recovery services are recognized upon success, when the related
stolen vehicle is recovered, and such recovery is approved by the customer or ratably
over the term of the agreement.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF
00-21), revenue from certain arrangements may include multiple elements within a
single contract. The Companys accounting policy complies with the requirements set
forth in EITF 00-21, relating to the separation of multiple deliverables into individual
accounting units with determinable fair values. The Company considers the sale of
products and subscriber fees to be separate units of accounting.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues generated from technical support services, installation and
de-installation are recognized when such services are rendered.
| | ------------------------------------------------------------------------------------------------------------------------------------

| | Certain
agreements include revenues from installation of products as well as revenues from sales
of Stolen Vehicle Recovery services or subscriber fees that are considered to be one unit
of accounting. In those cases revenues from installation are deferred and recognized over
the estimated duration of the service contracts.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Generally,
the Company does not grant rights of return. The Company follows SFAS No. 48, Revenue
Recognition when Right of Return Exists. Based on the Companys experience, no
provision for returns was recorded.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Research
and development costs, net of grants received, are charged to expenses as incurred.
| | --------------------------------------------------------------------------------------------

| | Grants
from the European community are recognized at the time the Company is entitled to such
grants, on the basis of the related costs incurred, and included as a deduction from
research and development costs.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands (except share and per share data)                           

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | m. | Advertising
expenses:
| | -- | ---------------------

| | Advertising
expenses are charged to the statement of operations as incurred. Advertising expenses for
the years ended December 31, 2005, 2004 and 2003 were $ 408, $ 177 and $ 6,
respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n. | Deferred
income taxes:
| | -- | ----------------------

| | The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes (SFAS No. 109). SFAS No. 109 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. The Company provides a valuation allowance
to reduce deferred tax assets to their estimated realizable values.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o. | Basic
and diluted net earnings (loss) per share:
| | -- | ------------------------------------------------

| | Basic
and diluted net earnings (loss) per share are computed based on the weighted average
number of Ordinary shares outstanding during the year. Diluted net earnings (loss) per
share further include the dilutive effect of stock options outstanding during the year,
in accordance with SFAS No. 128, Earnings per Share (SFAS No. 128).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Options
and warrants outstanding to purchase approximately 1,505,858, 957,950 and 758,136
Ordinary shares of the Company for the years ended December 31, 2005, 2004 and 2003,
respectively, were not included in the computation of diluted net earnings (loss) per
share, since they would have an anti-dilutive effect.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | p. | Accounting
for stock-based compensation:
| | -- | ----------------------------------------

| | The
Company has elected to follow Accounting Principles Board Statement No. 25, Accounting
for Stock Options Issued to Employees (APB No. 25) and FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation (FIN No. 44) in accounting for its employee stock option
plans. Under APB No. 25, when the exercise price of an employee stock option is
equivalent to or above the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company adopted the disclosure provisions of SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure (SFAS No. 148),
which amended certain provisions of SFAS 123, Accounting for Stock-Based
Compensation (SFAS No. 123).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
 Company  continues  to apply  the  provisions  of APB No.  25,  in  accounting  for
 stock-based                      compensation.
| | ----------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands (except share and per share data)                           

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Pro
forma information regarding the Companys net income (loss) and net earnings (loss)
per share is required by SFAS No. 123 and has been determined as if the Company had
accounted for its employee stock options under the fair value method prescribed by SFAS
No. 123. The fair value for options granted in 2005, 2004 and 2003 is amortized over
their vesting period and estimated at the date of grant using a Black-Scholes options
pricing model with the following weighted average assumptions:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                        | 2005    | 2004    | 2003   
| | ---------------------- | ------- | ------- | -------
|
|
|
|
| | Dividend yield         | 0%      | 0%      | 0%     
| | Expected volatility    | 49.3%   | 102%    | 55.6%  
| | Risk-free interest     | 4.3%    | 3.5%    | 1%     
| | Expected life of up to | 4 years | 5 years | 3 years

| | As
for fair value of options issued, see Note 12d.
| | --------------------------------------------------

| | Pro
forma information under SFAS 123 is as follows:
| | ---------------------------------------------------

| |                                                 | Year ended December 31,
| | ----------------------------------------------- | -----------------------
|
|
|
|
| | Net income (loss) as reported                   |                        
| | Add: Amortization of deferred stock-based       |                        
| | compensation in accordance with APB No. 25      |                        
| | Deduct: Amortization of deferred stock-based    |                        
| | compensation determined under fair value        |                        
| | method for all awards                           |                        
| |                                                 |                        
| |                                                 |                        
| | Pro forma net income (loss)                     |                        
| |                                                 |                        
| |                                                 |                        
| | Basic and diluted loss per share from           |                        
| | continuing operations as reported               |                        
| |                                                 |                        
| | Basic and diluted net earnings (loss) per share |                        
| | as reported                                     |                        
| |                                                 |                        
| | Pro forma basic and diluted net loss per share  |                        
| | from continuing operations                      |                        
| |                                                 |                        
| | Pro forma basic and diluted net earnings (loss) |                        
| | per share                                       |                        
| |                                                 |                        

F - 19

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands (except share and per share data)                           

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | q. | Severance
pay:
| | -- | --------------

| | The
liability of the Company and its subsidiary in Israel 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 balance sheet date.
Employees are entitled to one months salary for each year of employment, or a
portion thereof. The liability for Company and its subsidiary in Israel 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 include profits accumulated up to the balance sheet date. 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
pay expenses for the years ended December 31, 2005, 2004 and 2003 were $ 635, $ 172
and $ 143, respectively.
| | ----------------------------------------------------------------------------------------------------------------------

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

| | Financial
instruments that potentially subject the Company and its subsidiaries to concentrations
of credit risk consist principally of cash and cash equivalents, and trade receivables.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Trade
receivables include amounts billed to clients located mainly in Israel and South America.
Management periodically evaluates the collectibility of these trade receivables to
reflect the amounts estimated to be collectible. An allowance is determined in respect of
specific debts whose collection, in managements opinion, is doubtful. As for major
customers, see Note 15b(3).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company and its subsidiaries have no off-balance-sheet concentration of credit risk such
as foreign exchange contracts, option contracts or other foreign hedging arrangements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | s. | Fair
value of financial instruments:
| | -- | ------------------------------------

| | The
following methods and assumptions were used by the Company and its subsidiaries in
estimating fair value disclosures for financial instruments:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | The
carrying amounts reported in the balance sheet for cash and cash equivalents, short-term
investments, trade receivables, other accounts receivable, short-term bank credit, trade
payables and other accounts payable approximate their fair values due to the short-term
maturities of such instruments.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands                                                             

