---

---

# UNITED STATESSECURITIES AND
EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

---

# FORM 20-F

---

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

# Or

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

# For the fiscal year
ended December 31, 2007

# Or

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

# Or

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

# Date of event requiring
this shell company report

# For the transition
period
from                 
to

# Commission File number:

---



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

---

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

14 Hamelacha Street,
 Rosh Haayin 48091, Israel
 (Address of principal executive offices)

---

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

|Title of each class                               | Name of each exchange on which registered
|------------------------------------------------- | -----------------------------------------
|Ordinary Shares, NIS 3.00 nominal value per share | The NASDAQ Stock Market LLC              

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

Ordinary
Shares, NIS 3.00 nominal value per share 4,612,875

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

Yes  o  No   x

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

Yes   o    No   x

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

2

---

---

Introduction

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.

3

---

---

|                                                                |   
|--------------------------------------------------------------- | --
|PART I                                                          | 6 
|                                                               
|ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS   | 6 
|                                                               
|ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                 | 6 
|                                                               
|ITEM 3. KEY INFORMATION                                         | 6 
|                                                               
|A.     SELECTED FINANCIAL DATA                                  | 6 
|                                                               
|B.      CAPITALIZATION AND INDEBTEDNESS                         | 6 
|                                                               
|C.      REASONS FOR THE OFFER AND USE OF PROCEEDS               | 6 
|                                                               
|D.      RISK FACTORS                                            | 6 
|                                                               
|ITEM 4. INFORMATION ON THE COMPANY                              | 16
|                                                               
|A.      HISTORY AND DEVELOPMENT OF THE COMPANY                  | 16
|                                                               
|B.      BUSINESS OVERVIEW                                       | 20
|                                                               
|C.      ORGANIZATIONAL STRUCTURE                                | 28
|                                                               
|D.      PROPERTY, PLANTS AND EQUIPMENT                          | 29
|                                                               
|ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS            | 30
|                                                               
|A.      OPERATING RESULTS                                       | 30
|                                                               
|B.      LIQUIDITY AND CAPITAL RESOURCES                         | 42
|                                                               
|C.      RESEARCH AND DEVELOPMENT                                | 44
|                                                               
|D.      TREND INFORMATION                                       | 45
|                                                               
|E.      OFF BALANCE SHEET ARRANGEMENTS                          | 47
|                                                               
|F.      CONTRACTUAL OBLIGATIONS                                 | 47
|                                                               
|ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES             | 48
|                                                               
|A.      DIRECTORS AND SENIOR MANAGEMENT                         | 48
|                                                               
|B.      COMPENSATION                                            | 50
|                                                               
|C.      BOARD PRACTICES                                         | 50
|                                                               
|D.      EMPLOYEES                                               | 53
|                                                               
|E.      SHARE OWNERSHIP                                         | 54
|                                                               
|ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS       | 55
|                                                               
|A.      MAJOR SHAREHOLDERS                                      | 55
|                                                               
|B.      RELATED PARTY TRANSACTIONS                              | 56
|                                                               
|C.      INTERESTS OF EXPERTS AND COUNSEL                        | 57
|                                                               
|ITEM 8. FINANCIAL INFORMATION                                   | 57
|                                                               
|A.      CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION | 57
|                                                               
|B.      SIGNIFICANT CHANGES                                     | 57

4

---

---

|                                                                                  |   
|--------------------------------------------------------------------------------- | --
|ITEM 9. THE OFFER AND LISTING                                                     | 58
|                                                                                 
|A.     OFFER AND LISTING DETAILS                                                  | 58
|                                                                                 
|B.     PLAN OF DISTRIBUTION                                                       | 59
|                                                                                 
|C.     MARKETS                                                                    | 59
|                                                                                 
|D.     SELLING SHAREHOLDERS                                                       | 59
|                                                                                 
|E.     DILUTION                                                                   | 59
|                                                                                 
|F.     EXPENSES OF THE ISSUE                                                      | 59
|                                                                                 
|ITEM 10. ADDITIONAL INFORMATION                                                   | 59
|                                                                                 
|A.     SHARE CAPITAL                                                              | 59
|                                                                                 
|B.     MEMORANDUM AND ARTICLES OF ASSOCIATION                                     | 59
|                                                                                 
|C.     MATERIAL CONTRACTS                                                         | 64
|                                                                                 
|D.     EXCHANGE CONTROLS                                                          | 65
|                                                                                 
|E.     TAXATION AND GOVERNMENT PROGRAMS                                           | 65
|                                                                                 
|F.     DIVIDENDS AND PAYING AGENTS                                                | 71
|                                                                                 
|G.     STATEMENT BY EXPERTS                                                       | 71
|                                                                                 
|H.     DOCUMENTS ON DISPLAY                                                       | 71
|                                                                                 
|I.     SUBSIDIARY INFORMATION                                                     | 72
|                                                                                 
|ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK               | 72
|                                                                                 
|ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                   | 74
|                                                                                 
|PART II                                                                           | 74
|                                                                                 
|ITEM 13. DEFAULTS, DIVIDEND AVERAGES AND DELINQUENCIES                            | 74
|                                                                                 
|ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND             |   
|USE OF PROCEEDS                                                                   | 74
|                                                                                 
|ITEM 15. CONTROLS AND PROCEDURES                                                  | 74
|                                                                                 
|ITEM 16. [RESERVED]                                                               | 75
|                                                                                 
|ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                        | 75
|                                                                                 
|ITEM 16B. CODE OF ETHICS                                                          | 75
|                                                                                 
|ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                  | 75
|                                                                                 
|ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES              | 76
|                                                                                 
|ITEM 16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS | 76
|                                                                                 
|PART III                                                                          | 76
|                                                                                 
|ITEM 17. FINANCIAL STATEMENTS                                                     | 76
|                                                                                 
|ITEM 18. FINANCIAL STATEMENTS                                                     | 76
|                                                                                 
|ITEM 19. EXHIBITS                                                                 | 76

5

---

---

# 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 the years 2006 and 2003, we have incurred a net loss in each year of our
existence, including in 2007. Our net profits in 2006 were $1.2 million and were
principally from continuing operations of $0.3 million and other income of $1.3 million
off-set by impairment of long lived assets of $0.4 million. Our net profits in 2003 of
$5.3 million resulted from a one-time non-cash capital gain of $8.5 million from the
disposal of discontinued operations and were offset by a $3.3 million loss from continuing
operations. Prior to 2004, our majority owned subsidiary, Shagrir Systems Ltd. (formerly
Shagrir Motor Vehicle Systems Ltd.), or Shagrir, had never recorded net profits but has
recorded shareholders equity surplus for the first time in 2006. Although Shagrir is
currently profitable we may continue to sustain net losses for the foreseeable future, for
several reasons, including resulting from increases in working capital deficiency (see
Item 5Liquidity and Capital Resources) and costs associated with 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.

6

---

---

The
majority of our business operations are based in Israel.

Due
to our purchase of Shagrir in 2004, the acquisition of the business activities of Shagrir
Towing Services acquired by Shagrir in February 2005 and the acquisition of the assets and
activities of Cellocator Ltd. and Matan Y. Communication Tracking Systems Ltd., or
Cellocator, a private Israeli company, in 2007, the majority of our operations are located
in Israel. The Shagrir and Cellocator businesses account 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. As related to Shagrir 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. As related to our stolen vehicle
retrieval services
business, activity in such business depends on Israeli insurance companies mandating
subscription to a service such as ours. If insurers will not require such subscription,
customers might elect not to purchase yearly subscriptions.

Additionally,
a sustained downturn in the Israeli economy could have a significant impact on our
business.

The
manufacture of products in our technology and products division, including our Cellocator products, is highly complex, and an interruption or delay by
our supplier or a failure to deliver by our subcontractors or vendors could adversely
affect our business, financial condition or results of operations.

The
products in our technology and products division, including our Cellocator products, that we market, distribute and sell are either manufactured at our own
manufacturing facilities in Israel or, in certain cases, through supply agreements with
third party subcontractors. Many of our products are the result of complex
manufacturing processes, and are sometimes dependent on raw materials with a limited
source of supply. As a result, we can provide no assurances that supply sources will not
be interrupted from time to time. In addition, our subcontractors or vendors may fail to
obtain supply components and fail to deliver our products. As a result, a
failure to deliver by our subcontractors or vendorscan result in
decreased revenues. Such interruption or delay of our suppliers to deliver components or
interruption or delay of our vendors or subcontractors to deliver our products could
affect our business, financial condition or results of operations.

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. 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. However, we cannot assure 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. In a series of investments,
since March 2003 to date, we raised $41 million from investors, and in February 2005 our
subsidiary Shagrir received approximately $44 million in loans and convertible debt as
part of Shagrirs acquisition of the road-side assistance and towing services of
Shagrir Towing Services. In June 2004, as part of the purchase of all of the securities of
Shagrir not already held by our Company at such time, we issued further shares and
warrants to purchase our shares (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 have registered for resale securities issued and issuable in connection
with these transactions (for further information regarding the private placement
transactions see Item 10  Material Contracts). In May 2007 our registration
statement on Form F-3 was declared effective, pursuant to an investment with a group of
U.S. institutional investors consummated in April 2007, covering 1,207,500 of our ordinary
shares (including 402,500 ordinary shares issuable upon the exercise of warrants issued in
connection with that transaction). As a result of the registration statements that we
currently have outstanding and are currently filing, 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. In September 2007 we
received $7 million credit facility from Bank HaPoalim, B.M. to finance part of Cellocator
acquisition. In addition, in January 2008 we received credit facilities from Israel Discount Bank
in favor of working capital. 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.

7

---

---

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.

Both,
our subsidiary Shagrir and the company have significant loans which we are required to
repay in accordance with strict schedules that we may not be able to meet or that limit
our operating and financial flexibility.

In
order to finance Shagrirs acquisition of the road-side assistance and towing
services of Shagrir Towing Services, it received an approximately $23 million credit
facility from Bank Hapoalim B. M., an approximately $9 million loan from Shagrir Towing Services
and approximately $11.5 million loan from a group of investors led by Gandyr
Investments Ltd. and Egged Holdings Ltd., of which approximately $23 million as of March
31, 2008 remained payable. Nevertheless, Shagrir still has substantial outstanding loans
and, despite the fact that we are cash positive, should Shagrir fail to repay the loans in
accordance with the repayment schedule pertaining to each loan or 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.

The
acquisition of the business of Cellocator required financing amounts in excess of what we
had in cash reserves on September 18, 2007 (the date of acquisition). For this requirement we
received a credit facility of $7 million from Bank Hapoalim. In addition, according to
the acquisition agreement with the sellers of Cellocator, an additional amount of
approximately $0.9 million is outstanding, due to balance settlement ensuing from the
asset calculations. This amount has been calculated and agreed upon during March 2008. As
part of Cellocator consideration we issued a convertible debenture to the seller in  the
amount of $1.9 million which the seller elected in January 2008 not to
convert to shares. The debenture is due and payable in September 2010. While Pointer
is expected to be cash-positive, should we fail to repay the credit facilities and loans
in accordance with the repayment schedule pertaining to the lender or if the lender
refuses to amend the relevant repayment schedule, such lender may realize certain liens
that were created in its favor. Non repayment of any of the above mentioned credit
facility or loans may have a material adverse affect on our financial condition.

These
credit facilities and loans further contain a number of restrictive covenants that limit
our operating and financial flexibility. Our ability to continue to comply with these and
other obligations depends in part on the future performance of our business. There can be
no assurance that such obligations will not materially adversely affect our ability to
finance our future operations or the manner in which we operate our business. In
particular, any noncompliance with performance-related covenants and other undertakings of
our credit facilities could result in an acceleration of our outstanding debt under our
credit facilities and restrict our ability to obtain additional funds, which could have a
material adverse effect on our business, financial condition and results of operations.

8

---

---

For
further information on these loans, see Item 4  Recent Developments, Item 5
 Liquidity and Capital Resources 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 Drachim Road Side & Towing Services Ltd., Femi Premium
Ltd. and Shlomo-SIXT Road Side Services & Garages Ltd., 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 Location
& Control Ltd. is our main direct competitor in the stolen vehicle retrieval services
market in Israel and Argentina. LoJack  Car Security S.A. and LoJack de Mexico, S.
de RL de CV are our main competitors in Argentina and Mexico, respectively.

In
Europe, Latin America and Asia we sell mostly GPS/GPRS based vehicle devices and Radio
Frequency based vehicle devices. In the GPS/GPRS field there is strong competition with
many manufacturers introducing vehicle devices with competitive prices and various
performance features. These devices are offered to operators of Fleet Management and
Stolen Vehicle Recovery services and competition is on different aspects such as price,
performance parameters, etc.

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 LoJack
globally, Ituran in Argentina and other local service providers in each country. Such
competitors use different technologies such as radio technologies, cellular 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.

Should
any of our competitors successfully provide a broader range of products, with competitive
pricing, 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 technology,
products, 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.

The business of our technology and products division, including our Cellocator business,
depends on limited sources for components, and if we are unable to obtain these components when
needed, we will experience delays in manufacturing our products and our financial results may be
adversely affected.

We
acquire most of the components utilized in the products in our technology and products
division, including Cellocator, and certain services from a limited number of suppliers
and subcontractors. We may not be able to obtain such items from these suppliers and
subcontractors on satisfactory terms in the future. Temporary disruptions of our
manufacturing operations would result if we were required to obtain materials from
alternative sources, which may have an adverse effect on our financial results.

Undetected
defects in our products may increase our costs and impair the market acceptance of our
products.

The
development, enhancement and implementation of our complex fleet management and command
and control systems, and the products in our technology and products division, entail
substantial risks of product defects or failures. Despite testing by us and our customers,
errors may be found in existing or new products, resulting in delay or loss of revenues,
warranty expense, loss of market share or failure to achieve market acceptance, or
otherwise adversely affecting our business, financial condition and results of operations.
Moreover, the complexities involved in implementing our systems entail additional risks of
performance failures. We may encounter substantial delays or other difficulties due to
such complexities. Any such occurrence could have a material adverse effect upon our
business, financial condition and results of operations. In addition, the potential harm
to our reputation that may result from product defects or implementation errors could be
damaging to us.

9

---

---

We
depend on a small number of customers.

We
depend on a small number of customers located mainly in Israel, Latin America and Europe
for a significant part of our revenues, 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 a major part 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. Since our business model relies on a relatively low number
of customers and in 2007 one customer comprised over 10% of our revenues, the loss of even
a small number of customers could materially affect our financial condition.

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 or distributor (not owned by us), we use several
methods in order to assure collectibility. In 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.
However, we cannot be certain that our estimations will prove correct as to any one of our
customers.

We
rely on operators to provide services for our location based solution systems and to
market and deliver our Cellocator and other products.

In
certain countries where our subsidiaries conduct activities, we rely on subcontractors and
police forces to provide our stolen vehicle retrieval services. This requires us to
maintain good relationships with these third party operators and governmental entities to
ensure that they continue to work with us and provide a good service to our customers.
Since we do not own these subcontractors, we have little or no control over their
effectiveness or methods of operation.

In
countries where third party operators conduct stolen vehicle recovery and fleet management
services, 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 and most of our stolen vehicle retrival services, or SVR
services, in Argentina 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, labor costs 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 or labor costs, 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, poor road
maintenance or increased theft ratio may increase customer usage of our services in any
given year, thus reducing profit margins.

10

---

---

Part
of our SVR services in Israel are linked to the US Dollar while operational expenses, like
salary, are linked to NIS. Our profit margins could suffer as a result of revaluation of
the NIS against the US Dollar. Since it is often difficult to predict future exchange
rates our fixed price contracts may not adequately cover our future outlays and reduce
profit margins

Most
of our products prices are linked to the US Dollar while operational expenses such
as labor costs linked indirectly to the NIS account for an important portion of technology
costs (both devices and software). Our profit margins could suffer as a result of
inflation, where labor costs and other will rise without compensation, where foreign
currency payments by customers will not offset the increase. Since it is often difficult
to predict future exchange rates our fixed price contracts may not adequately cover our
future outlays and reduce profit margins (for further information on exchange rate risk
see Item 5  Impact of Exchange Rate Fluctuations on Results of Operations,
Liabilities and Assets).

We
rely on limited suppliers to manufacture end units for our Locations Based Solution systems.

While
we have commenced diversifying our product base, offering some customers radio frequency
devices and others cellular units together with GPS devices, we are still principally
reliant on devices and components which we do not manufacture ourselves. Most of our raw
material components for our Location Based Solution end unit devices are manufactured for
us by independent manufacturers abroad. Surface mounting on printed circuit boards is done
by 2 sub-contractors. Assembly is done by us and by subcontractor located in Israel. There
is no certainty that these subcontractors 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;
| | - | -------------------------------

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

| |  | thus
loss of time, when attempting to switch from one assembly-manufacturer to another,
thereby disrupting deliveries to customers.
| | - | -----------------------------------------------------------------------------------------------------------------------------------

Our
agreements and understandings 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.

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, Latin America, Europe
and Asia. 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:

11

---

---

| |  | A
severe and rapid currency devaluation in Argentina adversely affected the U.S. dollar results during 2002 of our subsidiary, Pointer
Localizacion Y Asistencia S.A., or PLA. This was mainly
due to PLA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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Venezuela
has in recent years imposed foreign exchange controls, for example in 2003, Venezuelas
foreign exchange controls effectively led to the cessation of purchase orders of our SVR
products and services from our main customer in Venezuela. Additionally there is
currently discussion by the Venezuelan government regarding the institution of a
nationalization program, which could further adversely affect our operations there.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
technology and standards in the stolen vehicle retrieval and the location based services 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, WiMax, 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 give any assurance that we will timely or successfully introduce or develop new or
enhanced products, which will effectively compete with 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.