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | t. | Reclassifications:
| | -- | ------------------

| | Certain
financial statement data for prior years have been reclassified to conform to current
year financial statement presentation. The reclassification did not impact net income,
working capital or cash flows from operations as previously reported.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | u. | Impact
of recently issued Accounting Standards:
| | -- | -----------------------------------------------

| | On
December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123
(revised 2004), Share-Based Payment (SFAS 123(R)), which is a
revision of SFAS 123. Generally, the approach in SFAS 123(R) is similar to the approach
described in SFAS 123. However, SFAS 123 permitted, but did not require share-based
payments to employees to be recognized based on their fair values while SFAS 123(R)
requires all share-based payments to employees to be recognized based on their fair
values. SFAS 123(R) also revises, clarifies and expands guidance in several areas,
including measuring fair value, classifying an award as equity or as a liability and
attributing compensation cost to reporting periods. The Company expects to adopt SFAS
123(R) on January 1, 2006.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
123(R) permits companies to adopt its requirements using one of the following two
methods:
| | -----------------------------------------------------------------------------------------------

| | 1. | The
modified prospective method, in which compensation cost is
          recognized commencing with the effective date (i) based on the requirements of
          SFAS 123(R) for all share-based payments granted after the effective date and
          (ii) based on the requirements of SFAS 123 for all awards granted to employees
          prior to the effective date of SFAS 123(R) that remain unvested at the
effective           date.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | The
modified retrospective method, which includes the requirements           of
the modified prospective method described above, but also permits entities to
          restate based on the amounts previously recognized under SFAS 123, for purposes
          of pro forma disclosures all prior periods presented.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
permitted by SFAS 123, the Company currently accounts for share-based payments to
employees using APB 25, the intrinsic value method. The impact of the adoption of SFAS
123(R) cannot be predicted at this time, as it depends on levels of share-based payments
for future grant. However, had the Company adopted SFAS 123(R) in prior periods, the
impact of that Standard would have approximated the impact of SFAS 123, as described in
the disclosure of the pro forma information above.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2005, the SEC Staff issued Staff Accounting Bulletin No. 107 (SAB 107) to give
guidance on implementation of SFAS 123(R).
| | ----------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands                                                             

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

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

|NOTE 3: |  | OTHER
ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|------- | - | ----------------------------------------------

| |                        | December 31,
| | ---------------------- | ------------
|
|
|
|
| | Government authorities |             
| | Employees              |             
| | Prepaid expenses       |             
| | Others                 |             
| |                        |             
| |                        |             
| |                        |             
| |                        |             

|NOTE 4: |  | INVENTORIES
|------- | - | -----------

| |                |  | 
| | -------------- |  | 
|
|
|
|
| | Raw materials  |  | 
| | Finished goods |  | 
| |                |  | 
| |                |  | 
| |                |  | 
| |                |  | 

F - 22

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands                                                             

|NOTE 5: |  | PROPERTY
AND EQUIPMENT
|------- | - | ----------------------

| | a. | Composition:
| | -- | ------------

| |                                     | December 31,
| | ----------------------------------- | ------------
|
|
|
|
| | Cost:                               |             
| | Installed products                  |             
| | Computers and development equipment |             
| | Office furniture and equipment      |             
| | Motor vehicles                      |             
| | Network installation                |             
| | Buildings                           |             
| | Leasehold improvements              |             
| |                                     |             
| |                                     |             
| |                                     |             
| |                                     |             
| | Accumulated depreciation:           |             
| | Installed products                  |             
| | Computers and development equipment |             
| | Office furniture and equipment      |             
| | Motor vehicles                      |             
| | Network installation                |             
| | Buildings                           |             
| | Leasehold improvements              |             
| |                                     |             
| |                                     |             
| |                                     |             
| |                                     |             
| |                                     |             
| | Depreciated cost                    |             
| |                                     |             

|b. | Depreciation
expenses for the years ended December 31, 2005, 2004 and 2003           were $ 2,533,
$ 1,134 and $ 1,104, respectively.
|-- | -------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands                                                             

|NOTE 6: |  | OTHER
INTANGIBLE ASSETS, NET
|------- | - | ----------------------------

| | a. | Other
intangible assets, net:
| | -- | -----------------------------

| |                           | December 31,
| | ------------------------- | ------------
|
|
|
|
| | Original amounts:         |             
| | Patents                   |             
| | Customer list             |             
| | Brand name                |             
| |                           |             
| |                           |             
| |                           |             
| |                           |             
| | Accumulated amortization: |             
| | Patents                   |             
| | Customer list             |             
| | Brand name                |             
| |                           |             
| |                           |             
| |                           |             
| |                           |             
| |                           |             
| | Amortized cost            |             
| |                           |             

| | b. | Amortization
expenses for the years ended December 31, 2005, 2004 and 2003 were           $ 2,464,
$ 931 and $ 67, respectively.
| | -- | --------------------------------------------------------------------------------------------------------------------------------

| | c. | The
customer list and brand name included in the gain from the decrease in           holdings
of Shagrir Motor Vehicle Systems (see Note 1c) is $ 483 and $ 58,           respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Estimated
amortization expenses for the years ending:
| | -- | -----------------------------------------------------

| | December 31, | 
| | ------------ | 
|
|
|
|
| | 2006         | 
| | 2007         | 
| | 2008         | 
| | 2009         | 
| | 2010         | 
| | Thereafter   | 
| |              | 
| |              | 
| |              | 
| |              | 

F - 24

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands                                                             

|NOTE 7: |  | SHORT-TERM
BANK CREDIT AND CURRENT MATURITIES OF LONG-TERM LOANS
|------- | - | ----------------------------------------------------------------

| | Classified
by currency, linkage terms and annual interest rates, the credit and loans are as
follows:
| | -----------------------------------------------------------------------------------------------------

| |                                 | Interest rate | December 31,
| | ------------------------------- | ------------- | ------------
|
|
|
|
|
| | Short-term bank loans:          |               |             
| |                                 |               |             
| | In Argentine pesos              |               |             
| | In NIS linked to the Israeli    |               |             
| | Consumer Price Index ("CPI")    |               |             
| | In NIS                          |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| | Short-term bank credit:         |               |             
| |                                 |               |             
| | In, or linked to, dollars       |               |             
| | In Argentine pesos              |               |             
| | In NIS                          |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| | Current maturities of long-term |               |             
| | loans:                          |               |             
| |                                 |               |             
| | In, or linked to, dollars       |               |             
| | In, or linked to, dollars       |               |             
| | In NIS linked to CPI            |               |             
| | In NIS                          |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| | Unutilized credit lines         |               |             
| |                                 |               |             

F - 25

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands                                                             

|NOTE 8: |  | OTHER
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|------- | - | -------------------------------------------

| |                                | December 31,
| | ------------------------------ | ------------
|
|
|
|
| | Employees and payroll accruals |             
| | Government authorities         |             
| | Provision for warranty         |             
| | Accrued expenses               |             
| | Related party                  |             
| | Others                         |             
| |                                |             
| |                                |             
| |                                |             
| |                                |             

|NOTE 9: |  | LONG-TERM
LOANS FROM BANKS
|------- | - | --------------------------

| | a. | Composition:
| | -- | ------------

| |                              | Interest rate | December 31,
| | ---------------------------- | ------------- | ------------
|
|
|
|
| | In, or linked to, dollars    |               |             
| | In, or linked to, dollars *) |               |             
| | In NIS linked to CPI *)      |               |             
| | In NIS                       |               |             
| |                              |               |             
| |                              |               |             
| |                              |               |             
| | Less - current maturities    |               |             
| | Less - discount              |               |             
| |                              |               |             
| |                              |               |             
| |                              |               |             
| |                              |               |             

| | *) | An
amount of approximately $ 1,650 thousand is guaranteed by certain former
          shareholders of Shagrir Motor Vehicle Systems.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------

| | b. | As
of December 31, 2005, the aggregate annual maturities of the long-term loans
          are as follows:
| | -- | ---------------------------------------------------------------------------------------------------------

| |                           | 
| | ------------------------- | 
|
|
|
|
| | 2006 (current maturities) | 
| | 2007                      | 
| | 2008                      | 
| | 2009                      | 
| | 2010                      | 
| | Thereafter                | 
| |                           | 
| |                           | 
| |                           | 
| |                           | 

F - 26

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands (except share and per share data)                           

|NOTE 9: |  | LONG-TERM
LOANS FROM BANKS (Cont.)
|------- | - | ----------------------------------

| | c. | In
respect of the bank loans that funded the Shagrir transaction (see Note 1c),
          the Company granted to Bank Hapoalim B.M. a warrant to purchase up to 100,000
          Ordinary shares of the Company, at a price per share of $ 18.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the credit facility from Bank Hapoalim B.M., Shagrir Motor Vehicle Systems is required to
meet financial covenants, as described in the commitment letter, commencing December 31,
2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
financial covenants are:
| | ----------------------------

| | a. | The
ratio of the debt to the bank to the annual EBITDA will not exceed 5.5.
| | -- | ---------------------------------------------------------------------------

| | b. | The
ratio of the annual EBITDA to the current maturities (the principal loan           plus
interest) of long-term loans from the bank, will not be less than 1, at any
          time.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | The
shareholders equity, including loans from shareholders, will not be           less
than NIS 25 thousand, at any time.
| | -- | --------------------------------------------------------------------------------------------------------------------------

| | d. | The
Company will not decide on any distribution of dividends from Shagrir Motor
          Vehicle Systems without a written pre-approval from the bank.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2005, Shagrir Motor Vehicle Systems meets the financial covenants.
| | -------------------------------------------------------------------------------------

|NOTE 10: |  | LONG-TERM
LOANS FROM SHAREHOLDERS AND OTHERS
|-------- | - | --------------------------------------------

| | a. | Long-term
loans from shareholders  composition:
| | -- | ------------------------------------------------

| |                           | Interest rate | December 31,
| | ------------------------- | ------------- | ------------
|
|
|
|
| | In, or linked to, dollars |               |             
| | (see d1 bellow)           |               |             
| | In NIS linked to CPI (see |               |             
| | d2-d3 bellow)             |               |             
| |                           |               |             
| |                           |               |             
| |                           |               |             
| | Less - current maturities |               |             
| |                           |               |             
| |                           |               |             
| |                           |               |             
| |                           |               |             

F - 27

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands (except share and per share data)                           

|NOTE 10: |  | LONG-TERM
LOANS FROM SHAREHOLDERS AND OTHERS (Cont.)
|-------- | - | ----------------------------------------------------

| | b. | Long-term
loans from others  composition:
| | -- | ------------------------------------------

| |                           | Interest rate | December 31,
| | ------------------------- | ------------- | ------------
|
|
|
|
| | In NIS linked to CPI (see |               |             
| | d4-d5 bellow)             |               |             
| | In NIS (see d6 bellow)    |               |             
| | In Mexican peso           |               |             
| |                           |               |             
| |                           |               |             
| |                           |               |             
| | Less - current maturities |               |             
| | Less - discount           |               |             
| |                           |               |             
| |                           |               |             
| |                           |               |             
| |                           |               |             

| | c. | As
of December 31, 2005, the aggregate annual maturities of the long-term loans
          from shareholders and others are as follow:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------

| |                           | 
| | ------------------------- | 
|
|
|
|
| | 2006 (current maturities) | 
| | 2007                      | 
| | 2008                      | 
| | 2009                      | 
| | 2010                      | 
| | Thereafter                | 
| |                           | 
| |                           | 
| |                           | 
| |                           | 

| | d. | 1. | A loan of $ 2,065 from Egged Holdings Ltd. shall bear an annual interest           rate
of three months LIBOR + 3.5%. The principal amount of the loan shall be           repaid
in 17 equal quarterly installments, commencing 36 months from February           28,
2005.
| | -- | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
lender shall be entitled to convert the loan into Ordinary shares of the Company (at a
conversion price of $ 12.9 per share) or into shares of Shagrir Motor Vehicle Systems (at
a conversion price of NIS 924). The conversion into shares of Shagrir Motor Vehicle
Systems is limited to such number of shares that will enable the Company to retain
holdings of at least 50.1% of the share capital of Shagrir Motor Vehicle Systems, on a
fully diluted basis.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 2, 2006, the loan was fully repaid (see Note 18).
| | --------------------------------------------------------

F - 28

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands (except share and per share data)                           

|NOTE 10: |  | LONG-TERM
LOANS FROM SHAREHOLDERS AND OTHERS (Cont.)
|-------- | - | ----------------------------------------------------