We
may be unable to adequately protect our proprietary rights, which may limit our ability
to compete effectively.

Our
success and our ability to compete, particularly in software licensing and sales of
Cellocator products depend on our proprietary technology. We rely on a combination of
proprietary technology, know-how 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 with respect
to our RF (radio frequency) 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;
| | - | --------------------------------------------------------------------------------------------------------------------------------

| |  | unauthorized
third parties may attempt to copy or obtain and use the technology that we
         regard as proprietary;
| | - | -----------------------------------------------------------------------------------------------------------------------

| |  | 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; 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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

12

---

---

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

While
the use of our Cellular Monitoring Units and services does not require regulatory
approvals, the use of our traditional Location Based Services 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, to the extent required for sale in the U.S. 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 shareholder has a controlling stake in our company and affiliated with three
members of our board of directors.

Pursuant
to a series of investments in our company since March 2003, and the exercise of certain
warrants, DBSI Investments Ltd., or DBSI, currently owns approximately 24% of our issued
and outstanding shares, or 20% on a fully diluted basis. As a result, DBSI has the ability
to control material decisions requiring the approval of our shareholders.

Our
board of directors currently consists of 6 members, of which three are affiliated with
DBSI. As a result, DBSI has the ability to affect the decisions made by our full board of
directors.

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 Israeli 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:

| |  | 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;
| | - | ------------------------------------------------------------------------

13

---

---

| |  | 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 and the Tel Aviv Stock Exchange,
or TASE. 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 from January 1, 2008 to March 31, 2008, on the NASDAQ Capital Market was
20,960 shares and on the TASE was 9,399 shares. The high and low bid price of our ordinary
shares for since January 1, 2008 to March 31, 2008, has been $6.95 and $4.23, respectively
on the NASDAQ Capital Market and between NIS 27 (approximately $7.7) and NIS 15
(approximately $3.8) during the same period on the TASE. 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.

Our
ordinary shares are listed for trading in more than one market and this may result in
price variations.

Our
ordinary shares are listed for trading on the NASDAQ Capital Market, and since December 19, 2006, on the
TASE. Trading in our ordinary shares are traded on these markets in different currencies
(U.S. dollars on the NASDAQ and New Israeli Shekels on the TASE), and at different times
(resulting from different time zones, different trading days and different public
holidays in the United States and Israel). Actual trading volume on the TASE is expected
to be lower compared to the trading volume on the NASDAQ Capital Market, and as such, could be subject
to higher volatility. The trading prices of our ordinary shares on these two markets are
expected to often differ, resulting from as a result of the factors described above, as
well as in this paragraph, and because of differences in exchange rates. Any decrease in
the trading price of our ordinary shares on one of these markets could cause a decrease
in the trading price of our ordinary shares on the other market.

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

As
a result of recent corporate governance scandals in the United States 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 costs of compliance with
this legislation and our insurance premiums.

14

---

---

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 products manufacturing 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,
recently there was an escalation in violence among Israel, Hamas, the Palestinian
Authority and other groups, as well as extensive hostilities along Israels northern
border with Lebanon in the summer of 2006, and extensive hostilities along Israels
border with the Gaza Strip since June 2007 when the Hamas effectively took control of the
Gaza Strip, which have intensified since February 2008.

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.

We
may be adversely affected by a change in the exchange rate of the New Israeli Shekel
against the U.S. dollar.

Because
exchange rates between the New Israeli Shekel, or NIS, and the U.S. dollar fluctuate
continuously, exchange rate fluctuations, particularly larger periodic devaluations, may
have an impact on our profitability and period-to-period comparisons of our results. In
2002 and 2005 the rate of devaluation of the NIS against the dollar was 7.3% and 6.8%
respectively, while in 2003, 2004 and 2006 the NIS appreciated in value in relation to
the dollar by 7.6% 1.6% and 8.2%, respectively. In 2007 the rate of the revaluation of
the NIS against the dollar was 9%.

A
majority of our revenues are denominated in NIS because our Shagrir subsidiary whose
revenues are mainly in NIS, account for approximately 83% of our revenues in 2007. A
portion of our loans and credit facilities, the amount of approximately $28.5 million,
approximately 82% out of our total loans and credit facilities, loaned to our subsidiary
Shagrir is also denominated in NIS. A portion of our expenses, primarily labor expenses in
Israel, is incurred in NIS. Additionally, certain assets, as well as a portion of our
liabilities, are denominated in NIS. On the other hand, our exports, including our sales
of Cellocator products, are denominated mainly in U.S. dollars and a significantly lesser
portion in Euro. A portion of our loans, consisting of approximately $5.5 million as of
December 31, 2007, are denominated in U.S. dollars.

15

---

---

Our
results may be adversely affected by the devaluation of the NIS in relation to the dollar
(or if such devaluation is on lagging basis), if our revenues in NIS are higher than our
expenses in NIS and/or the amount of our assets in NIS are higher than our liabilities in
NIS. Alternatively, our results may be adversely affected by appreciation of the NIS in
relation to the dollar (or if such appreciation is on a lagging basis), if the amount of
our expenses in NIS are higher than the amount of our revenues in NIS and/or the amount of
our liabilities in NIS are higher than our assets in NIS.

For
further discussion of such fluctuation of the $ to the NIS , 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 be adversely affected by a change of the Israeli Consumer Price Index.

Our
exposure to market rate risk for changes in the Israeli Consumer Price Index, or Israeli
CPI, relates primarily to loans borrowed by us from banks and other lenders. As of
December 31, 2007, we had total loans borrowed linked to Israeli CPI of approximately $18 million. We
generally do not utilize hedging to manage currency risk and, therefore, are exposed to
the risk that the rate of Israeli CPI, which measures inflation in Israel, will exceed the
rate of devaluation of the NIS in relation to the dollar or that the timing of this
devaluation lags behind inflation in Israel. This would have the effect of increasing the
dollar cost of our borrowings.

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.

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  of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or 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
| | -- | --------------------------------------

The
legal and commercial name of our company is Pointer Telocation Ltd. We were incorporated
under the laws of the State of Israel in July 17, 1991 under the name Nexus
Telecommunications Systems Ltd. We changed our name to Nexus Telocation Systems Ltd. in
December 1997 and to Pointer Telocation Ltd. in January 2006. The principal legislation
under which we operate is the Israeli Companies Law, 5759-1999, as amended.

Our
principal place of business is located at 14 Hamelacha Street Afek Industrial Park, Rosh
Haayin, Israel, and our telephone number is 972-3-572-3111.

16

---

---

We
are a leading provider of services to the automotive industry, insurance companies and
vehicle fleets, including road-side assistance and towing services, stolen vehicle
retrieval services and fleet management services. We provide services, for the most part,
in Israel, through our subsidiary Shagrir Systems Ltd., or Shagrir, and in Argentina and
Mexico through our local subsidiaries. We also develop, manufacture, market and sell
products relating to these types of services to independent operators in 25 countries,
including cellular monitoring units, fleet management software and mobile resource
management software used for fleet command and control centers.

For
a description of our products and services, see Item 4.B  Business 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 additional services to automobile
owners and insurance companies.

Our
strategy was implemented through several acquisitions in Israel, Argentina 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 Recuperacion de Mexico, SA de
CV, or PRM, 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.

In
August 2005, we effected a 100 to 1 reverse stock split of our ordinary shares. 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.

On
November 16, 2005, our ordinary shares resumed trading on the NASDAQ Capital Market under
the symbol NXUS, from where they had been trading on OTC Bulletin Board. Please see Item 9
 The Offer and Listing for further information about the trading of our
ordinary shares. On February 21, 2006 our shares began trading under a new symbol, PNTR.

On
December 19, 2006 our ordinary shares began trading on the Tel Aviv Stock Exchange in
Israel, or TASE, also under the symbol PNTR, and we became a dual listed company.

In
March 2007, our Argentinean subsidiary, Pointer Localisation y Assitencia S.A, which we
refer to as PLA, purchased the portfolio of customers of 2 Argentinean companies which
were in the field of stolen vehicle recovery. See Recent Developments below
for further information regarding this acquisition.

In
September 2007, we purchased the assets and activities of Cellocator, a developer and
manufacturer of GPS/GPRS based vehicle devices. See Recent Developments below
for further information regarding the Cellocator acquisition.

As
a result of the implementation of our strategy, we currently provide technology (devices
and command & control software) to independent operators of mobile resource management
solutions as well as our existing range of services to automobile owners and insurance
companies.

As
a result of the acquisitions we made in Israel, the Shagrir operations and technology
manufacturing of Cellocator are currently the most significant operations we have, and are
expected to account for the majority of our business and revenues in the foreseeable
future. In Israel we currently provide the full range of our services.

17

---

---

In
addition to our companys principal place of business described above, the
headquarters of our subsidiary, Shagrir, are located in Holon, Israel. The headquarters of
our subsidiary, PLA, are located in Buenos Aires, Argentina. The headquarters of our
subsidiary, PRM, are located in Mexico City, Mexico. In January 2005, our subsidiary,
Pointer (Eden Telecom Group) Ltd., was renamed Shagrir Motor Vehicle Systems Ltd. and in
March 2007 was renamed Shagrir Systems Ltd. Our Web site is www.pointer.com. Information
on our web site is not incorporated by reference in this annual report.

For
as discussion of our capital expenditures and divestitures, see Item 5.B. 
Operating and Financial Review and Prospects  Liquidity and Capital
Resources.

# Recent Developments

Since
January 1, 2007, the following important events have occurred to us:

Private Placements with
U.S. Institutional Investors

On
April 2, 2007, we entered into and consummated a share purchase agreement with a group of United States institutional investors for the purchase of
805,000 of our ordinary shares for an aggregate price of $8.5 million. Pursuant to the
transaction, the investors were also issued warrants to purchase 402,500 of our ordinary
shares, such that for each one share purchased the investors were entitled to a warrant
to purchase half a share. The warrants are exercisable into ordinary shares, at an
exercise price per share of $12.6 and will be exercisable for a period of five years.
Following the transaction two of the investors, individually, beneficially hold
more than 5% of our share capital.

Acquisition of Cellocator

In
September 2007, we acquired the assets and activities of Cellocator Ltd. and Matan Y.
Communication Tracking Systems Ltd., or Cellocator, a private Israeli company active in
the field of cellular location-based services and technology, in exchange for
approximately US$18.5 million, consisting of (i) approximately US$15 million in cash;
(ii) the issuance of 160,000 of our ordinary shares and (iii) a non-tradable debenture
with a face value of $1,921 convertible into 160,000 of our ordinary shares (with fair
value of $ 1,951 as of December 31, 2007). In addition, we paid Cellocator approximately
$1.6 million in connection with the post closing working capital adjustment as part of the
acquisition. In January 2008 the seller of Cellocator decided not to convert the
debenture, thus Cellocator and/or its shareholders hold approximately 3.5% of our issued
and outstanding share capital (on a fully diluted basis). As part of the acquisition, we
agreed to continue to fulfill specified conditions allowing Cellocator to meet particular
existing tax benefit qualifications under Israeli law. Cellocators operations are
included in our technology and products division.

MOU with a leading
provider of Road Side Assistance in Argentina

In
March 2007, we executed a Memorandum of Understanding, or MOU, with a leading provider of
road side assistance in Argentina, or the Argentinean Provider, to cooperate in offering
location based services and stolen vehicle retrieval services. The closing of the
transaction is subject to the success of the Argentinean Provider in reaching an agreement
with a leading automotive manufacturer in Argentina. Based on the MOU, upon closing, the
Argentinean Provider shall transfer to PLA all of its location based services and SVR
business in consideration for 11% of the outstanding share capital of PLA. Thereafter,
contingent upon the success of the project during the two years following the closing, the
Argentinean Provider will increase its holdings in PLA, and we will provide PLA with
certain of our products, free of charge, during these two years. During March 2007 most of
the stolen vehicle retrieval activities of the Argentinean Provider have been transferred
and the balance was transferred in February 2008.

18

---

---

Potential acquisition of
the Argentinean Provider

In
March 2007, we executed a non-binding Letter of Intent to acquire controlling ownership of
the Argentinean Provider discussed above, in consideration for $9 million. A due diligence
process will commence once the Argentinean Provider has undergone certain restructuring
and a number of required steps in this process remain pending.

Other Acquisitions in
Argentina

In
March 2007, our Argentinean subsidiary, PLA, purchased the portfolio of customers of 2
Argentinean companies who were in the field of stolen vehicle recovery for an amount of
approximately $300,000.

Loan to Hungarian
automotive service provider

On
January 8, 2008, we entered into a loan agreement with a Hungarian automotive service
provider, pursuant to which we will loan them up to 290,000 Euros ($450,000), but not less
than 240,000 Euros, over a period of twelve months.

Appointment of Chief
Financial Officer

In
January 2007, we announced the appointment of Mr. Zvi Fried, as our Chief Financial
Officer effective February 1, 2007.

Appointment of CTO and
General Manager of Technology & Products

Following
the acquisition of Cellocators business, in September 2007 we appointed
Cellocators founder, Mr. Amnon Duchovne-Nave, as our Chief Technology Officer and an
observer on our board of directors,and in November 2007 we appointed
Mr. Israel Ronn as our General Manager of Technology & Products division, created from
the merger of Cellocator and Pointers technology and manufacturing activities.

Private Placements with
Israeli Institutional Investors

On
December 28, 2006 we entered into a Share Purchase Agreement with a group of Israeli
institutional investors for the purchase of 425,000 of our ordinary shares for an
aggregate price of $4.7 million, out of which, an amount of $2,586,000 was received as of
December 31, 2006. The transaction was consummated on January 12, 2007. Pursuant to the
transaction, the investors were also issued warrants to purchase 212,500 of our ordinary
shares, such that for each one share purchased the investors were entitled to a warrant to
purchase half an ordinary share. The warrants are exercisable into ordinary shares, at an
exercise price per share of $13 and will be exercisable for a period of four years. None
of the investors were, or following the transaction have since become, our affiliates.

Name Change

On
March 2007 our subsidiary Shagrir changed its name from Shagrir Motor Vehicle Systems Ltd. to Shagrir Systems Ltd.

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

Shagrir
funded the Shagrir Towing Services acquisition through a credit line of approximately $23
million, made available by Bank Hapoalim B.M., a loan of approximately $9 million provided
by Shagrir Towing Services, a loan of approximately $11.5 million provided by a group of
investors led by Gandyr Investments Ltd. and Egged Holdings Ltd., or Egged, and a loan of
approximately $2 million provided by the Company and the investors.

19

---

---

On
May 1, 2006,  Shagrir repaid a $2 million  convertible  loan to Egged, and in October
2006, it repaid Egged an additional approximately $0.6 million. In 2007 Shagrir repaid approximately $0.9 million. As of March 31, 2008
approximately $0.5 million of the sums loaned by Egged are to be repaid by April and July 2008.

Settlement of Legal
Claim

In
February 2008 we finalized the settlement of outstanding litigation with China National
Electronics Import & Export Beijing Co., or CEIEC, regarding the alleged breach of
agreements regarding CEIECs customer Sino Telocation Ltd.s purchase of a car
localization system. Pursuant to the settlement both parties withdrew the claims against
each other and against the bank, Bank Hapoalim B.M., used in connection with the
agreement.

Grant of Options to
Employees

On
January 28, 2007, our board of directors resolved to issue to our employees options to
purchase 63,000 of our ordinary shares, pursuant to our 2003 Employee Share Option Plan,
which will vest in four equal annual installments over a period of four years, commencing
as of the date of the grant, at an exercise price of $11.24 per share.

On
March 5, 2007 our board of directors resolved to modify the terms of the options granted
to our former CFO on November 23, 2005, by accelerating the vesting of all of the options
and extending the exercise period until June 30, 2008.

On
December 28, 2007 our board of directors resolved to issue to our employees options to
purchase 92,000 of our ordinary shares, pursuant to our 2003 Employee Share Option Plan,
which will vest in four equal annual installments over a period of four years, commencing
as of the date of the grant, at an exercise price of $7.01 per share.

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

A. General

We
are a leading provider of services to the automotive industry, insurance companies and
vehicle fleets, including road-side assistance and towing services, stolen vehicle
retrieval services and fleet management services. We also develop, manufacture, market and
sell products relating to these types of services (other than road side assistance) to
independent operators in 25 countries, including cellular monitoring units, fleet
management software and mobile resource management software used for fleet command and
control centers.

We
provide our services, for the most part, in Israel, through our subsidiary Shagrir and in
Argentina and Mexico through our subsidiaries Pointer Localisation y Assitencia S.A, which
we refer to as PLA, and Pointer Recuperacion Mexico SA, which we refer to as PRM,
respectively. We market our products, systems and technical support to third party local
operators in Europe, Latin America, Asia and Israel who use our products and / or software
and through which they provide location based and security services.

As
a result of our two acquisitions in Israel during 2004 and 2005, our subsidiary Shagrir is
currently the most significant service operator 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 and towing, stolen
vehicle retrieval, fleet management and other value added services.

20

---

---

As
a result of the Cellocator acquisition in 2007 increasing the size of our technology and
products division, our technology and products division is expected to be a significant
contributor to our revenues with significant revenues derived from exports to Latin
America, Europe and Asia. See Item 5  Operating and Financial Review and
Prospects for a discussion of these acquisitions.