| | 2. | A
loan of $ 1,685 from Egged Holdings Ltd. is linked to the Israeli CPI and           bears
annual interest of 4% for the first two years and 7.5% for the remaining           eight
years.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The debt is convertible during two
years beginning February 28, 2005 into shares of the Company (at $ 18 per share) or
into shares of Shagrir Motor Vehicle Systems (40% of the conversion rights at NIS 729
 NIS 937 per share and 60% of the conversion rights at NIS 729 per share according
to the exercise date), at the discretion of the debt holders (the Embedded Call
Option). If the investors do not convert the debt into shares of the Company,
Shagrir Motor Vehicle Systems can, at the end of the first two-year period, force the
conversion of the debt (up to 60% of the conversion rights) into its shares at NIS 729 per
share (the Embedded Put Option). The conversion into shares of Shagrir Motor
Vehicle Systems is limited to such number of shares that will enable the Company to retain
holdings of at least 50.1% of the share capital of Shagrir Motor Vehicle Systems, on a
fully diluted basis.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | A
loan in the amount of $ 238 from Egged Holdings Ltd. is linked to the Israeli
          CPI and bears an annual interest rate of 6.5%. The loan shall be repaid in nine
          quarterly installments, commencing six months from February 28, 2005.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | A
loan of $ 9,402 is to be repaid by Shagrir Motor Vehicle Systems to Shagrir
          Towing Services Ltd. The loan will be repaid in 20 quarterly payments
commencing           one year from February 28, 2005, linked to the Israeli CPI and bears
an annual           interest rate of 6.5%.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Company granted Shagrir Towing Services Ltd. and Shagrir (1985) Ltd.
together a warrant to purchase up to 250,000 of its Ordinary shares at a price per share
of $ 18 for a period of 24 months. The loan and the warrants were recorded at fair value.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | A
loan in the amount of $ 946 from Gandyr Group is linked to the Israeli CPI           and
bears an annual interest rate of 6.5%. The loan shall be repaid in nine
          quarterly installments, commencing six months from February 28, 2005.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | A
loan of NIS 29.1 million of the Shagrir transaction was funded by Gandyr           Group.
| | -- | -------------------------------------------------------------------------------------------

| | On
November 30, 2005, Gandyr Group exercised its options to convert this loan into 38,479
shares of Shagrir Motor Vehicle Systems (43.4%). The remaining balance as of December 31,
2005 in the amount of $ 405 representing the interest accumulated as of the conversion
date, and bears no interest and has no maturity date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands (except share and per share data)                           

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

| | a. | Charges:
| | -- | --------

| | 1. | As
collateral for its liabilities, the Company has recorded floating charges on
          all of its assets, including the intellectual property and equipment, in favor
          of banks.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Shagrir
Motor Vehicle Systems recorded a first priority charge on all of its           assets in
favor of banks, and Shagrir Towing Services has a second ranking fixed           charge
over Shagrir Motor Vehicle Systems rights to proceeds from several           of its
customers.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Collateral:
| | -- | -----------

| | 1. | To
secure Shagrir Motor Vehicle Systems obligations for providing           services
to several of its customers, Shagrir Motor Vehicle Systems provided a           bank
guarantee in the amount of about $ 858, in force until March 2006           August
2010.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | The
Company obtained bank guarantees in the amount of $ 22 in favor of its           lessor.
| | -- | --------------------------------------------------------------------------------------------

| | 3. | The
Company obtained bank guarantees in the amount of $ 100 in favor of a           supplier.
| | -- | ---------------------------------------------------------------------------------------------

| | 4. | The
bank rehabilitated a bank guarantee in the amount of $ 300, pursuant to the
          litigation as described in d(1) below.
| | -- | --------------------------------------------------------------------------------------------------------------------------------

| | c. | Royalties:
| | -- | ----------

| | The
Company has undertaken to pay royalties to the BIRD Foundation (BIRD), at the
rate of 5% on sales proceeds of products developed with the participation of BIRD up to
the amount received, linked to the U.S. dollar. The contingent obligation as of December
31, 2005 is $ 2,089. No royalties were accrued or paid during 2005, 2004 and 2003.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 30

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands                                                             

|NOTE 11: |  | COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)
|-------- | - | ----------------------------------------------

| | d. | Lease
commitments:
| | -- | ------------------

| | The
Company and its subsidiaries have leased offices, motor vehicles and locations for
periods through 2010. Minimum annual rental payments under non-cancelable operating
leases are as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |      | 
| | ---- | 
|
|
|
|
| | 2006 | 
| | 2007 | 
| | 2008 | 
| | 2009 | 
| | 2010 | 
| |      | 
| |      | 
| |      | 
| |      | 

| | Rent
expenses for the years ended December 31, 2005, 2004 and 2003, were $ 1,438, $ 690
and $ 180, respectively.
| | ----------------------------------------------------------------------------------------------------------------

| | e. | Litigation:
| | -- | -----------

| | 1. | On
November 26, 2002, the Company filed a claim with the Tel-Aviv           Magistrates
Court for a permanent injunction against Bank Hapoalim B.M.           and the China
National Electronics Import Export Beijing Company           (CEIEC). In the
claim, the Company requested that the court prohibit           Bank Hapoalim from paying
CEIEC any amount, pursuant to a guarantee in the           amount of $ 300 in favor of
CEIEC provided to it in the framework of a           transaction, and to prohibit CEIEC
from requesting Bank Hapoalim to pay it any           sums pursuant to the guarantee. The
Company requested the injunction as a result           of unlawful requests made by CEIEC
that Bank Hapoalim will pay it the guarantee.           Following a hearing, which CEIEC
did not attend, on December 31, 2002, the           Tel-Aviv Magistrates Court ruled in
the Companys favor and thereby           permanently prohibited Bank Hapoalim from
paying any funds to CEIEC pursuant to           the guarantee and prohibited CEIEC from
requesting Bank Hapoalim to pay it any           funds pursuant to the guarantee. CEIEC
commenced proceedings in China, against           Bank Hapoalim, to which the Company is
not a party, for the payment of the           guarantee. In August 2004, Bank Hapoalim
informed the Company that it may pay to           CEIEC the guaranteed amount plus
interest at a rate of 0.5% per week, commencing           March 2002 and, in such an
event, will request that the Company indemnify it for           the amount paid.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2005, the Company filed a claim against CEIEC and another third party with China
International Economic and Trade Arbitration Commission Beijing, China (CIETAC)
for approximately $ 558 representing the damages caused to the Company by the breach by
CEIEC and the third party of the contract between the parties in respect of the
transaction mentioned above.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands                                                             

|NOTE 11: |  | COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)
|-------- | - | ----------------------------------------------

| | In
June 2005, CEIEC and the third party filed a counter claim with CIETAC for repayment of $
300 plus weekly interest of 0.5% (compounded from February 2002). The counter claim
relates to the same amount that CEIEC claims from Bank Hapoalim B.M pursuant to the
guarantee discussed above. However, in July 2005, the counterclaim was pulled back.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
January 2006, CIETAC provided a final ruling which is not appealable in favor of the
Company, pursuant to which CEIEC and the third party shall pay the Company $ 557
representing most of the damages caused to the Company plus interest rate of 6% per annum
from April 2003 and additional costs incurred by the Company. In February, 2006, the third party
petitioned the Beijing No. 2 Intermediate Peoples Court to overturn the ruling of
the arbitrator. In their petition they claimed that normative arbitration procedures were
not followed, that the decision of the arbitrators was outside the scope of the
jurisdiction granted to them, and that the decision of the arbitrators ruled on certain
matters in which they lacked jurisdiction. The Company has not yet officially received
this petition due to the inability of the Companys legal counsel in Beijing to
receive documents in connection with this petition in the absence of an explicit power of
attorney to do so. Based on the Companys legal advisors opinion, it is
unlikely that the petition to overturn the arbitrators ruling will be successful.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2005, the Company did not recognize any income from the above ruling.
| | ----------------------------------------------------------------------------------------

| | In
light of the permanent injunction ordered in the Companys favor, in 2002, in the
above ruling and without the Companys knowledge of the exact nature of the legal
proceedings underway between the bank and CEIEC, since it is not a party to these
proceedings, the Company is of the opinion that it has defense claims rejecting any
possible demands by Bank Hapoalim for indemnification.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Therefore,
no provision was recorded in the financial statements in respect of the potential claim
from Bank Hapoalim.
| | ----------------------------------------------------------------------------------------------------------------------

| | 2. | In
September 2000, Tracsat entered into a 30-month contract with a third party.
          Pursuant to the contract Tracsat committed to order from the third party a
          minimum level of unit installations. In October 2001 and thereafter, Tracsat
          ceased to make minimum payments to the third party. A legal demand was
presented           against Tracsat. In October 2003 and August 2004, the Argentinean
court ordered           a levy in the amount of $ 118 on a bank account. In
September 2005, law           court gave second instance sentence, saying that part of
the amounts demanded           should be paid in U.S. dollars. In October 2005, a new
levy was ordered on a           bank account for $ 104.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
November 2005, Tracsat reached a private agreement for $ 186 plus legal counsels fees.
The levies mentioned above were used to cancel the amount resulting from said agreement.
As of December 31, 2005, Tracsat owes costs of the court procedures and legal experts
fees, which were estimated and provisioned.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | As
of December 2005, several claims were filed against Shagrir Motor Vehicle
          Systems by customers. The claims are in an amount aggregating to approximately
          $ 434. The substance of the claims is the malfunction of Shagrir Motor
          Vehicle Systems products, which occurred during the ordinary course of
          business. Management, based on the opinion of its attorneys, is of the opinion
          that no material costs will arise to Shagrir Motor Vehicle Systems in respect
to           these claims and, therefore, no provision was recorded in the financial
          statements in respect of the claims.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands                                                             

|NOTE 11: |  | COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)
|-------- | - | ----------------------------------------------

| | f. | Commitments:
| | -- | ------------

| | 1. | The
Company and DBSI Investment Ltd. (DBSI) (see Note 15) have           entered
into a management services agreement pursuant to which DBSI shall           provide
management services in consideration for annual management fees of $ 180           for a
period of three years commencing on April 6, 2003.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | This
agreement shall be automatically renewed for additional periods of twelve months each
unless either party gives the other party a notice of termination three months prior to
the beginning of a renewal term.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | According
to the employment agreement of the Companys CEO, in 2003, 2004           and 2005,
the CEO is entitled to an annual bonus of 8% of the Companys           pre-tax
income, subject to adjustments.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, in the event that the CEO is entitled to the abovementioned bonus, the VP
Finance and the VP R&D are entitled to a bonus equal to two monthly salaries each.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 15, 2005, the services of the Companys CEO were terminated.
| | -------------------------------------------------------------------

| | 3. | During
1998, the Company entered into an agreement with Shagrir Motor Vehicle           Systems,
for the supply of the services and equipment required to set up           reception bases
to be positioned throughout Israel (the agreement).           The agreement
is for a period of 10 years with an option to extend it by an           additional 10
years.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | In
accordance with the agreement, Shagrir Motor Vehicle Systems committed to           the
Company, as determined in the aforesaid agreement, to exclusively purchase a
          minimum amount of products each year, until the end of 2007. In the event it
          does not purchase the minimal amount as it committed, Shagrir Motor Vehicle
          Systems shall pay the Company the difference between the minimal amount and the
          amount actually purchased. As of the date of these financial statements,
Shagrir           Motor Vehicle Systems is meeting its minimal purchase commitment as it
undertook           in the aforesaid agreement.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | According
to the agreement, it was determined that 36.4% of the price for the           site will
be paid to the Company by Shagrir Motor Vehicle Systems beginning from           the
first year in which Shagrir Motor Vehicle Systems has pre-tax income           (the
income), in the amount which equal to 15.2% of the aforesaid           income until
it completes the full payment of the consideration in respect of           the sites.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Following
the Shagrir transaction, the contingent liability toward the Company in respect to sites,
in the original amount of NIS 3.9 thousand was converted into a loan.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 33

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands                                                             

|NOTE 11: |  | COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)
|-------- | - | ----------------------------------------------

| | c) | According
to the aforesaid agreement, Shagrir Motor Vehicle Systems will pay           annual
royalties to the Company, which will be computed as 2% of Shagrir Motor           Vehicle
Systemss revenues in each year, but up to 5% of the annual income           before
taxes. Shagrir Motor Vehicle Systems will pay royalties up to a total           aggregate
amount of U.S. $ 1.2 million.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Following
the Shagrir transaction (see Note 1c), the aforesaid payments stated in b and c above,
were cancelled.
| | ----------------------------------------------------------------------------------------------------------------

| | 4. | Shagrir
Motor Vehicle Systems entered into a management services agreement with           the
Company, pursuant to which the Company will provide Shagrir Motor Vehicle
          Systems with management services with respect to its business for a period of
          two years starting February 28, 2005, in consideration of management fees of
NIS           1 million per year, subject to certain conditions.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | Shagrir
Motor Vehicle Systems entered into a management services agreement with           Ganyr
Group and Egged Holdings Ltd., pursuant to which Gandyr Group and Egged
          Holdings Ltd. will grant management services to Shagrir Motor Vehicle Systems
          beginning at the end of a period of 24 months from February 28, 2005, 6,024 in
          consideration of about NIS 1 million per year.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
case Gandyr Group and Egged Holdings Ltd. will not exercise all of their warrants (see
Note 10c), the management fees mentioned above will be renegotiated.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | Under
the credit facility from Bank Hapoalim B.M., Shagrir Motor Vehicle           Systems is
required to meet financial covenants (see Note 9c).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------

| | 7. | During
2005, four senior employees of Shagrir Motor Vehicle Systems were           granted
options to purchase up to 2,656 shares (5.3%) of Shagrir Motor Vehicle           Systems
at an exercise price of $ 160 per share. The options vest over a period           of 48
months. The exercise price is subject to adjustments in case of dividend
          distributions or any other amounts that may be paid to shareholders of Shagrir
          Motor Vehicle Systems.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
options do not entitle their owners to any voting rights once exercised.
| | ------------------------------------------------------------------------------

| | On
July 28, 2005, 1,753 options granted to one of the senior employees were cancelled.
| | --------------------------------------------------------------------------------------

| | 8. | On
November 22, 2005, the Company granted the former CEO of Pointer Mexico an
          option to purchase from the Company 1,000 shares of Pointer Mexico (2% of the
          share capital of Pointer Mexico) at a total exercise price of $ 30 (with no
          option to partial exercise). This option is fully vested and to be terminated
on           June 30, 2006.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 34