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 and towing  our road-side assistance services include
               towing services, mobile automobile repair services, vehicle replacement
               services, sales of spare-parts and services connecting the driver to other
               service providers. We provide our road-side assistance service through our
               Shagrir subsidiary, which currently operates in Israel. In order to
provide such                services, we use our own fleet and employees as well as
sub-contractors.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | Stolen
vehicle retrieval services  we are operators and providers of
               services directly targeted to stolen and missing vehicle retrieval, which
we                refer to as our SVR services. SVR services includes in some cases both
               preventing vehicles from being stolen as well as retrieving them in
co-operation                with law enforcement and private security agencies. The
services incorporate                both a spread spectrum technology (SPSP) in the ISM
frequency band, intended for                self-deployed wide area networks (WAN) and
Cellular / GPS technology                communication system in order to offer a total
remote vehicle monitoring and                retrieval solution.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) | Fleet
management services  we provide an array of services to enhance our
               customers fleet management capabilities in order to ensure better
               utilization of vehicles and other mobile resources. We provide end units
for original equipment manufacturers                as well as after market in-vehicle installations, to monitor
online the                operating parameters of a vehicle fleet and to report the
results to the fleet                owners and managers, through web-based or OS-based
monitoring and management                location applications. Our end-unit products can
retrieve data from various                sensors utilizing RS-422, RS-232, CANbus and
Dallas serial communication                standards, or by analog and discrete (on or
off) ports.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
respect of both SVR and fleet management services, we are operators of these services in
Israel, Argentina and Mexico and we provide technology for stolen vehicle recovery and
fleet management to third party operators and distributors in 25 countries in Europe,
Latin America and Asia.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iv) | Other
services  In 2007 our Shagrir subsidiary began providing services to
               insurance companies relating to their household insurance coverage.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

In connection with these services,
our technology and products division provides the following products:

| |  | Stolen
Vehicles Recovery (SVR)  Both SPSP and Cellular / GPS communication systems enable
unique features for SVR solutions, including (i) communication & location facilities
(ii) concealed terminal (iii) alarm system adaptability (iv) remote command (v) accuracy
(vi) back-up power supply, and (vii) 24x7 redundant command and control center (CCC). The
radio frequency monitoring devices use our proprietary Pointerware technology SPSP
(spread spectrum technology) used for wide area networks. We still rely on third party
suppliers to manufacture our Location Based Services systems which primarily consist of
radio frequency devices.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

---

---

| | As
a result, in connection with our SVR services business, we have used both cellular and
radio frequency (Location Based Services) monitoring devices.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Cellular
Monitoring Units; Location Based Services systems  Prior to 2007 we subcontracted
with third parties for the provision of cellular monitoring units which utilize advanced
cellular modems with GPS. Following our acquisition of Cellocator in 2007, we are
currently manufacturing our own cellular units and are no longer reliant on third party
suppliers. The Cellocator units enable us to provide versatile information as well as
nationwide coverage, utilizing the cellular network in each territory. These units are
specially designed to operate in harsh conditions inside the vehicle; the design takes
into consideration the metallic envelope that surrounds the unit, the temperature and
vibration stress that are imposed on it, the limited and unstable power supply that
characterizes the car power supplies generally, and specific installation requirements of
the variety of cars available in the market. The design is intended to provide a high
degree of reliability and flexibility.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Fleet
Management Application Products  In connection with our fleet management services
business, we provide Cellular / GPS units & web-based application to enhance many
fleet management capabilities, ensuring better utilization of vehicles and other mobile
resources. The end-unit can connect to various sensors by RS-422 or RS-232 or CANbus
standards, by analog or by discrete (on or off) wirelines. The sensors monitor various
vehicle operating parameters, and the end unit will report the results to the fleet
owners and managers.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Mobile
Resource Management/Command and Control Software  We provide SW and web access to
other software modules required for the execution of vehicular and fleet management
operations. The product also includes monitors on which location and other data collected
from the end units is displayed, tracked, analyzed and reported, in order to determine
location and certain functionalities (e.g. input from sensors).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Products and Services
Description

# A. Road-side Assistance
Services

We
provide our road-side assistance services mainly in Israel through our subsidiary Shagrir.
We believe Shagrir is a leader in Israel in providing road-side assistance and towing
services. Shagrir provides services to its subscribers throughout Israel and its fleet of
vehicles includes approximately 100 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 and the type of vehicle (private
or commercial).

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.

22

---

---

Road-side Assistance
 Equipment, Subcontractors and Supplies

As
of January 2008, Shagrir owned approximately 100 service cars, mobile garages and towing
vehicles and owned approximately 100 replacement vehicles.

The general policy of Shagrir is to
replace its towing vehicles, towing equipment and mobile garages approximately every five
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.

Most
of the replacement vehicles are rented from various rental companies in Israel and about
25% performed by Shagrirs own fleet. Shagrir purchases the spare parts it uses in
the provision of road-side assistance from various suppliers in Israel.

# B. Stolen Vehicle
Retrieval (SVR) Services

We
operate our SVR services in Israel through our Shagrir subsidiary and in Argentina and
Mexico through our subsidiaries, PLA and PRM, respectively. Our services are provided
based on spread spectrum technology (SPSP) intended for wide area networks (WAN) or
Cellular / GPS technology. In Israel, Argentina and Mexico we provide location based
services for vehicles using our command and control centre, radio frequency products and
infrastructure, cellular network and other sophisticated systems for the protection and
location of vehicles.

If
a vehicle is stolen, our system may be alerted by sensors located in the vehicle as well
as by the vehicle owner. The sensors maintain alert 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. In
addition, our value added location based services 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.

Remote Monitoring &
Control Security

Our
SVR services (and our larger fleet management package of services) offer a remote
monitoring and control solution. Our 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 Pointerware network) or through cellular networks.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Mobile
/ Vehicle Units
| | - | ----------------------

| | Each
unit consists of a transceiver (radio frequency or cellular modem communication) with
inputs and outputs capability, 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
or to the vehicle computer (mostly called CAN Bus), while the outputs send commands
(which they receive from the CCC) to the object. Location of the vehicle is achieved
either by triangulation measurements from several base stations installed by the operator
or by means of GPS device in the vehicle unit.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23

---

---

| |  | Communication
Infrastructure
| | - | ----------------------------

| | Communication
is accomplished by either the cellular network in each territory of operations or radio
frequency infrastructure with 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 for the purpose of locating the vehicle. These
measurements, together with additional data received from the end-units, are then
converted into digital data and sent to the Command & Control Center.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
design of our 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.

Our
command and control monitoring center connects to the end-units via radio frequency or
cellular communications. For SVR and location based services in Israel, our subsidiary
Shagrir mainly uses our proprietary Pointerware SPSP (speed spectrum technology) system and products, and to a lesser but growing
extent end units based on Cellular/GPS technology, mainly for fleet management
applications. In order to retrieve the stolen cars Shagrir uses its own personnel as well
as law enforcement and various subcontractors.

In
Israel, Argentina and Mexico, we also operate the command and control center from which we
dispatch external security personnel subcontracted 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 performed either by our in-house employees, or by subcontractors
mainly in designated installation centers. Fleet Management services are provided to
customers as web-based applications.

Our
Argentinean subsidiary PLA provides mainly stolen vehicle retrieval services based on our
proprietary Pointerware system and we have recently introduced fleet management and stolen
vehicle retrieval services based on Cellular / GPS technology. This technology enables us
to extend services outside Buenos Aires.

Our
Mexican subsidiary, PRM, provides SVR and fleet management services based on Cellular /
GPS technology.

C. Fleet Management Services (and other Monitoring Systems) and Value Added
          Location Based Services

Our
subsidiary Shagrir is also a leading provider of fleet management services in Israel. The
communication method for this service is predominantly cellular with location via GPS and
connectivity to the vehicle either by CAN Bus or to sensors via inputs and outputs.
Operators monitor vehicles using a web-based application with capabilities for monitoring
the vehicles location, speed and various inputs (if connected). Reports to
operators employees are provided automatically or upon request, via internet, GPRS
or SMS. These reports may include parameters that enable monitoring performance

In
our fleet management services, Cellular / GPS Units & Web-based application enable
many fleet management capabilities, ensuring better utilization of vehicles and other
mobile resources. The end-unit can connect to various sensors by RS-422 or RS-232 or
CANbus standards, by analog or by discrete (on or off) wirelines. The sensors monitor
various vehicle operating parameters, and the end unit will report the results to the
fleet owners and managers.

In
Argentina, we have recently introduced fleet management and stolen vehicle retrieval
services based on Cellular / GPS technology, and in Mexico our subsidiary, PRM, already
provides fleet management services, based on Cellular / GPS technology.

24

---

---

# D. Other Services
Household Insurance Services

In
2007, Shagrir commenced providing certain services to insurance companies which provide
household insurance coverage. Shagrir provides households with water-pipe repair services
to those households which have subscribed to these services.

# E. Our Technology and
Products Division

We
operate our services in Israel, Argentina and Mexico as described above. We also sell our
systems and / or products to third party local operators (directly or through
distributors) in Latin America, Europe, Asia and Israel, who, like our subsidiaries,
Shagrir, PLA and PRM, provide fleet management and / or stolen vehicle retrieval or other
services using our technology. Operators purchase either Cellular Monitoring Units;
Location Based Services systems, including our Cellocator products, or Command &
Control software or our fleet management application products or a combination of them and
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 purchase from us, and deploy, the Command and
Control software and fleet management application products and, if they provide SVR
services via our radio frequency solution, sufficient base stations to cover their
respective territories.

B. Sales and Marketing

Israel

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. Our SVR
services are marketed primarily through vehicle importers and to a lesser extent to 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 security products and car units for installation in the
vehicles of private customers, business customers and vehicle fleets either directly or
through our network of approximately 70 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.

Argentina and Mexico

In
order to execute their sales and marketing initiatives, our Argentinean and Mexican
subsidiaries, PLA and PRM, employ an in-house sales and marketing force and third party
dealers whose efforts are focused on sales and marketing to insurance companies and
vehicle agents, fleet operators directly, or indirectly through insurance agents, vehicle
distributors and vehicle financing corporations in their respective designated
territories.

Other Countries

Our
sales and marketing efforts to operators in other countries, mainly in respect of our
products, are executed by our internal marketing, sale force and customer support
employees, focusing on sales of our technology and being attentive to needs of these
customers, in order to provide them with the solutions they require.

25

---

---

C. Patent and Licenses;
Government Regulation

In
Israel, we are not dependent on any patent or licenses, which are material, to our
business or profitability, with the exception of 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, 2008;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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, 2008;
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, 2008.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
use of products incorporating our Pointerware 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.

Our
Argentinean subsidiary, PLA, is not dependent on any patent or licenses which is material
to its business or profitability.

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. PLA has been required to obtain domestic licenses for the
deployment of our systems in Argentina.

Regarding
our Mexican subsidiary, PRM, since 2006 our services in Mexico through PRM are based
entirely upon Cellular Monitoring Units and therefore require no specific governmental
licenses.

While
the use of our Cellular Monitoring Units and services does not require regulatory
approvals, the use of our radio frequency (Location Based 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 Federal Communications Commission in the United States for our
vehicular end-unit device (RMU) and for our SVR services receiving base station, to the
extent required for sale in the U.S. 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. See Item 3  Risk Factors.

D. Competition

In
Israel, our primary competitors are Drachim Road Side & Towing Services Ltd., Femi
Premium Ltd. and Shlomo-SIXT Road Side Services & Garages Ltd., all of which mainly
compete with us in providing road-side assistance and towing services. 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 and
fleet management services market.

26

---

---

Our
primary competitors in the stolen vehicle retrieval services market in Argentina and
Mexico are LoJack and Ituran. In Mexico our prime competitor is LoJack. Many additional
competitors operate in both countries, however their positioning is not as strong as
LoJack and Ituran. In fleet management services we have many competitors for the low-entry level services for
monitoring vehicles. When management is required (analysis, reporting, diagnostics,
driver-behavior patterns) fewer competitors operate in both countries however activities
are intensive.

Some
competitors in the stolen vehicle retrieval services market offer a similar solution to
ours and others, like LoJack, 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, analog or
paging technologies).

Many
companies manufacture vehicle devices based on GPS / Cellular technology. Our primary
competitors in the vehicle devices (GPS/Cellular) product market in Argentina and Mexico
include Skypatrol, Webtech, Trafficmaster, Octotelematics, Cobra, AirIQ and the modem
manufacturer Enfora. Our competitors in Europe and Asia consist mainly of Enfora USA and
European manufacturers such as Octotelematics, Trafficmaster, Falcom, and Cobra.

Significant
differences from one GPS / Cellular device to the other are mainly a result of proprietary
firmware that enables applications (for monitoring, management and sensor-data inputs) and
connectivity of products to their network, and only to a lesser extent by hardware and
packaging.

E. Seasonality

In
Israel, the demand for road-side assistance, towing services and replacement vehicles is
greatly impacted 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 impacted 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 in Israel.

Our business
provided in Argentina and Mexico and in other countries are not significantly seasonal.

# Principal Markets:

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

27

---

---

|          | 2007 | 2006 | 2005
|--------- | ---- | ---- | ----
|
|
|
|
|Services: |      |      |     
|          |      |     
|Products: |      |      |     
|          |      |     
|Total:    |      |      |     

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

|              | 2007 | 2006 | 2005
|------------- | ---- | ---- | ----
|
|
|
|
|Israel        |      |      |     
|              |      |     
|Latin America |      |      |     
|              |      |     
|Europe        |      |      |     
|              |      |     
|Other         |      |      |     
|              |      |     
|Total         |      |      |     
|              |      |      |     

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

We
are organized under the laws of the State of Israel. The following is a list of our
currently active subsidiaries, their countries of incorporation and our ownership interest
in each of them:

|NAME OF SUBSIDIARY                         | JURISDICTION OF INCORPORATION
|------------------------------------------ | -----------------------------
|Pointer Localisacion y Assistencia S.A (1) | Argentina                    
|Shagrir System Ltd.(2)                     | Israel                       
|Pointer Recuperacion Mexico SA (3)         | Mexico                       

| | (1)
          We hold 93% of the issued and outstanding shares of PLA.
| | ----------------------------------------------------------------------

| | (2)
          We hold 56.56% of the issued and outstanding shares of Shagrir.
| | -----------------------------------------------------------------------------

| | (3)
          We hold 74% of the issued and outstanding shares of PRM.
| | ----------------------------------------------------------------------

28

---

---

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

Our
executive offices, operational, research and development and laboratory facilities are
located in Rosh Haayin, Israel (a suburb of Tel Aviv) where we currently lease
approximately 1,400 square meters with annual lease payments of approximately $240,000.
Due to the Cellocator acquisition in 2007 we have recently consolidated our facilities of
Pointer Telocation, included our headquarters, and Cellocator, to our current location in
14 Hamelacha Street, Rosh Haayin 48091, Israel, which is east of Tel Aviv.  PLAs
offices and operations facility are located in Buenos Aires. PLA currently leases 2,173
square meters (including 1,433 square meters used by its installation centers) with an
annual lease payment of $144,000. 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 $210,000. 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 $46,000. PRMs offices and operations facility are
located in Mexico City, Mexico. PRM currently leases 480 square meters with an annual
lease payment of $79,000. For further information, see Note 11d of our consolidated
financial statements.

|ITEM 4A. |  | UNRESOLVED
STAFF COMMENTS
|-------- |  | -------------------------

Not applicable.

29

---

---

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

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

The
following discussion of our results of operations and financial condition should be read
in conjunction with our consolidated financial statements and the related notes thereto
included elsewhere in this annual report. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those set forth in Item 3.D.  Key
InformationRisk Factors.

# Overview

We
are a leading provider of services to the automotive industry, insurance companies and
vehicle fleets, including road-side assistance and towing services, stolen vehicle
retrieval services and fleet management services. We also develop, manufacture, market and
sell products relating to these types of services, including cellular monitoring units,
fleet management software and mobile resource management software used for fleet command
and control centers. We operate our services principally in Israel, and to a lesser
extent, in Argentina and Mexico. We sell our products to third party operators in 25
countries.

Our
revenues are principally derived from (i) provision of services, including our road-side
assistance services, subscriber fees, SVR services and fleet management services; and to
a lesser extent, by technical support services that we provide, and (ii) sales of our
systems and products, including sales of our Cellular Monitoring Units, sales of our
fleet management application products and command and control software and third party
products.

We
operate as service providers predominantly in Israel and Latin America (Argentina and
Mexico), mainly to insurance companies and automobile owners. As technology and product
developers, we sell our products in Israel, Latin America, Europe and Asia.

Since
our acquisition of Shagrir in 2004 and certain of the activities and assets of Shagrir
Towing Services in 2005, we have expanded our operations and increased our revenues in
Israel. The majority of our revenues are now derived from customers in Israel.
Our revenues from customers in Israel in 2007 were $43 million, and approximately 83% of our
revenues in 2007 were derived from the Israeli market in comparison to 89% in 2006. The increase
of our international revenues in 2007 is primarily attributable to the inclusion of
Cellocator in the fourth quarter of 2007. We expect that the portion of revenues from
international revenues will increase in 2008 since revenues from Cellocators
products will be included for the full year.

In
2006 we introduced a new line of products, Cellular Monitoring Units, into our SVR
services and fleet management services businesses, which we purchased from third party
subcontractors. In September 2007 we acquired a developer and manufacturer of Cellular
Monitoring Units, Cellocator, and this acquisition will assist us in our objective to
present new products to the market, improve our gross margin from cellulars products
and to achieve vertical efficiencies of scale by manufacturing our own units without being
required solely to use third party subcontractors. As a result of the Cellocator
acquisition in 2007, Cellocator is a significant contributor to our revenues in the fourth
quarter of 2007 with significant revenues derived from exports to customers in Latin
America, Europe and Asia. We anticipate that a majority of our revenues from sales of
products in 2008 will be derived from sales of such units and from selling of other
products under development to the vehicle location market. Thus, the portion of revenues
from sales of our products out of our total revenues is expected to be increased in 2008.

As
a result of these acquisitions we made in Israel, the Shagrir operations and the
technology manufacturing by Cellocator are currently the most significant operations we
have, and are expected to account for the majority of our business and revenues in the
foreseeable future.

30

---

---

In
addition, in 2007 we expanded the range of services that our Israeli subsidiary, Shagrir,
offers to our insurance company clients. In addition to our traditional range of services,
Shagrir now offers household insurance coverage to insurance companies. Shagrir provides
households with water-pipe repair services to those households which have subscribed to
these services. Although the contribution of this service was not significant we
believe that this additional type of service, among other, will increase our ability to
present a comprehensive package of service solutions to our insurance company clients.

In
2007, we also expanded our sales of products and technology in the following geographical
area included Latin America, Europe and Asia attributable to the acquisition of Cellocator
which operates in those areas.

Acquisitions

As
part of our strategy, we have pursued and may continue to pursue acquisitions and other
initiative in order to offer new products or services to enhance our market position and
strength. Our acquisitions are either technology or operators that provide services. As a
result of those acquisitions the total goodwill and other intangible assets in our balance
sheets were $69 million and $47 million as of December 31, 2007 and 2006 respectively. See
about our acquisitions in Item 4  History and Development of the Company and
Recent Developments.

Research
and Development

Our
research and development activities involve the development of new products in respond to
an identified market demand primarily of our internal products development and in
conjunction with a customer requirement. Research and development expenditures were $1.7
million, $1.2 million and $0.9 million in the fiscal years ended December 31, 2007, 2006
and 2005 respectively, respecting 3.2%, 2.8% and 2.4% respectively, of our total revenues
in these fiscal years while in respect of revenues from products only the percentages
were 10.6%, 12% and 10 % in these fiscal years.

Business Challenges/
Areas of Focus

Our
primary areas of focus and business include:

| |  | Continuing
the growth and revenues and profitability of our products and services by the
                  subsidiaries;
| | - | ------------------------------------------------------------------------------------------------------------------------

| |  | Enhancing
the introduction and recognition of our new products, including the Cellocator
                  products, into the markets;
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| |  | Penetrating
into new markets, mainly Latin America and Europe through our Cellocator products, and
strengthening our presence in existing markets by proposing full scope of services;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Succeeding
in selling diversify products in territories where we already activity, mainly in Latin
America and Europe; and
| | - | --------------------------------------------------------------------------------------------------------------------------

| |  | Achieving
operating profitability of our Mexican subsidiary by increasing number of subscribers
using our technology.
| | - | ---------------------------------------------------------------------------------------------------------------------

# Certain Issues Affecting
our Results of Operations

In
2005 we consolidated our financial reports in order to reflect 100% of our subsidiary
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 $6
million into 43.44% of the shares of Shagrir Systems. As a result, our holdings in Shagrir
Systems were reduced to 56.56%. Since 2006 Shagrirs shareholders equity become
positive and we have consolidated its financial results only for the then existing holding
(by recording a minority interest), which materially negatively affects our net income
(loss) at such periods.

31

---

---

Revenues

Products

We
generate revenues from sales of our products to our subsidiaries and third party operators
in Latin America, Europe, Israel and our other sale locations around the world. The ratio
of products out of the total revenues increased in the fourth quarter of 2008 due to the
inclusion of Cellocator products sales beginning in September 2007. We anticipate that the
increase of products ratio out of the total revenues will be increase in 2008 as a result
of this acquisition. The acquisition of Cellocator enables us to spread our sales in new
areas primarily in Europe and Latin America.

Services

We
generate revenues from sales of our services primarily by our subsidiaries in Israel and
Latin America. The services included mainly road side assistance, SVR, fleet
management and other value added services. A majority of our revenues represent
subscription fees paid to us by our customers who include insurance companies, commercial
companies and individuals. Due to very intense competition in road side assistance in
Israel we expect price erosion. Such competitive pressures are not expected to have a
major impact on our Israelis subsidiarys 2008 cash flow provided by operating
activities results.

# Costs and Expenses

Cost of Revenues

Cost
of revenues referring to services 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. Cost of revenues referring to products includes expenses
related to the cost of purchasing or manufacturing systems and products, including raw
materials and components, salaries and employee benefits, subcontractors and consulting.
Amortization of intangible assets is attributable to the Cellocator acquisitions  intangible
assets of developed technology.

Operating Expenses

Research and Development
Expenses.

Research
and development expenses consist primarily of salaries and employee benefits,
subcontractors and consulting in connection with our products.

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.

32

---

---

Amortization of
intangible assets.

Intangible
assets consist of the acquired patents, customer related intangible and brand names.
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.

Financial Income
(Expenses), Net.

Financial
expenses consist mainly of bank charges and interest expenses, foreign currency
translation adjustments, hedging expenses and others. 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.

Tax expense.

Tax
expense consists of federal, state, local taxes on the income of our business, deferred
income taxes and amortization of goodwill related to the acquisition of Shagrir. See Item
10.E  Taxation and Government Programs for further information on taxation
applicable to us.

Critical Accounting Policies

The
consolidated financial statements include Pointer and the accounts of our subsidiaries.
Intercompany transactions and balances are eliminated in consolidation.   The
preparation of financial statements in conformity with U.S. GAAP requires us, 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 and the use of different assumptions would likely result in
materially different results of operations. 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.

33

---

---

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.

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
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.

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

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.

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. The level of our write-offs related to our inventories accounts
fluctuates depending upon all of the factors mentioned above.

Valuation of Long-Lived
Assets, Intangibles and Goodwill

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. We have elected to test for goodwill impairment on December 31 of each
year. The goodwill impairment test is a two-step process that requires our management to
make judgments in determining what assumptions to use in the calculation. The first step
of the process consists of estimating the fair value of each reporting unit based on a
discounted cash flow model using revenue and profit forecasts and comparing those
estimated fair values with the carrying values, which includes the allocated goodwill. If
the estimated fair value is less than the carrying value, a second step is performed to
compute the amount of the impairment by determining an implied fair value of
goodwill. The determination of a reporting units implied fair value of
goodwill requires us to allocate the estimated fair value of the reporting unit to the
assets and liabilities of the reporting unit. Any unallocated fair value represents the
implied fair value of goodwill, which is compared to its corresponding
carrying value. Significant estimates used in these processes include estimates of future
cash flows, future short-term and long-term growth rates and weighted average cost of
capital for the applicable reporting unit. As of December 31, 2007, we have
determined that no impairment with respect to our goodwill exists.

We
cannot reliably predict the occurrence of future events, if any, that might adversely
affect the reported value of goodwill, other intangible assets or its long lived assets at
December 31, 2007. Such events include, but are not limited to, a number of future events,
including decisions made in response to economic and competitive conditions, the impact of
the economic environment on the our customer base, or a material negative change in our
relationships with significant customers. A variance in the discount rate or cash flows
could have had a significant impact on the outcome of future goodwill impairment tests. If
in the future we will be required to record an impairment of goodwill, our results of
operations could be materially harmed and our equity could be decreased.

Intangible
assets consist of the brand name, customer related intangibles, developed technology and
acquired patents. 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.

The
brand names are amortized over periods between two and nine years; and the customer
related intangibles are amortized over periods between five and nine years; the
developed technology is amortized over a five-year period; and patents are amortized over an
eight-year period.

34

---

---

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.

Due
to the requirement of certain major potential customers in Mexico to increase the
territorial coverage to a nationwide coverage and due to the increased costs of
communication services with respect to the proprietary system that we used (such increase
in costs was observed only in Mexico), we decided to migrate from our traditional radio
frequency (RF) system communication technology to Cellular/GPS technology in Mexico. This
necessitated dismantling of 9 base-stations and replacing about 500 RMU vehicle units with
Cellular / GPS vehicle units. This process required us to impair equipment valued at about
$372,000 recorded in 2006. Such factors existed only in Mexico and not at other locations
in which the Company operates and as such, the Company continues to use the traditional RF
technology at other locations with no change in the expected lives of the equipment.

Share based compensation

Stock-Based Compensation
Expense.

On
January 1, 2006, we adopted FASB Statement No. 123 (Revised 2004), Share-Based
Payment, or SFAS 123(R), which requires the measurement and recognition of compensation
expense for all share-based payment awards made to our employees and directors including
employee stock options which are based on estimated fair values. Stock-based compensation
expense recognized under SFAS 123(R) for 2007 and 2006 was $559,000 and $251,000
respectively. For fiscal 2005, stock-based compensation expense of $126,000 had been
recognized under previous accounting standards. See Note 2p to our Consolidated Financial
Statements for additional information.

Upon
adoption of SFAS 123(R), we began estimating the value of employee stock options on the
date of grant using a Black-Scholes model. Prior to the adoption of SFAS 123(R), the value
of each employee stock option was estimated on the date of grant using the intrinsic value
method in accordance with APB No. 25 and the Black-Scholes model for the purpose of the
pro forma financial information provided in the notes to the financial statement in
accordance with SFAS 123.

The
determination of fair value of stock options awards on the date of grant is affected by
several factors including our stock price, our stock price volatility, risk-free interest
rate, expected dividends and employee stock option exercise behaviors. If such factors
change and we employ different assumptions in the application of SFAS 123(R) in future
periods, the compensation expense that we record under SFAS 123(R) may differ
significantly from what we have recorded in the current period.

# Selected Financial Data

We
derived the following selected consolidated financial data presented below for each of the
years ended December 31,  2005, 2006 and 2007 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, 2003 and 2004 have been derived from audited financial statements not included in this annual
report.

35

---

---

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.

|                                  | 2007 | 2006 | 2005 | 2004    | 2003
|--------------------------------- | ---- | ---- | ---- | ------- | ----
|
|
|
|
|Statement of Income Data:         |      |      |      |         |     
|Revenues, products                |      |      |      | 15,821  |     
|Revenues, services                |      |      |      | 35,806  |     
|Total Revenues                    |      |      |      | 51,627  |     
|                                  |      |     
|Cost of revenues, products        |      |      |      | 9,414   |     
|                                  |      |     
|Cost of revenues, services        |      |      |      | 23,034  |     
|Amortization of intangible assets |      |      |      | 277     |     
|Total Cost of Revenues            |      |      |      | 32,725  |     
|Gross profit                      |      |      |      | 18,902  |     
|Research and development costs,   |      |     
|net                               |      |      |      | 1,675   |     
|Selling, general and              |      |     
|administrative expenses           |      |      |      | 11,143  |     
|Amortization of deferred stock    |      |     
|based compensation                |      |      |      | -       |     
|Amortization of intangible assets |      |     
|and Impairment of long lived      |      |     
|assets                            |      |      |      | 1,877   |     
|Other income, net                 |      |      |      | -       |     
|                                  |      |     
|Operating income (loss)           |      |      |      | 4,207   |     
|Financial expenses                |      |      |      | 2,814   |     
|Other income (expenses)           |      |      |      | 12      |     
|                                  |      |     
|Income (loss) before              |      |     
|tax on income                     |      |      |      | 1,381   |     
|Taxes on income                   |      |      |      | 353     |     
|                                  |      |     
|Income (loss) before Minority     |      |     
|interest                          |      |      |      | 1,028   |     
|                                  |      |     
|Minority interest                 |      |      |      | 1,366   |     
|Income (loss) from continuing     |      |     
|operations                        |      |      |      | (338    | )   
|Income(Loss) from discontinued    |      |     
|operations*                       |      |      |      | -       |     
|                                  |      |     
|Net income (loss)                 |      |      |      | (338    | )   
|                                  |      |     
|Basic net earning (loss) per      |      |     
|share from                        |      |     
|continuing operations             |      |      |      | (0.08   | )   
|Diluted net earning (loss) per    |      |     
|share from continuing operations  |      |      |      | (0.08   | )   
|                                  |      |     
|Basic net earning (loss) per      |      |     
|share                             |      |      |      | (0.08   | )   
|Diluted net earning (loss) per    |      |     
|share                             |      |      |      | (0.08   | )   
|Weighted average number of shares |      |     
|outstanding (in thousands)        |      |      |      | 4,310   |     
|                                  |      |     
|Balance Sheet Data:               |      |     
|Total assets                      |      |      |      | 100,236 |     
|Net assets (liabilities) of       |      |     
|continuing operations             |      |      |      | 32,203  |     
|Working capital (deficit)         |      |      |      | (15,327 | )   
|Convertible debentures            |      |      |      | 1,979   |     
|Shareholders' equity (deficiency) |      |      |      | 32,203  |     
|Share capital                     |      |      |      | 3,139   |     
|Additional paid-in capital        |      |      |      | 116,910 |     

* Sale of all our holdings in
NexusData, the assets, liabilities, operating results attributed to NexusData have been
deemed to be discontinued operations.

36

---

---

# Operating Results

The following table presents, for the
periods indicated, certain financial data expressed as a percentage of revenues for
the line items discussed below:

|                                             | 2007 | 2006 | 2005
|-------------------------------------------- | ---- | ---- | ----
|
|
|
|
|Revenues:                                    |      |      |     
|Revenues, products                           |      |      |     
|Revenues, services                           |      |      |     
|Total Revenues                               |      |      |     
|Cost of Revenues:                            |      |     
|Cost of revenues, products                   |      |      |     
|Cost of revenues, services                   |      |      |     
|Amortization of intangible                   |      |      |     
|Total Cost of Revenues                       |      |      |     
|Gross profit                                 |      |      |     
|Operating Expenses:                          |      |     
|Research and development costs, net          |      |      |     
|Selling, general and administrative expenses |      |      |     
|Total Operating Expenses                     |      |      |     
|                                             |      |     
|Amortization of intangible assets            |      |     
|and Impairment of long lived assets          |      |      |     
|Other income, net                            |      |      |     
|                                             |      |     
|Operating income (loss)                      |      |      |     
|Financial expenses                           |      |      |     
|Other income (expenses)                      |      |      |     
|                                             |      |     
|Income (loss) before tax on income           |      |      |     
|Taxes on income                              |      |      |     
|Income (loss) before Minority interest       |      |      |     
|Minority interest                            |      |      |     
|Income (loss) from continuing operations     |      |      |     
|                                             |      |     
|Net income (loss)                            |      |      |     

37

---

---

Twelve Months Ended
December 31, 2007 Compared with Twelve Months Ended December 31, 2006

Revenues.Revenues sharply increased by $9.7 million, or 23% from $42
          million in 2006 to $51.6 million in 2007. The increase in total revenues in 2007
          as compared to 2006 is attributable to the Cellocator acquisition in September
          2007, revaluation of the NIS against the dollar by 7.8% and internal growth. The
          revenues from products increased by $6.1 million to $ 15.8 million from $ 9.7
          million in 2006. This increase of 63% is primarily attributable to Cellocator
          acquisition which contributed to $3.5 million and the rest attributable to
          internal growth. The revenues from services increased by $3.6 million from $32.2
          million to $35.8 million. This increase of 11% was impacted also by revaluation
          of the NIS against the dollar.

Revenues from services in 2007
accounted for 69% out of total revenues as compared with 77% in 2006. This change is
primarily attributable to the increase of revenues from products due to the contribution
of selling Cellocators products since September 2007.

Our international revenues in 2007
accounted for 17% out of total revenues compare to 11% in 2006. During 2007 we increase
our sales to Latin America from $3.4 million in 2006 to $4.6 million in 2007 and in Europe
from $ 1 million in 2006 to $3.8 million in 2007.

Cost of
Revenues. Our cost of revenues increased to $32.7 million for the twelve
months ended December 31, 2007 as compared to $26.3 million for the same period in 2006.
This increase of 24% was associated with commence of selling Cellocators products,
revaluation of the NIS against the dollar and amortization of intangible assets on the
amount of $277,000 attributable to Cellocator acquisition

Gross Profit.
Our gross profit increased by $3.4 million from $15.5 million in 2006 to $18.9 million in
2007. This increase is mainly as a result of the foregoing. As a percentage of total
revenues gross profit accounted 37% in 2007 and 2006.

Research and Development
Costs. Net research and development expenses in 2007 increased by $0.5
million from $1.2 million in 2006 to $1.7 million in 2007, this is mainly as a result
Cellocator acquisition and merger of our R&D department with Cellocators
R&D.

Selling and Marketing
Expenses. Selling and marketing costs increased by $1 million to $4.9
million in 2007 from $3.9 million in 2006. The major increase in 2007 resulted from the
increase in salaries and marketing costs.

General and Administrative
Expenses. General and administrative expenses increased by $1.5 million to
$ 6.2 million in 2007 to $4.7 million in 2006. The main impact in 2007 resulted from
increase in our salaries cost and due to the merger of Cellocator which we accounted,
among other, expenses in salaries and rental.

Amortization of intangible
assets and Impairment of long lived assets. Amortization of intangible
assets  and impairment of long lived assets increased by $235,000 from $2.1 million in 2006 to $1.9 million in 2007. The
amortization of intangible assets includes amortization of intangible assets related to
Cellocator acquisition.

Due to the requirement of certain
major potential customers in Mexico to increase the territorial coverage to a nationwide
coverage and due to the increased costs of communication services with respect to the
proprietary system that we used (such increase in costs was observed only in Mexico), we
decided to migrate from the traditional RF (radio frequency) system communication
technology to Cellular/GPS technology in Mexico. This process required us to impair
equipment valued at about $372,000 recorded in 2006.