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands (except share and per share data)                           

|NOTE 12: |  | SHAREHOLDERS EQUITY
|-------- | - | --------------------

| | a. | In
August 2005, a 100 to 1 reverse stock split of the Companys Ordinary
          shares was effected. As a result of the reverse stock split, each one hundred
          shares of the Companys Ordinary shares with par value of NIS 0.03 each
          were converted into one Ordinary share of NIS 3.00 par value. All shares and
per           share data have been retroactively adjusted to reflect this split.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Ordinary
shares:
| | -- | ----------------

| | Ordinary
shares confer upon their holders voting rights, the right to receive cash dividends and
the right to share in excess assets upon liquidation of the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Issued
and outstanding share capital:
| | -- | -------------------------------------

| | 1. | During
2003, the Company signed a share purchase agreement effective as of           March 13,
2003. According to the agreement, the Company issued to investors           585,455
shares (454,545 of which were issued to DBSI) for a total consideration           of $
2,576 ($ 4.4 per share). In addition, the Company issued to the           investors
409,818 warrants (318,182 of which were issued to DBSI) with an           exercise price
of $ 4.4 per share. The warrants shall be exercisable in           cash or through a
cashless exercise at the election of its holder for a period           which is the
earlier of: (1) a merger and acquisition (M&A)           transaction (as
defined in the investment agreement) or (2) three years from           April 6, 2005.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
August 2003, the Company entered into an additional agreement with certain
          investors pursuant to which the Company issued 282,591 shares (136,364 of which
          were issued to DBSI) for a total consideration of $ 1,244 ($ 4.4 per
          share). In addition, the Company issued to the investors 197,814 warrants
          (95,455 of which were issued to DBSI) with an exercise price of $ 4.4 per
          share. The warrants shall be exercisable in cash or through cashless exercise
at           the election of its holder for a period which is the earlier of: (1) an M&A
          transaction or (2) three years from the closing date.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | During
2004, 143,195 warrants were exercised into 130,051 of the Companys
          Ordinary shares. Out of the 143,195 warrants, 110,518 warrants were exercised
by           way of cashless exercise into 97,374 Ordinary shares, and 32,677 warrants
were           exercised into Ordinary shares, for a consideration of $ 143.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Following
the closing of the transaction for the purchase of the outstanding           and issued
share capital of Shagrir Motor Vehicle Systems, as described in Note           1b, the
Company issued 429,154 of the Companys Ordinary shares.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 35

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands (except share and per share data)                           

|NOTE 12: |  | SHAREHOLDERS EQUITY
(Cont.)
|-------- | - | ----------------------------

| | 5. | During
February and March 2005, the Company completed a round of financing of           $ 6,070
($ 1,000 of which was invested by DBSI Investments Ltd., a           major
shareholder of the Company), in consideration of 722,587 of the           Companys
Ordinary shares at a price per share of $ 8.4. Under the terms of           the
investment agreements, the investors were issued warrants to purchase up to
          158,969 shares of the Company, with an exercise price of $ 8.4 per share. The
          warrants may be exercised at any time during the period, beginning on February
          28, 2005 and until the earlier of (i) April 6, 2006; or (ii) an M&A
          transaction.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Out
of the total number of shares and warrants issued, Egged Holdings Ltd. was issued 309,524
shares and 68,095 warrants.
| | -------------------------------------------------------------------------------------------------------------------------

| | 6. | During
2005, 55,437 warrants and stock options were exercised into 51,928 of           the
Companys Ordinary shares. Out of the 55,437 warrants and stock           options,
7,000 warrants were exercised by way of cashless exercise into 3,491           Ordinary
shares, and 48,437 stock options were exercised into Ordinary shares,           for a
consideration of $ 214.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Options and warrants:
| | -- | ---------------------

| | 1. | The
Company grants, under various option plans, options to its employees,           directors
and service providers. The options are granted for a period of five           years and
usually have a vesting period of up to three years. As of December 31,           2005,
6,024 options of the 2003 Employee Share Option Plan are available for           future
grant.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | On
June 1, 2004, the Board of Directors resolved to issue to the Companys
          employees options to purchase 21,900 of the Companys Ordinary shares at
an           exercise price of $ 13.3 per share. 44% of the options granted to each
          employee were vested on December 31, 2004. An additional 7% of the options
          granted to each employee shall vest at the end of each of eight consecutive
          quarters, ending December 31, 2006. The options are subject to the terms of the
          2003 Employee Share Option Plan.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | During
2004, following the closing of the transactions for the purchase of the
          outstanding and issued share capital of Shagrir Motor Vehicle Systems, as
          described in Note 1b, the Company issued 75,896 fully vested employee stock
          options at an exercise price of $ 13.3 per share to employees of Shagrir
          Motor Vehicle Systems who held Shagrir Motor Vehicle Systems options before the
          transaction. The options are exercisable over a period of five years.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | During
2005, the Company issued warrants to purchase up to 508,969 shares of           the
Company. 158,969 warrants were issued to investors, at an exercise price of           $ 8.4
per share (see Note 12c(5)). 250,000 warrants were issued to Shagrir           Towing
Services Ltd. and Shagrir (1985) Ltd., at an exercise price of $ 18.
          100,000 warrants were issued to Bank Hapoalim B.M., at an exercise price of
          $ 18.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 36

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands (except share and per share data)                           

|NOTE 12: |  | SHAREHOLDERS EQUITY
(Cont.)
|-------- | - | ----------------------------

| | 5. | On May 23, 2005, the Company entered
into an employment agreement with a new CEO, pursuant to which the Company granted to the
new CEO warrants to purchase 40,000 Ordinary shares of the Company, at an exercise price
of $ 10.6 per share. Such options can be exercised in full after 48 months of
continuous service, with 25% of the options vesting after each 12 month-period of
continuous service.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | On
November 23, 2005, the Company issued to its employees options to purchase
          59,000 of the Companys Ordinary shares, at an exercise price of $ 9.5
          per share. The options shall vest in four equal annual installments, over a
          period of four years, commencing on November 23, 2006. The options shall expire
          on November 23, 2010.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company also granted to four of its directors options to purchase Ordinary shares of the
Company (see Note 18).
| | -------------------------------------------------------------------------------------------------------------------

| | 7. | For
employee stock options of Shagrir Motor Vehicle Systems, see Note 11f(7).
| | -- | -----------------------------------------------------------------------------

| | 8. | A
summary of the status of the Companys employee stock options as of
          December 31, 2005, 2004 and 2003, and changes during the years then ended, are
          as follows:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                   | Year ended December 31,
| | ----------------- | -----------------------
|
|
|
|
| | Options           |                        
| | outstanding at    |                        
| | beginning of year |                        
| | Granted           |                        
| | Exercised         |                        
| | Forfeited         |                        
| |                   |                        
| |                   |                        
| | Options           |                        
| | outstanding at    |                        
| | end of year       |                        
| |                   |                        
| |                   |                        
| | Options           |                        
| | exercisable at    |                        
| | end of year       |                        
| |                   |                        