38

---

---

Other income.On
May 26, 2006, we entered into a settlement agreement, with respect to a past claim against
a Latin American customer, pursuant to which we received a net amount of approximately
$1.3 million.

Operating Profit.As a result of the foregoing, we recorded in 2007 a $4.2 million operating
profit, compared to an operating profit of $4.9 million in 2006. Most of our operations
are located in Israel and are in NIS and as a result were also impacted by the revaluation
of the NIS against the dollar of 7.8% in 2007, which negatively impacted our expenses such
as labor, local operating and other maintenance expenses, by $0.8 million in 2007.

Financial Expenses
(Net). Financial expenses increased from $2.6 Million in 2006 to $2.8
million in 2007 mainly due to the effect of foreign currency translation adjustment.
Financial expenses of 2007 include $1.8 million of net interest expenses and bank charges,
adjustment of foreign currency $0.5 million and other financial expenses $0.5 million.

Taxes on income.
 Taxes on income were $353,000 in 2007 compare to $82,000 in 2006. In 2007, taxes on
income on the amount of $2.2 million were partially offset by an increase in the deferred
tax asset of $1.9 million related to operating losses carried forward and other timing
differences and in 2006, taxes on income in the amount of $1.7 million were partially
offset by an increase in the deferred tax asset of $1.6 million related to operating
losses carried forward and other timing differences.

Minority
interest. We recorded minority interest in the Statement of Operations of
our Israeli subsidiary Shagrir as results based on actual holdings, which is 56.6%. The
minority interest recorded in 2007 and 2006 were $1.4 million and $1.04 million
respectively.

Net Income
(Loss). In 2007, we had net loss of $338,000 compared to a net income of
$1.2 million in 2006.

Twelve Months Ended
December 31, 2006 Compared with Twelve Months Ended December 31, 2005

Revenues.Revenues sharply increased by $4.9 million, or 13.3% from $37
          million in 2005 to $41.9 million in 2006. The increase in total revenues in 2006
          as compared to 2005 is also attributable to the fact that revenues in 2005
          included only ten months of revenues deriving from the acquisition of the
          road-side assistance and towing business of Shagrir Towing Services completed on
          February 28, 2005.

Cost of
Revenues. Our cost of revenues increased to $26.4 million for the twelve
months ended December 31, 2006 as compared to $23.3 million for the same period in 2005.
This increase was associated mainly to the fact that cost of revenues in 2005 included
only ten months of cost of revenues deriving from the acquisition of the road-side
assistance and towing business of Shagrir Towing Services completed on February 28, 2005.

Gross Profit.
Our gross profit increased by $1.9 million from $13.7 million in 2005 to $15.5 million in
2006, mainly as a result of the foregoing.

Research and Development
Costs. Net research and development expenses in 2006 increased by $278,000
from $892,000 in 2005 to $1.17 million in 2006, this is mainly a result of an increase in
salaries cost and an increase in subcontractors cost.

Selling and Marketing
Expenses. Selling and marketing costs increased by 6.3% to $3.9 million in
2006 from $3.7 million in 2005. The major increase in 2006 resulted from the increase in
salaries costs.

General and Administrative
Expenses. General and administrative expenses decreased by approximately
16% from $ 5.6 million in 2005 to $4.7 million in 2005. The main impact in 2006 resulted
from a decrease in salaries cost and in rent expenses, due to the merger of the Road-Side
assistance and towing business of Shagrir Towing Services.

Amortization of intangible
assets and Impairment of long lived assets.Amortization of intangible
assets decreased by $722,000 from $2.5 million in 2005 to $1.7 million in 2006.

During 2006, we have dealt with the
service coverage demanded by potential customers in the market. During 2006, the service
which we provided offered regional coverage while major potential customers such as
insurance companies, car manufacturers/dealers and fleet companies, demand nationwide
coverage. Thus, our management is assessing the transitioning from our current technology
(radio platform) to a new technology (cellular phone platform) that would allow nationwide
coverage. Therefore, our management has recognized an impairment loss related to our base
stations (network installation), which constitute the base of our current technology to
provide our services. Network installation has been reduced to its fair value as
determined by our management based on present value of future net cash flows. Impairment
loss has been recognized in a separate caption in our Statement of Operations contained
elsewhere in this annual report, in the amount of $372,000.

39

---

---

Other income. On
May 26, 2006, we entered into a settlement agreement, with respect to a past claim against
a Latin American customer, pursuant to which we received a net amount of approximately
$1.3 million.

Operating
Profit. As a result of the foregoing, we recorded in 2006 a $4.9 million
operating profit, compared to an operating profit of $959,000 in 2005.

Financial Expenses
(Net). Financial expenses decreased from $4.0 Million in 2005 to $2.6
million in 2006 mainly due to the effect of foreign currency translation adjustment.

Taxes on income.
 Taxes on income were $82,000 in 2006. In 2006, taxes on income in the amount of $1.7
million were partially offset by an increase in the deferred tax asset of $1.6 million
related to operating losses carried forward and other timing differences.

Minority
interest. During the fourth quarter we recorded a minority interest in the
Statement of Operations of our Israeli subsidiary Shagrir as results based on actual
holdings which is 56.6%. The minority interest recorded in 2006 was $1.04 million.

Net Income
(Loss). In 2006, we had net income of $1.2 million compared to a net loss
of $2.7 million in 2005.

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

Our
results of operations, liabilities and assets were mainly impacted 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.

We
recently made two acquisitions in Israel. Due to the acquisition of Shagrir, 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 Services are mainly
denominated in NIS. On the other hand, the majority of Cellocator revenues are generated
in U.S. dollars while part of the expenses such as raw materials are mainly in U.S. dollars and
part of the expenses such as labor and rental are in NIS. See Risk Factors  We
may be adversely affected by a change in the exchange rate of the New Israeli Shekel
against the U.S. dollar for a discussion of the risks relating to income and
expenses in U.S. dollars and 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 generally continuing, has been significantly reduced and the
rate of devaluation has been substantially diminished and in some years reversed.

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 Israeli CPI, and other expenses, which are paid in New Israeli Shekels. Regarding
fluctuations in the U.S. dollar  NIS exchange rate 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. Revaluation of the NIS against the US
dollar will increase our NIS denominated revenues and expenses in US dollar terms. See
Risk Factors. Due to the potential off-set of the affects described above, we
cannot evaluate the net impact on our results of operations.

40

---

---

The
exchange rate fluctuated during 2007 from a low of NIS 3.83 to the U.S. dollar to a high
of NIS 4.342 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 | LOW
|------------- | ---- | ---
|
|
|
|
|October 2007  |      |    
|November 2007 |      |    
|December 2007 |      |    
|January 2008  |      |    
|February 2008 |      |    
|March 2008    |      |    

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, 2003 - December 31, 2003 | 4.5483 NIS/$1
| | January 1, 2004 - December 31, 2004 | 4.4820 NIS/$1
| | January 1, 2005 - December 31, 2005 | 4.4878 NIS/$1
| | January 1, 2006 - December 31, 2006 | 4.4565 NIS/$1
| | January 1, 2007 - December 31, 2007 | 4.1081 NIS/$1

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 1.2% where the U.S. dollar devalued against the NIS by
approximately 1.6%. As a result of the revaluation of the NIS, we experienced increases 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 U.S.
dollar by approximately 6.8%. As a result of the devaluation of the NIS, we experienced
decreases in the costs of our Israel operations, as expressed in U.S. dollars, in 2005.In 2006, the Israeli economy recorded negative inflation of approximately 0.1% where
the NIS revalued against the U.S. dollar by approximately 8.21%. As a result of the
revaluation of the NIS, we experienced increases in the costs of our Israel operations, as
expressed in U.S. dollars, in 2006. In 2007, the Israeli economy recorded positive
inflation of approximately 3.4% where the NIS revalued against the U.S. dollar by
approximately 9%. We experienced increases in the costs of our Israel operations, as
expressed in U.S. dollars, in 2007.

Regarding
our operation in Argentina and the fact that most of PLAs revenues are not denominated
in U.S. dollars, we believe that inflation in Argentina and fluctuations in the exchange
rate between U.S. dollar and Argentinean Peso may have a significant effect on the
business and overall profitability of PLA and as a consequence, on the results of our
operations. In 2002, a severe and rapid currency devaluation in Argentina adversely
affected PLAs U.S. dollar results. This was mainly due to PLAs inability to
increase its Argentinean Peso-denominated prices to its customers, while its major costs
of inventory and infrastructure were denominated in U.S. dollars. In 2004, the U.S. dollar
 Argentinean 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 Argentinean Peso
increased by approximately 2.02% against the U.S. dollar. This increase had no material
effect on our business during 2004. In 2005 the U.S. dollar  Argentinean 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 Argentinean Peso increased by approximately 1.78%
against the U.S. dollar. In 2006 the U.S. dollar  Argentinean Peso exchange rate
fluctuated between 2.979 and 3.062 Pesos to the dollar. From January 1, 2006 to December
31, 2006, the value of the Argentinean Peso increased by approximately 2.79% against the
U.S. dollar. This increase had no material effect on our business during 2006. In 2007 the
U.S. dollar  Argentinean Peso exchange rate fluctuated between 3.062 and 3.149 Pesos
to the dollar. From January 1, 2007 to December 31, 2007, the value of the Argentinean
Peso increased by approximately 2.84% against the U.S. dollar. This increase had no material
effect on our business during 2007.

41

---

---

The
fluctuations of the Mexican Peso are not material to our business as a whole.

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,
in 2007 we entered into a foreign currency hedging transaction for the duration of 2
months, which expired in June 28, 2007 which we accounted $111,000 in 2007 as financial
expenses. We may in the future undertake, as we did in 2007, 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 operating 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. Starting January 1, 2008
the tax authorities announced a significant increase in the valuation of employee vehicles
for the coming years. Its early to evaluate how such resolution might 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 U.S. dollar against the
Argentinean 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.

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

As
of December 31, 2007, we had a negative working capital of $15.3 million, our current
assets to current liabilities ratio was 0.53 and we had cash and cash equivalents of $1.2
million and an unused credit facility of $4.1 million.

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

As
a result, we expect to fund our operations through capital contributions, bank loans,
private and public placements and cash flow from our operations. These sources of
liquidity consist of our long-term and short-term credit facilities,  and our private
placements with U.S. institutional investors, the latest of which we consummated in April 2007. See Item
4 Information on the Company  Recent Developments.

As
of December 31, 2007, we had a long-term credit facility for approximately $33.1 million,
of which $26.9 was provided to our subsidiary Shagrir. $5.5 million are long-term loans in
or linked to the U.S. dollar from banks, $9.3 million are NIS long-term loans from a bank
and others. $17.5 million are long-term loans in NIS adjusted to the Israeli CPI from banks and
others. A $0.7 million loan is in Mexican pesos. For further information regarding our
consolidated long term loans, loans mature and the interest rate structure see notes 9 and
10 to our financial statements.

42

---

---

As
of December 31, 2007, we had a short term credit facility for approximately $9.4 million.
$4.1 million of the short term credit facility remains as of December 31, 2007 available
for our use. The outstanding short term credit facility of $4.1 million is part of our credit
facilities from banks that are utilized according to our needs.

In
September 2007 we received $7 million credit facilities with Bank HaPoalim B.M. to finance
part of our Cellocator acquisition. As of December 31, 2007, $5 million out of the $7 million
was utilized.

In
2007, net cash provided by our continuing operating activities amounted to $8.0 million as
compared to net cash provided from continuing operating activities of $5.4 million in
2006. The increase was primarily attributable to other accounts payable and accrued
expenses in the amount of $2.2 million which consisted mainly of deferred revenues.

In
2007, net cash used in our continuing investing activities was $18.4 million as compared
to $1.3 million in 2006. The increase was primarily attributable to our Cellocator acquisition
in the amount of $16.6 million.

In
2007, net cash provided by financing activities was $5.7 million as compared to net cash
used in financing activities of $10,000 in 2006. Net cash provided by financing activities
of $5.7 million was primarily attributable to financing of the Cellocator acquisition by
receipt of long term loans of $5 million and proceeds from the issuance of shares to
finance the acquisition of $9.6 million off set by repayment of long and short term loans
from banks and other sources of $8.9 million.

Current
liabilities increased from $27.9 million in 2006 to $32.9 million as of December 31, 2006,
mainly due to the liabilities acquired in connection with the acquisition of Cellocator.
Long-term liabilities increased from $28 million in December 31, 2006 to $30 million as of
December 31, 2007 mainly due to loans provided to us by Bank Hapoalim B.M. to fund the
acquisition of Cellocator.

The
acquisitions we made in Israel in 2004 and 2005 had a positive impact on our cash flow
from our operating activities, which is offset by a negative impact on our cash flow used
in financing activities. The acquisition we made in Israel in 2007 of Cellocator
is expected
to have a positive impact on our cash flow from our operating activities, which is offset
by a negative impact on our cash flow used in financing activities. However, we cannot
assure that any such net positive cash flows, if any, will sufficiently cover negative
cash flows expected to be incurred by our newly operative Mexican subsidiary,
PRM, and by our
significant operating expenses, which we expect to incur in connection with our
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, and the Cellocator acquisition 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,
such as Argentina.

43

---

---

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.

Capital
expenditures were $2.3 million in 2006 and $19.3 million in 2007, and in 2006 were used
principally for purchasing  property and equipment and in 2007 were used for purchasing of
property and equipment in the amount of $2.6 million and the acquisition of Cellocator in the amount of $16.6 million.

We
estimate that our capital expenditures for 2008 will total approximately $4.8 million,
substantially all of which will relate to fix assets that serve our road side assistance
and SVR business as well as our pursuit of new business opportunities, of which approximately
56% is estimated to be spent in Israel, 27% in Latin America and 17 % in other countries. We also will need to continue to provide our Mexican subsidiary, PRM, with financing until it has sufficient cash
flows to run its operations. We expect to finance these expenditures primarily from our
cash and cash equivalents, operating cash flow and our credit facilities. However, the
actual amount of our capital expenditures will depend on a variety of factors, including
general economic conditions, changes in the demand for our products, fluctuation of the $
against the NIS and the risks and uncertainties involved in doing business in Israel.

| | 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 products and new
applications as well as enhancements to our existing systems and products are necessary to
compete effectively in the rapidly evolving market. We dedicate a significant portion of
our resources to (i) introducing the best advanced products and systems; (ii) designing
improvements to existing products and applications by working closely with our customer
support department in order to implement suggestions received from our customers investing
in improvements to our production methods and services provision in, and by working in
tandem with our operation department; and (iii) improving the customer
friendliness of our products.

In
order to facilitate future growth we are focusing on expanding our ability to enhance our
existing systems and products and to introducing new versions and new products on a timely
basis. Since we commenced operations we have conducted extensive research and development
activities and we continue to improve our products including the Pointerware network. Our net
expenditures for research and development programs during the years ended December 31,
2007 and December 31, 2006, totaled approximately $1.7 million and $1.2 million
respectively. We expect that we will continue to commit substantial resources to research
and development in the future. As of December 2007, we employed 21 persons in
research and development. Our research and development expenses constituted approximately
3.2% and 2.8% of such sales, in the respective years ended December 31, 2007 and 2006. For
additional information concerning commitments for research development programs see Note
10 to our financial statements included elsewhere in this annual report.

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.

44

---

---

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. As of December 31, 2007, our contingent
obligation to the BIRD Foundation was $2.2 million.

We
hold various United States patents relating to the use of Pointerware 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 or have already lost 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.

Our
proprietary technology also includes software. Much of the software algorithms are also
included and claimed in the patent applications for Pointerware communications technology.
Although software protection is anticipated to be available in the United States, there
can be no assurance that the software will have patent protection in the United States.
Foreign patent protection for software is generally afforded lesser protection than in the
United States. See Item 3.D  Risk Factors  We may be unable to
adequately protect our proprietary rights, which may limit our ability to compete
effectively.

| | 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.

45

---

---

Since
our acquisition of Shagrir in 2004 and certain of the activities and assets of Shagrir
Towing Services in 2005, and due to the acquisition of Cellocator assets in
September 2007, we have expanded our operations and increased our revenues in Israel. The majority of our
revenues are now derived from customers in Israel, with total revenues of $42.8 million.
In 2007, approximately 83% of our revenues were derived from the Israeli market in
comparison to 89% in 2006. The increase of revenues from international sales in 2007
compare to 2006 is mainly attributable to Cellocator acquisition in September 2007. Most
of Cellocator revenues generate from sales out of Israel, since the acquisition was in
September 2007 we expect to increase our ratio of international sales in 2008. Due to very
intense competition in road side assistance in Israel we expect price erosion.

In
2007 our Argentinean subsidiary, PLA, has continued to be negatively affected from the
reduction in car theft rates mainly associated with success of law enforcement programs.

In
February 2005, our subsidiary, PRM, commenced operations in Greater Mexico City. We
currently hold 74% of the issued and outstanding shares of PRM. We still need to provide
it with financing until it has sufficient cash flows to run its operations.

In
2006 we introduced third party Cellular Monitoring Units which provide high functionality
for location based services, utilizing advanced cellular modems with GPS. Following the
acquisition of Cellocator in 2007, we are currently manufacturing our own units and no
longer depend on a third party. These units enable us to provide versatile information as
well as nationwide coverage, utilizing the cellular network in each territory. These units
are specially designed to operate in harsh conditions inside the vehicle; the design takes
into consideration the metallic envelope that surrounds the unit, the temperature and
vibration stress that are imposed on it, the limited and unstable power supply that
characterizes the car power supplies generally, and specific installation requirements of
the variety of cars available in the market. The design takes special concern of these
requirements, with high degree of reliability and flexibility.