F - 37

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands (except share and per share data)                           

|NOTE 12: |  | SHAREHOLDERS EQUITY
(Cont.)
|-------- | - | ----------------------------

| | The
following table summarizes information relating to employees' stock options outstanding as of
December 31, 2005, according to exercise price range:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

| |   | Options outstanding | Options exercisable
| | - | ------------------- | -------------------
|
|
|
|
| | $ | 4.4                 |                    
| | $ | 9.5-10.6            |                    
| | $ | 13.0-13.3           |                    
| | $ | 103.0-255.0         |                    
| | $ | 900.0-1650.0        |                    
| |   |                     |                    
| |   |                     |                    
| |   |                     |                    
| |   |                     |                    

| | The
weighted average fair values of options granted during the years ended December 31,
2005, 2004 and 2003 were:
| | -----------------------------------------------------------------------------------------------------------------

| |                  | Exercise price less than market price | Exercise price equal to market price
| | ---------------- | ------------------------------------- | ------------------------------------
|
|
|
|
| | Weighted average |                                       |                                     
| | exercise prices  |                                       |                                     
| |                  |                                       |                                     
| |                  |                                       |                                     
| | Weighted average |                                       |                                     
| | fair value on    |                                       |                                     
| | grant date       |                                       |                                     
| |                  |                                       |                                     

| | 9. | The
Companys outstanding warrants to investors as of December 31, 2005,           are
as follows:
| | -- | --------------------------------------------------------------------------------------------------

| | Number                   | Year of
issuance | Expiration date | Exercise price
| | ------------------------ | ---------------- | --------------- | --------------
|
|
|
|
| | 485,355                  |                  |                 | 2003          
| | 247,781 (see Note 1b)    |                  |                 | 2004          
| | 158,969 (see Note 12d(4) |                  |                 | 2005          
| | 350,000 (see Note 12d(4) |                  |                 | 2005          
| |                          |                  |                 |               
| |                          |                  |                
| | 1,242,105                |                  |                
| |                          |                  |                 |               

| | (*) | The
earlier of an M&A transaction or three years from the issuance dates           (March
and August 2006).
| | --- | -----------------------------------------------------------------------------------------------------------

| | (**) | The
earlier of April 6, 2006 or an M&A transaction.
| | ---- | ---------------------------------------------------

F - 38

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands (except share and per share data)                           

|NOTE 12: |  | SHAREHOLDERS EQUITY
(Cont.)
|-------- | - | ----------------------------

| | e. | Dividends:
| | -- | ----------

| | Any
dividend distributed by the Company will be declared in NIS and paid in dollars on the
basis of the exchange rate prevailing at the date of payment.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 13: |  | NET
EARNINGS (LOSS) PER SHARE
|-------- | - | -----------------------------

| | The
following table sets forth the computation of basic and diluted net earnings (loss) per
share:
| | --------------------------------------------------------------------------------------------------

| |                                                     | Year ended December 31,
| | --------------------------------------------------- | -----------------------
|
|
|
|
| | Numerator for basic and diluted earnings (loss) per |                        
| | share, net income (loss) available to shareholders  |                        
| |                                                     |                        
| |                                                     |                        
| | Weighted average shares outstanding (in thousands)  |                        
| |                                                     |                        
| |                                                     |                        
| | Basic and diluted net earnings (loss) per share     |                        
| |                                                     |                        

F - 39

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|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands                                                             

|NOTE 14: |  | INCOME
TAXES
|-------- | - | ------------

| | a. | Measurement
of taxable income under the Income Tax (Inflationary Adjustments)           Law, 1985 (the
Law):
| | -- | --------------------------------------------------------------------------------------------------------------

| | Under
the Law, the Companys results for tax purposes are measured in terms of earnings in
NIS after certain adjustments for changes in the Israeli CPI. As explained in Note 2b,
the financial statements are measured in dollars. The difference between the annual
change in the Israeli CPI and in the NIS/dollar exchange rate causes a difference between
taxable income and the income before taxes shown in the financial statements. In
accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred
income taxes on the difference between the functional currency and the tax bases of
assets and liabilities.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Company is an industrial company, as defined by this law and, as such, is
entitled to certain tax benefits, mainly accelerated depreciation of machinery and
equipment, as prescribed by regulations published under the Income Tax Law (Inflationary
Adjustments), 1985, the right to claim public issuance expenses in three annual
installments and an annual deduction of 12.5% of patents and other intangible property
rights as deductions for tax purposes.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | On
July 25, 2005, the Knesset (Israeli Parliament) passed the Law for the
          Amendment of the Income Tax Ordinance (No. 147), 2005, which prescribes, among
          others, a gradual decrease in the corporate tax rate in Israel to the following
          tax rates: in 2006  31%, in 2007  29%, in 2008  27%, in 2009
           26% and in 2010 and thereafter  25%.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Loss
before taxes on income:
| | -- | ----------------------------

| |          | Year ended December 31,
| | -------- | -----------------------
|
|
|
|
| | Domestic |                        
| | Foreign  |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        

F - 40

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---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands                                                             

|NOTE 14: |  | INCOME
TAXES (Cont.)
|-------- | - | --------------------

| | e. | Deferred
taxes:
| | -- | ---------------

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

| |                                                    | December 31,
| | -------------------------------------------------- | ------------
|
|
|
|
| | Reserves and accruals                              |             
| | Carryforward tax losses                            |             
| | Goodwill                                           |             
| | Other temporary differences, net                   |             
| |                                                    |             
| |                                                    |             
| | Net deferred tax assets before valuation allowance |             
| | Valuation allowance *)                             |             
| |                                                    |             
| |                                                    |             
| | Net deferred tax assets                            |             
| |                                                    |             

| | *) | The
Company and its subsidiaries have provided valuation allowances in respect           of
deferred tax assets resulting from tax loss carryforwards and other temporary
          differences. Since the Company and its subsidiaries have a history of losses,
it           is more likely than not that the deferred taxes regarding the losses
          carryforwards and other temporary differences will not be realized in the
          foreseeable future.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Changes
in tax rates in Israel (see Note 14c) were taken into consideration in the deferred
taxes.
| | --------------------------------------------------------------------------------------------------

| | f. | Carryforward
tax losses and deductions:
| | -- | ---------------------------------------

| | Carryforward
tax losses of the Company totaled approximately $ 65,493 as of December 31,
2005. The carryforward tax losses have no expiration date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | Carryforward
tax losses of Tracsat are approximately $ 2,652 as of December 31, 2005. The carryforward
tax losses will expire from 2006 to 2010.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| | Carryforward
tax losses of Shagrir Motor Vehicle Systems totaled approximately $ 23,680 as of December 31,
2005. The carryforward tax losses have no expiration date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Carryforward
tax losses of Pointer Mexico totaled approximately $ 1,457 as of December 31, 2005. The
tax loss carryforwards can be offset in the following 10 fiscal years against taxable
income.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | The
main reconciling items between the statutory tax rate of the Company and           the
effective tax rate are the non-recognition of tax benefits from accumulated           net
operating losses carryforward and other temporary differences, due to the
          uncertainty of the realization of such tax benefits.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 41

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---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands                                                             

|NOTE 15: |  | BALANCES
AND TRANSACTIONS WITH RELATED PARTIES
|-------- | - | ----------------------------------------------

| | a. | Balances
with related parties:
| | -- | ------------------------------

| |                                               | December 31,
| | --------------------------------------------- | ------------
|
|
|
|
| | Other accounts payable and accrued expenses:  |             
| | DBSI (see Note 11f(1))                        |             
| | AMS                                           |             
| |                                               |             
| | Long-term loans from shareholders and others: |             
| | Egged Holdings Ltd. (see Note 10a)            |             

| | b. | Transactions
with related parties:
| | -- | ----------------------------------

| |                                                 | Year ended December 31,
| | ----------------------------------------------- | -----------------------
|
|
|
|
| | Management fees to DBSI (see Note 11f.1)        |                        
| | Purchases from AMS *)                           |                        
| | Interest on long-term loans from Egged Holdings |                        
| | Ltd. (see Note 10a)                             |                        

| | *) | AMS
is not a related party as of 2005.
| | -- | --------------------------------------

|NOTE 16: |  | SEGMENT,
CUSTOMER AND GEOGRAPHIC INFORMATION
|-------- | - | --------------------------------------------

| | a. | General:
| | -- | --------

| | The
Company operates in one segment, value added services provided to insurance companies and automobile owners.
| | ----------------------------------------------------------------------------------------------------------------

| | The
Company applies SFAS 131, Disclosures About Segments of an Enterprise and Related
Information.
| | ----------------------------------------------------------------------------------------------------

| | b. | Summary
information about geographical areas:
| | -- | ---------------------------------------------

| |                 | Year ended December 31,
| | --------------- | -----------------------
|
|
|
|
| | 1. Revenues *): |                        
| |                 |                        
| | Israel          |                        
| | Latin America   |                        
| | Other           |                        
| |                 |                        
| |                 |                        
| |                 |                        
| |                 |                        

| | *) | Revenues
are attributed to geographic areas based on the location of the           end-customers.
| | -- | -------------------------------------------------------------------------------------------------

F - 42

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---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands                                                             

|NOTE 16: |  | SEGMENT,
CUSTOMER AND GEOGRAPHIC INFORMATION (Cont.)
|-------- | - | ----------------------------------------------------

| |                       | Year ended December 31,
| | --------------------- | -----------------------
|
|
|
|
| | 2. Long-lived assets: |                        
| |                       |                        
| | Israel                |                        
| | Argentina             |                        
| | Mexico                |                        
| |                       |                        
| |                       |                        
| |                       |                        
| |                       |                        

| | 3. | Revenues
classified by major customer:
| | -- | --------------------------------------

| | Percentage
of sales to customers exceeding 10% of total revenues:
| | -----------------------------------------------------------------

| |            | 2005 | 2004 | 2003
| | ---------- | ---- | ---- | ----
|
|
|
|
| | Customer A |      |      |     
| | Customer B |      |      |     
| | Customer C |      |      |     

| | *) | Represents
an amount lower than 10%.
| | -- | ------------------------------------

F - 43

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---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands                                                             

|NOTE 17: |  | SELECTED
STATEMENTS OF OPERATIONS DATA
|-------- | - | --------------------------------------

| |    |                                             | Year ended December 31,
| | -- | ------------------------------------------- | -----------------------
|
|
|
|
| | a. | Research and development, net:              |                        
| |    |                                             |                        
| |    | Total expenses                              |                        
| |    | Less - grants and participation             |                        
| |    |                                             |                        
| |    |                                             |                        
| |    |                                             |                        
| |    |                                             |                        
| | b. | Financial expenses, net:                    |                        
| |    |                                             |                        
| |    | Income:                                     |                        
| |    | Interest on short-term bank deposits        |                        
| |    |                                             |                        
| |    |                                             |                        
| |    | Expenses:                                   |                        
| |    | Induced conversion of convertible debenture |                        
| |    | Bank charges and interest expenses          |                        
| |    | Foreign currency translation adjustments    |                        
| |    | Interest on long-term loans to shareholders |                        
| |    | Interest on long-term loans to others       |                        
| |    | Amortization of discount on long-term loans |                        
| |    | Amortization of compensation related to     |                        
| |    | warrants issued to a bank                   |                        
| |    | Other                                       |                        
| |    |                                             |                        
| |    |                                             |                        
| |    |                                             |                        
| |    |                                             |                        
| |    |                                             |                        
| |    |                                             |                        
| |    |                                             |                        
| | c. | Other income (expenses), net:               |                        
| |    |                                             |                        
| |    | Capital gain (loss)                         |                        
| |    | Gain from partial sale of investment in     |                        
| |    | subsidiary                                  |                        
| |    | Other                                       |                        
| |    |                                             |                        
| |    |                                             |                        
| |    |                                             |                        
| |    |                                             |                        

F - 44

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|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
(Formerly: Nexus Telocation Systems Ltd.)
|--------------------------------------------------------------------------------------
|                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            
|                                                                                      
|U.S. dollars in thousands (except share and per share data)                           

|NOTE 18: |  | SUBSEQUENT
EVENTS
|-------- | - | -----------------

| | a. | On November 23, 2005, according
to the board of directors decision, the Company granted four of its directors each options
to purchase 3,000 Ordinary shares of the Company of NIS 3 par value each, to vest in three
equal installments over a period of three years, commencing as of the date of the grant,
at an exercise price of $ 7.6 per share. On January 17, 2006, the grant was officially
approved in a shareholders meeting.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | On
May 1, 2006, Shagrir Motor Vehicle Systems exercised its right to an early
          repayment of the convertible loan of $ 2,065 from Egged Holdings Ltd. and
          fully repaid the loan. The option to convert the loan into Ordinary shares of
          Shagrir Motor Vehicle Systems or the Company expired.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | During
the six months ended June 30, 2006, 616,104 warrants and options were           exercised
into Ordinary shares of the Company for total consideration of           $ 2,711.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | On
May 26, 2006, the Company entered into an agreement with a Latin American
          customer pursuant to which the Company received, after payments of related
          expenses, a net amount of approximately $ 1.4 million.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 45

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