As
a result of our Cellocator acquisition, we are expanding our sales in the near future
mainly in Latin America and Europe to the existing customers of Cellocator and new
customers. We believe that price stability is greater for high feature devices in the
stolen vehicle retrieval market, such as those sold by Cellocator, which include many
features, functions, sensors input and connectivity to vehicle computers, whereas prices
for lower feature products have been driven down in recent years due to increased
competition.

As
a result of the acquisitions we made in Israel, the Shagrir operations and technology
manufacturing by Cellocator are currently the most significant operations we have, and are
expected to account for the majority of our business and revenues in the foreseeable
future. In Israel we currently provide the full range of our services.

We
believe the increasing demand for high-quality services and products from automotive
manufacturers, importers and dealers, fleet operators as well as insurance companies, will
present new challenges and create unique business opportunities for our company. We are
currently in the process of evaluating partnerships that should enable us to capitalize on
economies of scale to sustain our growth strategy in existing territories and new ones.

46

---

---

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

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

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

|Contractual Obligations
December 31,
2007 (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         |           |                   | 32,938
|                                                             |  |      
|Long-term loans                                              |  |       |                  | 2         |           |                   | 24,228
|                                                             |  |      
|Accrued severance pay, net                                   |  |       |                  | 3         |           |                   | 864   
|                                                             |  |      
|Management fees to DBSI                                      |  |       |                  | 4         |           |                   | 52    
|                                                             |  |      
|Operating lease obligations                                  |  |       |                  | 5         |           |                   | 1,668 
|                                                             |  |      
|Purchase Obligations                                         |  |       |                  |           |           |                   | 122   
|                                                             |  |      
|Royalties to BIRD                                            |  |       |                  | 6         |           |                   | 2,230 
|                                                             |  |      
|Total contractual obligations                                |  |       |                  |           |           |                   | 62,102
|                                                             |  |       |                  |           |           |                   |       

---

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 and other third parties. For further
          information please see Item 11  Liquidity and Capital
          Resources.

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

4We pay annual fees
$180,000 in consideration for DBSI management services pursuant to an agreement with DBSI,
which is automatically renewable every 12 months unless either party provides prior notice
of termination three months prior to the beginning of a renewal term.

5Operating 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).

47

---

---

|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    | 52  | Chairman of Board of Directors                                 
| | Danny Stern         | 56  | President and CEO                                              
| | Alicia Rotbard      | 62  | External Director                                              
| | Gov Ben Ami         | 81  | External Director                                              
| | Barak Dotan         | 40  | Director                                                       
| | Ken Lalo            | 51  | Director                                                       
| | Yoel Rosenthal      | 53  | Director                                                       
| | Amnon Duchovne-Nave | 52  | Chief Technology Officer                                       
| | Israel Ron          | 52  | General Manager of the Product and Technology Business Division
| | Zvi Fried           | 43  | Vice President and Chief Financial Officer                     
| | Gideon Rossman      | 48  | Vice President, Business Development                           
| |                     |     |                                                                

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 Ltd.

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 PIDC (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.

48

---

---

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.

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.

Amnon Duchovne
Nave is the founder of Cellocator and was its General Manger and
R&D Manager until Pointers acquisition. Mr. Duchovne Nave has been
appointed as Pointers CTO- Chief Technology Officer. He is responsible for the
continuous development of Cellocators family products and Pointers Automotive
Solutions. Mr. Duchovne Nave has over 20 years of experience in communication and
location systems. His resume includes being a system consultant to Israel Aircraft
Industries, the Israeli Air Force, being the head of R&D in the special projects
section of Tadirans communication group, where he was involved in the Mini RPV and
smart weapons communications project, as well as being in charge of the development of the
communications payload for the prestigious Ofek satellite program. Mr.
Duchovne Nave holds a B.Sc. in Electronic Engineering from the Tel Aviv University.
He is a Pointer Ltd. shareholder.

Israel Ronn
Joined Pointer Ltd. as the General Manager of the Product and Technology Business Division
in August 2007. Before joining Pointer, during the past 10 years, Mr. Ronn served as a CEO
of several companies in US and Israel such as Telrad USA and Tenecs. He also lead the
merger of Tenecs and Congruency which created Telrad Connegy. Later he was the CEO of
Cellmax Systems. Mr. Ronn holds a B.A. degree in Computer Science and Economics from Bar
Ilan University and is a graduate of Tafnit Executive Business Administration Program.

Zvi Fried was
appointed our Chief Financial Officer in February 2007. Prior to his appointment Mr. Fried
was Chief Financial Officer of the publicly traded Chim Nir (TASE: CMNR) and Finance
Director for Amdocs (Nasdaq: DOX). Mr. Fried holds a B.A. in Economics and Accounting
degree from Bar Ilan 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.

49

---

---

| | 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, 2007, was approximately
$954,000, 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 $128,000.

In
addition, during 2007 a total of 92,000 options were granted to all persons as a group who
served in the capacity of executive officer and employees. 52,000 options were granted at
an exercise price of $7.01 and 40,000 at an exercise price of $11.24.

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

Our
Articles of Association provide for a board of directors of not less than three nor more
than eleven members. Our board of directors is currently comprised of six members.
Pursuant to the DBSI investment, three of these directors are affiliated with 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. We are subject to the Israeli Companies Law which entered into effect on
February 1, 2000 and was amended most recently in March 2005, and which requires the board
of directors of a public company to determine the number of directors who shall possess
accounting and financial expertise.

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 external
director, the substitute may only be another external director who possesses the same
expertise as the external director being substituted and may not be a regular member of
such 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.

50

---

---

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.

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.

51

---

---

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

Audit Committee

Nasdaq Requirements

Our
ordinary shares are listed for quotation on the NASDAQ Capital Market and we are subject
to the rules of the Nasdaq Marketplace Rules applicable to listed companies. Under the
current Nasdaq rules, a listed company is required to have an audit committee consisting
of at least three independent directors, all of whom are financially literate and one of
whom has accounting or related financial management expertise. Mr. Ken Lalo and our two
outside directors, Ms. Alicia Rotbard and Mr. Gov Ben Ami qualify as independent directors
under the current Nasdaq requirements, and all are members of the Audit Committee. Mr. Ken
Lalo is our audit committee financial expert. In addition, we have adopted an
Audit Committee charter.

Our
Audit Committee assists our board in fulfilling its responsibility for oversight of the
quality and integrity of our accounting, auditing and financial reporting practices and
financial statements and the independence qualifications and performance of our
independent auditors. The Audit Committee also has the authority and responsibility to
oversee our independent auditors, to recommend for shareholder approval the appointment
and, where appropriate, replacement of our independent auditors and to pre-approve audit
engagement fees and all permitted non-audit services and fees.

Israeli Companies
Law Requirements

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.

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.

Remuneration
Committee

The
compensation payable to executive officers must be approved by a majority of the directors
on our board.

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

52

---

---

| | 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
|------------------------ | ------ | ----- | -----
|
|
|
|
|2007                     |        |       |      
|Sales and Marketing      |        |       |      
|Administration           |        |       |      
|Research and Development |        |       |      
|Other                    |        |       |      
|Total                    |        |       |      
|                         |        |       |      

|                         | Israel | Other | Total
|------------------------ | ------ | ----- | -----
|
|
|
|
|2006                     |        |       |      
|Sales and Marketing      |        |       |      
|Administration           |        |       |      
|Research and Development |        |       |      
|Other                    |        |       |      
|Total                    |        |       |      
|                         |        |       |      

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

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.

As
a result of Cellocator acquisition we engaged with Cellocators employees, about 30,
and they employed by us. Most of the employees engaged with us under the success of their
rights. Their compensation is like the compensation of our employees.

53

---

---

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 employees to a fund known as the
Managers Insurance or pension funds. 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
| | -- | ---------------

The
following table details the number of our ordinary shares beneficially owned (including
the shares underlying options or warrants held by such person that are exercisable within
60 days), by our directors and members of our senior management, as of March 31, 2008:

|Name                | Title/Office | Number of Ordinary
Shares Beneficially
Owned | As a % of Outstanding
Ordinary Shares
Beneficially Owned(1)    
|------------------- | ------------ | -------------------------------------------- | ---------------------------------------------------------------
|
|
|
|
|Yossi Ben Shalom    |              |                                              | Chairman of Board of Directors                                 
|Danny Stern         |              |                                              | President and CEO                                              
|Alicia Rotbard      |              |                                              | External Director                                              
|Gov Ben Ami         |              |                                              | External Director                                              
|Barak Dotan         |              |                                              | Director                                                       
|Ken Lalo            |              |                                              | Director                                                       
|Yoel Rosenthal      |              |                                              | Director                                                       
|Zvi Fried           |              |                                              | Chief Financial Officer                                        
|Amnon Duchovne-Nave |              |                                              | Chief Technology Officer                                       
|Israel Ronn         |              |                                              | General Manager of the Product and Technology Business Division
|Gideon Rossman      |              |                                              | Vice President, Business Development                           
|All directors and   |              |                                             
|officers as a group |              |                                              |                                                                
|                    |              |                                              |                                                                

* Less than 1%.

| | (1) | The
percentage of outstanding ordinary shares beneficially owned is based on
          4,612,875 shares outstanding as of March 31, 2008. 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 of March 31, 2008.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | As
office holders of DBSI Investment Ltd., Messrs. Yossi Ben Shalom and Barak
          Dotan may be considered to be the beneficial holders of the 24.36% of our
issued           and outstanding shares held by DBSI Investment Ltd.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | As
the Cellocator founder and principal shareholder of Cellocator prior to its
          acquisition by us, Mr. Amnon Duchovne-Nave may be considered to be the
          beneficial holder of the 3.5% of our issued and outstanding shares received in
          the acquisition.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

54

---

---

# Employee Share Option
Plans

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

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

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

The
following table and notes thereto set forth certain information as of, March 31, 2008,
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.

|Name of Beneficial Owner   | Number of Ordinary Shares
Beneficially Owned* | Percent of
Outstanding Ordinary
Shares Beneficially
Owned*
|-------------------------- | --------------------------------------------- | ----------------------------------------------------------
|
|
|
|
|DBSI Investment Ltd. (1)   |                                               |                                                           
|LB I Group Inc.(2)         |                                               |                                                           
|                           |                                               |                                                           
|Fort Mason Capital LLC (4) |                                               |                                                           

|* | The
percentage of outstanding ordinary shares beneficially owned is based on 4,612,875 shares
outstanding as of March 31, 2008. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission. 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 of March 31, 2008,
notwithstanding the Issuance Limitation or the Funds Issuance Limitation as defined in
footnotes 3 and 5 below. 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.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (1) | As
office holders of DBSI Investment Ltd., Messrs. Barak Dotan and Yossi Ben
               Shalom may be considered to be the beneficial holders of the 20.49% of our
               outstanding shares held by DBSI.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | LB
I Group Inc. is an affiliate of Lehman Brothers Inc., a registered
               broker-dealer. This selling stockholder has represented to us that it (i)
               purchased the securities in the ordinary course of business and (ii) did
not                have an agreement or understanding, directly or indirectly, with any
person to                distribute the securities at the time it purchased the
securities. Lehman                Brothers Holdings Inc., a public reporting company, is
the ultimate parent                company of this selling stockholder.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Includes
190,000 ordinary shares issuable upon the exercise of a warrant. The
               warrants provide that in no event shall they be exercisable to the extent
that                the issuance of shares upon their exercise would result in the
beneficial                ownership by LB I, of more than 4.99% of our outstanding
shares. This mechanism                is termed the Issuance Limitation. LB I has the
express right to waive the                Issuance Limitation upon sixty-one (61) days
written notice to us.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

55

---

---

| | (4) | Fort
Mason Capital, LLC, a Delaware limited liability company                (Capital),
serves as theinvestment manager of, and possesses the                sole power to vote
and the sole power to direct the disposition of all, our                ordinary shares
held by, Fort Mason Master, LP, a Cayman Islands limited                partnership (Master),
and Fort Mason Partners, LP, a Delaware                limited partnership (together with
Master, the Funds), which Funds                held in the aggregate 183,900
of our ordinary shares and, in addition, warrants                exercisable to purchase
167,000 of our ordinary shares described in footnote 5.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Includes
167,000 ordinary shares issuable upon the exercise of warrants held by                the
Funds. The warrants provide that in no event shall they be exercisable to
               the extent that the issuance of shares upon their exercise would result in
the                beneficial ownership by the Funds and their affiliates, of more than
4.99% of                our outstanding shares. This mechanism is termed the Funds
Issuance Limitation.                The Funds have the express right to waive the Funds
Issuance Limitation upon                sixty-one (61) days written notice to us.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
of March 26, 2008 there were approximately 52 record holders of our ordinary shares,
including approximately 12 record holders in the United States (who held approximately 72%
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 Developments.

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

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
approximately $230,000 million, subject to certain conditions.

In
February 2005 we consummated a loan consolidation agreement with Shagrir the terms and
conditions of which govern approximately $ 5.6 million in previous loans made by us to
Shagrir. Interest repayments and repayments of the principal commenced on February 28,
2007, with approximately $184,000 payable annually on account of the interest and
approximately $46,000 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 approximately $900,000 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. 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 approximately $2 million loan
agreement with Shagrir, of which we loaned Shagrir approximately $1.1 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 approximately $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.
In April 2007, the agreement was automatically renewed for an additional 12 month period
and may be automatically renewed for additional 12 month terms unless terminated by
either of the parties.

56

---

---

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 was until the end of year 2007 and we
are in negotiations regarding its renewal.

Subsequently,
on April 25, 2004, we entered into an agreement with the shareholders of Shagrir, to
purchase all 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, and exchanged 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. 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 ($7.6
million) into 43.44% of the shares of Shagrir. As a result, our holdings in Shagrir were
reduced to 56.56%. For information regarding our agreements with Shagrir see Item 4 
Recent Developments.

See
Item 4  Recent Developments.

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

# Not applicable

|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

As
of December 31, 2007, several claims were filed against Shagrir Systems, mainly by
customers. The claims are in an amount aggregating to approximately $0.3 million. The
substance of the claims is the malfunction of Shagrir products, which occurred during the
ordinary course of business. The Companys management is of the opinion that no
material costs will arise to Shagrir Systems in respect to these claims and, therefore, no
provision was recorded in the financial statements in respect of the claims.

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

For
a description of significant events, which took place since the year ending December 31,
2007, see as incorporated by reference in Item 4  Information on the Company
 Recent Developments above.

57

---

---

|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
| | ------------------- | ---- | ---
|
|
|
|
| | 2008 March          |      |    
| | 2008 February       |      |    
| | 2008 January        |      |    
| | 2007 December       |      |    
| | 2007 November       |      |    
| | 2007 October        |      |    
| | 2007 Fourth Quarter |      |    
| | 2007 Third Quarter  |      |    
| | 2007 Second Quarter |      |    
| | 2007 First Quarter  |      |    
| | 2006 Fourth Quarter |      |    
| | 2006 Third Quarter  |      |    
| | 2006 Second Quarter |      |    
| | 2006 First Quarter  |      |    
| |                     |      |    
| | 2007                |      |    
| | 2006                |      |    
| | 2005                |      |    
| | 2004                |      |    
| | 2003                |      |    

In
December 19, 2006, we commenced listing our ordinary shares on the TASE in Israel under
the symbol PNTR The following table sets forth, for the periods indicated, the
high and low reported sales prices, in NIS, of the ordinary shares on the Tel Aviv Stock
Exchange:

| | Period              | High | Low
| | ------------------- | ---- | ---
|
|
|
|
| | 2008 March          |      |    
| | 2008 February       |      |    
| | 2008 January        |      |    
| | 2007 December       |      |    
| | 2007 November       |      |    
| | 2007 October        |      |    
| | 2007 Fourth Quarter |      |    
| | 2007 Third Quarter  |      |    
| | 2007 Second Quarter |      |    
| | 2007 First Quarter  |      |    
| | 2006 December       |      |    
| |                     |      |    

58

---

---

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

# Not applicable

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

Our shares are listed on the NASDAQ
Capital Market under the symbol PNTR and on the Tel Aviv Stock Exchange under
the same symbol.

| | 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.

59

---

---

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 2006, 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) executive vice president, (vii) vice president, (viii) another
manager directly subordinate to the managing director or (ix) 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, no
later than the first board meeting in which such transaction is discussed, 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.

60

---

---

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. 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
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.

61

---

---

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.

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 as provided in
sections 255 and 268 to 275 of the Israeli Companies Law.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------

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.

62

---

---

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 NASDAQ 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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

63

---

---

| |  | 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.
| | - | ----------------------------------------------------------------------------------------------------

| |  | 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
| | -- | ------------------

Acquisition of Cellocator
Ltd.

In
September 2007, we acquired the assets and activities of Cellocator Ltd. and Matan Y.
Communication Tracking Systems Ltd., or Cellocator, a private Israeli company active in
the field of cellular location-based services and technology, in exchange for
approximately US$18.5 million, consisting of (i) approximately US$ 15 million in cash;
(ii) the issuance of 160,000 of our ordinary shares and (iii) a non-tradable debenture
with a face value of $1,921 convertible into 160,000 of our ordinary shares (with fair
value of $ 1,951 as of December 31, 2007). In addition, we paid Cellocator approximately
$1.6 million in connection with the post closing working capital adjustment as part of the
acquisition. In January 2008 the seller of Cellocator decided not to convert the
debenture, thus Cellocator and/or its shareholders hold approximately 3.5% of our issued
and outstanding share capital (on a fully diluted basis). As part of the acquisition, we
agreed to continue to fulfill specified conditions allowing Cellocator to meet particular
existing tax benefit qualifications under Israeli law. Cellocators operations are
included in our technology and products division.

Private Placements with
U.S. Institutional Investors

On
April 2, 2007, we entered into and consummated a share purchase agreement with a group of United States institutional investors for the purchase of
805,000 of our ordinary shares for an aggregate price of $8.5M. Pursuant to the
transaction, the investors were also issued warrants to purchase 402,500 of our ordinary
shares, such that for each one share purchased the investors were entitled to a warrant
to purchase half a share. The warrants are exercisable into ordinary shares, at an
exercise price per share of $12.6 and will be exercisable for a period of five years.
Following the transaction two of the investors, individually, beneficially hold more than 5% of our
share capital.

Private Placements with
Israeli Institutional Investors

On
December 28, 2006 we entered into a Share Purchase Agreement with a group of Israeli
institutional investors for the purchase of 425,000 of our ordinary shares for an
aggregate price of $4.7 million, out of which, an amount of $2,586,000 was received as of
December 31, 2006. The transaction was consummated on January 12, 2007. Pursuant to the
transaction, the investors were also issued warrants to purchase 212,500 of our ordinary
shares, such that for each one share purchased the investors were entitled to a warrant to
purchase half an ordinary share. The warrants are exercisable into ordinary shares, at an
exercise price per share of $13 and will be exercisable for a period of four years. None
of the investors were, or following the transaction have since become, our affiliates.

64

---

---

Management Services
Agreement with Gandyr Group and Egged

On
November 16, 2004, Shagrir entered into a management services agreement with the Gandyr
group and Egged, pursuant to which the Gandyr group and Egged were to grant management
services to Shagrir, commencing March 1, 2007, in consideration for approximatel NIS 1
million per year. Pursuant to the management services agreement, in the event that
the Gandyr group or Egged did not convert in full the convertible securities which
they held at the time, then the parties would renegotiate the management fees. Egged
elected not to convert its convertible loan.

For
a summary of our other material contracts, see Item 4  Information on the
Company  Recent Developments and Item 6 Related Party Transactions,
which is incorporated herein by reference.

| | 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.

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 subject to Corporate Tax on their taxable income. On July 25,
2005, the Knesset (Israeli Parliament) approved the Law of 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 2005  34%, in 2006
 31%, in 2007  29%, in 2008  27%, in 2009  26% and in 2010 and
thereafter  25%. However, the effective tax rate payable by a company which derives
income from an approved enterprise (as further discussed below) may be considerably less.

65

---

---

Special Provisions
Relating to Taxation Under Inflationary ConditionsUnder the Income Tax (Inflationary
Adjustments) Law, 1985 (the Israeli law), results for tax purposes are
measured in real terms, in accordance with the changes in the Israeli Consumer Price Index
(Israeli CPI). Accordingly, until 2002, results for tax purposes were measured
in terms of earnings in NIS after certain adjustments for increases in the Israeli CPI.
Commencing in taxable year 2003, the Company has elected to measure its taxable income and
file its tax return under the Israeli Income Tax Regulations (Principles Regarding the
Management of Books of Account of Foreign Invested Companies and Certain Partnerships and
the Determination of Their Taxable Income), 1986. Such an elective obligates the Company
for three years. Accordingly, commencing taxable year 2003, results for tax purposes are
measured in terms of earnings in dollar. In February 2008, the Knesset
(Israeli parliament) passed an amendment to the Income Tax (Inflationary Adjustments) Law,
1985, which limits the scope of the law starting 2008 and thereafter. Starting 2008, the
results for tax purposes will be measured in nominal values, excluding certain adjustments
for changes in the Consumer Price Index carried out in the period up to December 31, 2007.
The amended law includes, inter alia, the elimination of the inflationary additions and
deductions and the additional deduction for depreciation starting 2008.

# 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 Capital Investments, 1959

Certain
of our facilities have been granted Approved Enterprise status under the Law
for the Encouragement of Capital Investments, 1959, as amended, or the Investment Law. The
Investment Law provides that a capital investment in eligible facilities may, upon
application to the Israel Investment Center of the Ministry of Industry and Trade of the
State of Israel (referred to as the Investment Center), be designated as an Approved
Enterprise. Each certificate of approval for an Approved Enterprise relates to a specific
investment program delineated both by its financial scope, including its capital sources
and its physical characteristics, for example, the equipment to be purchased and utilized
pursuant to the program. The tax benefits derived from any such certificate of approval
relate only to taxable income attributable to the specific Approved Enterprise.

A
recent amendment to the Investment Law which came into effect as of April 1, 2005, or the
Amendment, significantly changed the provisions of the Investment Law. The Amendment
limits the scope of enterprises which may be approved by the Investment Center by
determining criteria for the approval of a facility as an Approved Enterprise, such as
provisions generally requiring that at least 25% of the income of an Approved Enterprise
will be derived from export. Additionally, as explained below, the Amendment sets forth
major changes in the manner in which tax benefits are awarded under the Investment Law
whereby companies no longer require Investment Center approval (and Approved Enterprise
status) in order to qualify for tax benefits. However, the Investment Law provides that
terms and benefits included in any certificate of approval already granted will remain
subject to the provisions of the Investment Law as in effect on the date of such approval.
Therefore the tax benefits granted to our Approved Enterprises under the Investment Law
will generally not be subject to the provisions of the Amendment.

# Tax Benefits Prior to
the Amendment

In
general, taxable income of a company derived from an Approved Enterprise was subject to
corporate tax at the maximum rate of 25% rather than the rates stated above (this will
also apply to Approved Enterprises approved after the Amendment, as explained below). The
25% corporate tax rate applies for a period of time termed the benefit period.
The benefit period is a period of seven years commencing with the year in which the
Approved Enterprise first generated taxable income. In any event, the benefit period is
limited to 12 years from the commencement of production or 14 years from the year of
receipt of approval, whichever is earlier. Under certain circumstances (as further
detailed below), the benefit period may extend to a maximum of ten years from the
commencement of the benefit period. In the event that a company is operating under more
than one approval or that only part of its capital investments are approved, or a Mixed
Enterprise, its effective Company Tax rate is the result of a weighted combination of the
various applicable rates.

66

---

---

A
company which qualifies as a Foreign Investors Company is entitled to an
extended benefit period and to further reductions in the tax rate normally applicable to
Approved Enterprises. Subject to certain conditions, a Foreign Investors
Company is a company in which persons who are not residents in Israel invested more
than 25% of its combined shareholders investment in share capital (in terms of
rights to profits, voting and the appointment of directors) and in long term
shareholders loans, as defined in the Investment Law. The percentage owned by
nonresidents of Israel for any tax year will be determined by the lowest percentage of any
of the above rights held by nonresidents during that year. Such a company will pay
corporate tax at reduced rates for an extended ten-year (rather than the otherwise
applicable seven-year) period as detailed below:

| | Level of Foreign Investment | Corporate Tax Rate | Benefit period (years)
| | --------------------------- | ------------------ | ----------------------
|
|
|
|
| | Over 0% but less than 25%   |                    |                       
| | Over 25% but less than 49%  |                    |                       
| | Over 49% but less than 74%  |                    |                       
| | Over 74% but less than 90%  |                    |                       
| | 90% or more                 |                    |                       
| |                             |                    |                       

There
can be no assurance that the above-mentioned shareholding proportion will be reached by
us.

Prior
to the Amendment, a company owning an Approved Enterprise approved after April 1, 1986 (or
prior thereto provided no government grants or loans had previously been granted regarding
such enterprise) was entitled to elect (as we have) to forego certain Government grants
extended to Approved Enterprises in return for an alternative track of tax
benefits, or the Alternative Track. Under the Alternative Track, a companys
undistributed income derived from an Approved Enterprise is exempt from corporate tax for
a period of between two and ten years from the first year of taxable income, depending on
the geographic location of the Approved Enterprise within Israel, and such company is
eligible for the reduced tax rates under the Investment Law for the remainder of the
benefit period as mentioned above.

The
entitlement to the above benefits is conditional upon fulfillment of the conditions
stipulated by the law, regulations published thereunder and the instruments of approval
for the specific investments in the Approved Enterprise. In the event of failure to comply
with these conditions, the benefits may be canceled and a company may be required to
refund the amount of the benefits, in whole or in part, with the addition of linkage
differences, interest and penalties.

Should
we derive income from sources other than the Approved Enterprise during the relevant
periods of benefits, such income will be taxable at regular corporate tax rates.

A
company that elected the Alternative Track and that subsequently pays a dividend out of
income derived from the Approved Enterprise(s) during the tax exemption period will be
subject to corporate tax in the year the dividend is distributed in respect of the amount
distributed (including the corporate tax thereon), at the rate that would have been
applicable had the company not elected the Alternative Route (10%-25%, depending on the
level of foreign investment in the company, as explained above). In addition, the dividend
recipient is taxed at the reduced rate applicable to dividends from Approved Enterprises
(15%), if the dividend is distributed during the tax exemption period or within a
specified period thereafter (In the event, however, that the company qualifies as a
Foreign Investors Company, there is no such time limitation). This tax must be
withheld by the company at source, regardless of whether the dividend is converted into
foreign currency.

Subject
to certain provisions concerning income subject to the Alternative Route, all dividends
are considered to be attributable to the entire enterprise and the effective tax rate is
the result of a weighted combination of the various applicable tax rates.

67

---

---

The
Investment Law also provides that an Approved Enterprise is entitled to accelerated
depreciation on its property and equipment that are included in an approved investment
program.

Grants
and certain other incentives received by a company in accordance with the Investment Law
remain subject to final ratification by the Israel Investment Center and final
determination by the Israel Tax Authority. Such ratification and determination are
conditional upon fulfillment of all of the terms of the approved program.

# Tax Benefits under the
Amendment

As
a result of the Amendment, it is no longer required to acquire Approved Enterprise status
in order to receive the tax benefits previously available under the Alternative Track of
benefits and therefore companies need not apply to the Investment Center for this purpose.
However, the Investment Center will continue to grant Approved Enterprise status to
companies seeking governmental grants. A company may claim the tax benefits offered by the
Investment Law directly in its tax returns, provided that its facilities meet the criteria
for tax benefits set forth in the Amendment, or a Benefited Enterprise. Companies are also
entitled to approach the Israeli Tax Authority and request for a pre-ruling regarding
their eligibility for benefits under the Amendment. The Amendment includes provisions
intended to ensure that a company will not enjoy both government grants and tax benefits
for the same investment program.

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

The
tax benefits available under the Amendment to qualifying income of a Benefited Enterprise
are determined by the geographic location of the Benefited Enterprise in Israel. The
Investment Law divides the country into three zones  A, B and C, so that a Benefited
Enterprise operating in Zone A (which generally includes areas remote from the center of
Israel) will receive the greatest benefits and Benefited Enterprises in Zone C will
receive the least benefits.

The
Amendment provides that a company producing income from a Benefited Enterprise in Zone A
may elect either that (i) the undistributed income derived from the Benefited Enterprise
will be fully tax exempt for the entire benefit period described below, or tax exemption,
in which case the ordinary provisions described below concerning the taxation of the
company and shareholder for distribution of dividends will apply; or (ii) that the income
from its Benefited Enterprise will be subject to corporate tax at a rate of a 11.5%, in
which case dividends paid out of such income to a foreign resident will be taxed at a rate
of 4% and the company will not be subject to additional tax upon dividend distribution.
Further benefits are available in the event of certain large investments by multinational
companies. Benefited Enterprises located in Zones B and C will be exempt from tax for six
and two years, respectively, and subject to tax at a rate of 10%-25% for the remainder of
the benefit period, depending on the extent of foreign investment in the Company, as
described above.

Similarly
to a company which elected the Alternative Track before the amendment, dividends paid out
of income derived by a Benefited Enterprise, or out of dividends received from a company
whose income is derived from a Benefited Enterprise, are generally subject to withholding
tax at the rate of 15%, such tax being deductible at source. The reduced withholding tax
rate of 15% is limited to dividends and distributions out of income derived during the
benefit period and actually paid at any time up to 12 years thereafter. A company
qualifying for tax benefits under the Amendment which pays a dividend out of income
derived by its Benefited Enterprise during the tax exemption period will be subject to
corporate tax in respect of the gross amount of the dividend. The rate of such corporate
tax will be 25%, which is the rate to which a Benefited Enterprise is generally subject.
Such tax rate is lower in the case of a qualified Foreign Investors
Company. The dividend recipient is subject to tax at the rate of 15% on the amount
received which tax is deductible at source.

68

---

---

The
period for which tax benefits are available under the Amendment is also determined by the
geographical location of the Benefited Enterprise in Israel. The benefit period for
Benefited Enterprises in Zone A will end on the earlier of (i) a period of ten years from
the tax year in which the company first derived taxable income from the Benefited
Enterprise, or the Commencement Year; or (ii) twelve years (or in certain cases fourteen
years) from the first day of the Year of Election. The benefit period for Benefited
Enterprises in Zones B and C will extend until the earlier of (i) seven years from the
Commencement Year or (ii) 12 years from the first day of the Year of Election. This period
may be extended for Benefited Enterprises owned by a Foreign Investors
Company during all or part of the benefit period.

Additionally,
the Amendment sets forth a minimal amount of foreign investment required for a company to
be regarded a Foreign Investors Company.

There
can be no assurance that we will attain approval for additional tax benefits under the
Amendment, or receive approval for Approved Enterprises in the future.

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

Under
the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement
Law, Industrial Companies (as defined below) are entitled to the following tax benefits:

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

(b)
          The right to elect, under specified conditions, to file a consolidated tax
          return with other related Israeli Industrial Companies.

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

(d)
          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 some of our shareholders pursuant to a grand-fathering
          clause; the recent tax reform repealed the grandfathered exemption for any
gains           accrued from January 1, 2003.)

(e)
          Accelerated depreciation rates on equipment and buildings.

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

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

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.

69

---

---

From
January 1, 2003, capital gains from the sale of our securities were generally subject to
tax. On January 1, 2006, an amendment to the Israeli tax regime became effective (the
2006 Tax Reform). The 2006 Tax Reform significantly changed the tax rates
applicable to income derived from securities.

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.

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

Non-residents
of Israel are subject to income tax on income accrued or derived from sources in
Israel.  These sources of income include passive income such as dividends, royalties
and interest, as well as non-passive income from services rendered in Israel.  On
distributions of dividends other than bonus shares, or stock dividends, to Israeli
individuals and foreign resident individuals and corporations we would be required to
withhold income tax at the rate of 20%.  If the income out of which the dividend is
being paid is attributable to an Approved Enterprise under the Law for the Encouragement
of Capital Investments, 1959, the rate is 15%.  A different rate may be provided for
in a treaty between Israel and the shareholders country of residence.  Under
the U.S.-Israel tax treaty, if the income out of which the dividend is being paid is not
attributable to an Approved Enterprise, then income tax with respect to shareholders that
are U.S. corporations holding at least 10% of our voting power in the twelve-month period
preceding the distribution of such dividends, is required to be withheld at the rate of
12.5%.

70

---

---

Residents
of the United States will generally have taxes in Israel withheld at source. Such persons
generally would be entitled to a credit or deduction for United States Federal income tax
purposes for the amount of such taxes withheld, subject to limitations applicable to
foreign tax credits. Non-residents of Israel are subject to income tax on income accrued
or derived from sources in Israel.  These sources of income include passive income
such as dividends, royalties and interest, as well as non-passive income from services
rendered in Israel.  On distributions of dividends other than bonus shares, or stock
dividends, to Israeli individuals and foreign resident individuals and corporations we
would be required to withhold income tax at the rate of 20%.  If the income out of
which the dividend is being paid is attributable to an Approved Enterprise under the Law
for the Encouragement of Capital Investments, 1959, the rate is 15%.  A different
rate may be provided for in a treaty between Israel and the shareholders country of
residence.  Under the U.S.-Israel tax treaty, if the income out of which the dividend
is being paid is not attributable to an Approved Enterprise, then income tax with respect
to shareholders that are U.S. corporations holding at least 10% of our voting power in the
twelve-month period preceding the distribution of such dividends, is required to be
withheld at the rate of 12.5%.

Residents
of the United States will generally have taxes in Israel withheld at source. Such persons
generally would be entitled to a credit or deduction for United States Federal income tax
purposes for the amount of such taxes withheld, subject to limitations applicable to
foreign tax credits.

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

# Not Applicable

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

# Not Applicable

| | 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.

71

---

---

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

In
the course of our normal operations, we are exposed to market risks including
fluctuations in foreign currency exchange rates, interest rates and the Israeli CPI.

Foreign exchange risk

The
majority of our revenues is generated in or linked to U.S. dollars (Dollars).
In addition, a substantial portion of our costs is incurred in Dollars. We believe that
the Dollar is the currency of the primary economic environment in which we operate. Thus,
the functional and reporting currency of the Company is the Dollar.

For
Shagrir whose functional currency has been determined to be its local currency, the new
Israeli shekel (NIS) is its functioning and reporting currency. For PLA, whose
functional currency has been determined to be its local currency, the Argentine peso is
its functioning and reporting currency, and for Pointer Mexico, whose functional currency
has been determined to be its local currency, the Mexican peso is its functioning and
reporting currency. 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 (loss), in shareholders equity (deficiency).

As
of December 31, 2007, accumulated other comprehensive loss increased by $1,668
million compared to December 31, 2006. As of December 31, 2006, accumulated
other comprehensive loss decreased by $1,236 million compared to December 31, 2005.

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.

Our
revenues and expenses generated by Shagrir are mostly denominated in NIS and are therefore
exposed to exchange rate fluctuations between the NIS and the Dollar. As of December 31,
2007 we had net assets of $0.7 million and net income of $148,000, denominated in the NIS.
Assuming an adverse foreign exchange rate fluctuation, we would experience a change in
Dollar revenues and net income. A hypothetical 10% devaluation of the Dollar against the
NIS would thus result in approximately $56,000 net decrease in our earnings

Our
revenues and expenses generated by PLA are mostly denominated in Argentinian Pesos and are
therefore exposed to exchange rate fluctuations between the Argentinian Peso and the
Dollar. As of December 31, 2007 we had net assets of $296,000 and net expenses of
$164,000, denominated in the Argetinian Peso. Assuming an adverse foreign exchange rate
fluctuation, we would experience a change in Dollar revenues and net income. A
hypothetical 10% devaluation of the Dollar against the Argentinian Peso would thus result
in approximately $46,000 net decrease in our earnings.

72

---

---

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. As of December 31, 2007 we had
net assets of $116,000 and net expenses of $866,000 million denominated in the Mexican
Peso. Assuming an adverse foreign exchange rate fluctuation, we would experience a change
in U.S. dollar revenues and net income. A hypothetical 10% devaluation of the US dollar
against the Mexican Peso would thus result in approximately $98,000 net decrease in our
earnings.

Interest rate risk

Our
exposure to market rate risk for changes in interest rates relates primarily to funds
borrowed by us from banks and other. In 2007 we used interest derivative financial
instruments. See also disclosure about hedging in Item 5  Impact of Exchange Rate
Fluctuations. As of December 31, 2007, we had total loans borrowed bearing variable
interest rates of $ 5.7 million.

The
net decrease in our earnings for the next year resulting from an increase of 10% in
variable interest rates will be approximately $41,000 assuming all other variables are
constant.

Israeli CPI

Our exposure to market rate risk for
changes in CPI relates primarily to loans borrowed by us from banks and other. As of
December 31, 2007, we had total loans borrowed linked to CPI of $ 18 million. The net
decrease in our earnings for the next year resulting from an increase of 10% in variable
interest rates will be approximately $18,000 assuming all other variables are constant.

The table below details the balance
sheet exposure by currency and interest rates:

|                           |  | Expected Maturity Dates
|-------------------------- |  | -----------------------
|
|
|
|Assets:                    |  |                        
|                           |  |                        
|Cash - in U.S. dollars     |  |                        
|Cash- In other NIS         |  |                        
|Cash- In other currency:   |  |                        
|                           |  |                        
|Liabilities:               |  |                        
|                           |  |                        
|Short-term bank credit     |  |                        
|In NIS:                    |  |                        
|In other currency          |  |                        
|                           |  |                        
|Long-term loans (including |  |                        
|current maturities)        |  |                        
|In U.S. dollars:           |  |                        
|In NIS                     |  |                        
|In other currency          |  |                        
|                           |  |                        

73

---

---

|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)
Evaluation of Disclosure Controls and Procedures

Management
of the Company, with the participation of the Chief Executive Officer and the Chief
Financial Officer, evaluated the effectiveness of the design and operation of the
Companys disclosure controls and procedures, as of December 31, 2007. The term
disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other procedures of a company that
are designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized
and reported, within the time period specified in the SECs rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated to the
companys management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding adequate disclosure.
Management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives and
management necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of the Companys disclosure
controls and procedures as of December 31, 2007, our Chief Executive Officer and Chief
Financial Officer concluded that, as of such date, the Companys disclosure controls
and procedures were effective at the reasonable assurance level.

(b)
Management's Report on Internal Control Over Financial Reporting

Management
of the Company is responsible for establishing and maintaining adequate internal control
over financial reporting as defined in Rule 13a-15(f) under the Exchange Act.
Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.

Management
conducted an assessment of the effectiveness of the Companys internal control over
financial reporting as of December 31, 2007 based on the framework published by the
Committee of Sponsoring Organizations of the Treadway Commission, Internal Control  Integrated
Framework. As permitted, our management excluded from its assessment the assets and
activities of Cellocator Ltd. and Matan Y. Communication and Tracking Systems, or
Cellocator, which we acquired in September 2007, and which accounted for approximately 7%
of our revenues for the fiscal year ended December 31, 2007. Based on this assessment,
our Chief Executive Officer and Chief Financial Officer have concluded that, as of
December 31, 2007, our internal control over financial reporting is effective based on
those criteria.

74

---

---

(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, 2007 and 2006.

|                      | 2007 | 2006
|--------------------- | ---- | ----
|
|
|
|
|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 May 2007 and amended in September
          2007.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

75

---

---

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 2007 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, incorporated by reference to Registrants Annual Report
on Form 20-F, filed with the Commission on June 27, 2006.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.1 | English
translation of Hebrew language translation of Agreement between the Company, Matan Y.
Communication Tracking Systems Ltd. and Amnon Duchovna-Naveh dated July 16, 2007,
incorporated by reference to Registrants Registration Statement on Form F-3/A,
filed with the Commission on September 24, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 | Securities
Purchase Agreement among the Company and the Investors as defined therein, dated April 2,
2007, incorporated by reference to Registrants Report of Foreign Issuer on Form
6-K, filed with the Commission on April 3, 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 | Registration
Rights Agreement among the Company and the Investors as defined therein, dated April 2,
2007, incorporated by reference to Registrants Report of Foreign Issuer on Form
6-K, filed with the Commission on April 3, 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 | Form
of Ordinary Share Purchase Warrant issued to the investor parties to the Securities
Purchase Agreement, dated April 2, 2007, incorporated by reference to Registrants
Report of Foreign Issuer on Form 6-K, filed with the Commission on April 3, 2007.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

76

---

---

|4.5 | English
Translation of Hebrew Language Order Form and Warrant issued in Israeli Private Placement
in January 2007, incorporated by reference to Registrants Form 20F/A, filed with
the Commission on July 31, 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|14.1 | Consent
of Kost, Forer, Gabbay & Kasierer Certified Public Accountants (Israel).
|---- | --------------------------------------------------------------------------------

|14.2 | Consent
of Grant Thornton Argentina S.C. Certified Public Accountants (Argentina).
|---- | ----------------------------------------------------------------------------------

|14.3 | Consent
of Salles, Sainz - Grant Thornton, S.C. Certified Public Accountants (Mexico).
|---- | --------------------------------------------------------------------------------------

77

---

---

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

April 8, 2008.

78

---

---

# POINTER TELOCATION
LTD. AND ITS SUBSIDIARIES

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2007

# 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           | F-6       
|                                                       
|Consolidated Statements of Cash Flows                   | F-7 - F-8 
|                                                       
|Notes to Consolidated Financial Statements              | F-9 - F-44
|                                                        |           



---

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders of

# POINTER TELOCATION LTD.

We
have audited the accompanying consolidated balance sheets of Pointer Telocation Ltd.
(the Company) and its subsidiaries as of December 31, 2007 and 2006 and the
related consolidated statements of operations, changes in shareholders equity and
cash flows for each of the three years in the period ended December 31, 2007. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We did not audit the financial statements of two subsidiaries, whose financial statements
reflect total assets constituting 3.7% and 2.6% as of December 31, 2007 and 2006,
respectively, and total revenues constituting 6.5%, 5.2% and 5.7% of the related
consolidated totals for the years ended December 31, 2007, 2006 and 2005,
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,
2007 and 2006 and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles.

As
discussed in Note 2o to the consolidated financial statements, in 2006 the Company adopted
statement of Financial Accounting Standard Board No. 123 (revised 2004) Share Based
Payment.

|                 |                                 
|---------------- | --------------------------------
|
|
|
|
|                 | /s/ KOST FORER GABBAY & KASIERER
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|April 8, 2008    | A Member of Ernst & Young Global
|                 |                                 

F - 2

---

---



REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

|                                         |                           
|---------------------------------------- | --------------------------
|                                         | Grant Thornton Argentina  
|                                         | Av. Corrientes 327 piso 3o
|                                         | C1043AAD - Buenos Aires   
|                                         | Argentina                 
|                                         |                           
|                                         | T (54 11) 4105 0000       
|To the Shareholders of                   | F (54 11) 4105 0100       
|Pointer Localización y Asistencia
  S.A. | E post@gtar.com.ar        
|(Previously named Tracsat S.A.)          | www.gtar.com.ar           

We have audited the accompanying balance sheets of
Pointer Localización y Asistencia S.A. (Previously named Tracsat S.A.) (an
Argentine corporation) as of December 31, 2007 and 2006, and the related
statements of operations, changes in shareholders deficiency, and cash flows
for each of the three years in the period ended December 31, 2007. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Bord (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform an audit of  its internal control over financial
reporting. Our audit 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 includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to
above present fairly, in all material respects, the financial position of
Pointer Localización y Asistencia S.A. (previously named Tracsat S.A.) as of
December  31, 2007 and 2006 and the results
of its operations and cash flows for each of the three years in the period ended
December 31, 2007 in conformity with accounting principles generally accepted in
the United  States of America.

GRANT THORNTON ARGENTINA S.C.




Buenos Aires, Argentina
April 7, 2008




---

---

|                                                 | 
|------------------------------------------------ | 
|Pointer
  Recuperación de México, S. A. de C. V.
|                                                
|                                                

Certified Public AccountantsMember of Grant Thornton International

Report of Independent Registered
Public Accounting Firm

Board
of Directors and ShareholdersPointer Recuperación de México, S. A de C. V.

We
have audited the accompanying balance sheets of Pointer Recuperación de México,
S.A de C.V. (based in Mexico) as of December 31, 2007 and 2006, and the related
statements of operations, changes in shareholders equity and cash flows, for each of
the three years in the period ended December 31, 2007. These financial statements
are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We
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. The Company is not required to have,
nor were we engaged to perform an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amount and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Pointer Recuperación de México,
S. A. de C. V. as of December 31, 2007 and 2006, and the related statements of
operations, changes in shareholders equity and cash flows, for each of the
three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted
in the United States of America.

SALLES,
SAINZ  GRANT THORNTON, S.C.

Rogelio Avalos
Partner




Mexico City, MEXICO
January 25, 2008




---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
|--------------------------------------------
|                                            
|CONSOLIDATED BALANCE SHEETS                 
|                                            
|U.S. dollars in thousands                   

|                                                                               | December 31,
|------------------------------------------------------------------------------ | ------------
|
|
|
|
|ASSETS                                                                         |             
|                                                                               |             
|CURRENT ASSETS:                                                                |             
|Cash and cash equivalents                                                      |             
|Trade receivables (net of allowance for doubtful accounts of $321 and $ 302 at |             
|December 31, 2007 and 2006, 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)                                           |             
|Deferred income taxes                                                          |             
|Other intangible assets, net (Note 6)                                          |             
|Goodwill                                                                       |             
|                                                                               |             
|                                                                               |             
|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               
|-----------------------------------------------------------
|                                                           
|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)                     |              | 
|Other long-term liabilities                                                |              | 
|Accrued severance pay                                                      |              | 
|Convertible debentures (Note 11)                                           |              | 
|                                                                           |              | 
|                                                                           |              | 
|                                                                           |              | 
|                                                                           |              | 
|                                                                           |              | 
|MINORITY INTEREST                                                          |              | 
|                                                                           |              | 
|                                                                           |              | 
|SHAREHOLDERS' EQUITY:                                                      |              | 
|Share capital (Note 13) -                                                  |              | 
|Ordinary shares of NIS 3 par value -                                       |              | 
|Authorized: 8,000,000 shares at December 31, 2007 and 2006; Issued and     |              | 
|outstanding: 4,612,875 and 3,222,875 shares at December 31, 2007 and 2006, |              | 
|respectively                                                               |              | 
|Additional paid-in capital                                                 |              | 
|Receipts on account of shares                                              |              | 
|Accumulated other comprehensive income                                     |              | 
|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     
|-------------------------------------------------
|                                                 
|CONSOLIDATED STATEMENTS OF OPERATIONS            
|                                                 
|U.S. dollars in thousands (except per share data)

|                                                               | Year ended December 31,
|-------------------------------------------------------------- | -----------------------
|
|
|
|
|Revenues (Note 17b):                                           |                        
|Products                                                       |                        
|Services                                                       |                        
|                                                               |                        
|                                                               |                        
|Total revenues                                                 |                        
|                                                               |                        
|                                                               |                        
|Cost of revenues:                                              |                        
|Products                                                       |                        
|Services                                                       |                        
|Amortization of intangible assets                              |                        
|                                                               |                        
|                                                               |                        
|Total cost of revenues                                         |                        
|                                                               |                        
|                                                               |                        
|Gross profit                                                   |                        
|                                                               |                        
|                                                               |                        
|Operating expenses:                                            |                        
|Research and development, net                                  |                        
|Selling and marketing                                          |                        
|General and administrative                                     |                        
|Amortization of intangible assets and impairment of long-lived |                        
|assets (Note 5c)                                               |                        
|Other income, net (Note 1g)                                    |                        
|                                                               |                        
|                                                               |                        
|Total operating expenses                                       |                        
|                                                               |                        
|                                                               |                        
|Operating income                                               |                        
|Financial expenses, net (Note 18a)                             |                        
|Other expenses (income), net (Note 18b)                        |                        
|                                                               |                        
|                                                               |                        
|Income (loss) before taxes on income                           |                        
|Taxes on income                                                |                        
|                                                               |                        
|                                                               |                        
|Income (loss) before minority interest                         |                        
|Minority interest                                              |                        
|                                                               |                        
|                                                               |                        
|Net income (loss)                                              |                        
|                                                               |                        
|                                                               |                        
|Basic net earnings (loss) per share (Note 14)                  |                        
|                                                               |                        
|                                                               |                        
|Diluted net earnings (loss) per share (Note 14)                |                        
|                                                               |                        

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

F - 5

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES 
|---------------------------------------------
|                                             
|STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
|                                             
|U.S. dollars in thousands (except share data)

|                                         | Number of
shares | Share
capital | Additional
paid-in
capital | Deferred
stock-based
compensation | Receipts
on account
of shares | Accumulated
other
comprehensive
loss | Accumulated
deficit | Total
comprehensive
income
(loss) | Total
shareholders'
equity
|---------------------------------------- | ---------------- | ------------- | -------------------------- | --------------------------------- | ----------------------------- | ------------------------------------ | ------------------- | --------------------------------- | --------------------------
|
|
|
|
|Balance as of January 1, 2005            |                  |               |                            | 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               |                                   |                           
|                                         |                  |              
|Reclassification of deferred stock       |                  |              
|compensation into additional paid-in     |                  |              
|capital upon adoption of SFAS 123(R)     |                  |               |                            | -                                 |                               |                                      | -                   |                                   |                           
|Stock-based compensation expenses        |                  |               |                            | -                                 |                               |                                      | -                   |                                   |                           
|Exercise of warrants and stock options   |                  |               |                            | 743,855                           |                               |                                      | 460                 |                                   |                           
|Receipts on account of shares            |                  |               |                            | -                                 |                               |                                      | -                   |                                   |                           
|Comprehensive income:                    |                  |              
|Foreign currency translation adjustments |                  |               |                            | -                                 |                               |                                      | -                   |                                   |                           
|Net income                               |                  |               |                            | -                                 |                               |                                      | -                   |                                   |                           
|                                         |                  |               |                            |                                   |                               |                                      |                     |                                   |                           
|Total comprehensive income               |                  |               |                            |                                   |                               |                                      |                     |                                   |                           
|                                         |                  |               |                            |                                   |                               |                                      |                     |                                   |                           
|                                         |                  |              
|Balance as of December 31, 2006          |                  |               |                            | 3,222,875                         |                               |                                      | 2,140               |                                   |                           
|                                         |                  |              
|Issuance of shares                       |                  |               |                            | 1,390,000                         |                               |                                      | 999                 |                                   |                           
|Stock-based compensation expenses        |                  |               |                            | -                                 |                               |                                      | -                   |                                   |                           
|Receipts on account of shares            |                  |               |                            | -                                 |                               |                                      | -                   |                                   |                           
|Comprehensive income:                    |                  |              
|Foreign currency translation adjustments |                  |               |                            | -                                 |                               |                                      | -                   |                                   |                           
|Net loss                                 |                  |               |                            | -                                 |                               |                                      | -                   |                                   |                           
|                                         |                  |               |                            |                                   |                               |                                      |                     |                                   |                           
|Total comprehensive income               |                  |               |                            |                                   |                               |                                      |                     |                                   |                           
|                                         |                  |               |                            |                                   |                               |                                      |                     |                                   |                           
|                                         |                  |              
|Balance as of December 31, 2007          |                  |               |                            | 4,612,875                         |                               | $                                    | 3,139               |                                   | $                         
|                                         |                  |               |                            |                                   |                               |                                      |                     |                                   |                           

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

F - 6

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
|--------------------------------------------
|                                            
|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 operating activities:                               |                        
|Depreciation, amortization and impairment                       |                        
|Accrued interest and exchange rate changes of convertible       |                        
|debenture and long-term loans                                   |                        
|Accrued severance pay, net                                      |                        
|Gain from sale of property and equipment, net                   |                        
|Gain from realization of investment in subsidiary, net          |                        
|Amortization of deferred stock-based compensation               |                        
|Minority interest in earnings of subsidiary                     |                        
|Decrease (increase) in trade receivables, net                   |                        
|Decrease (increase) in other accounts receivable and prepaid    |                        
|expenses                                                        |                        
|Increase in inventories                                         |                        
|Write-off of inventories                                        |                        
|Deferred income taxes                                           |                        
|Decrease (increase) in long-term accounts receivable            |                        
|Increase (decrease) in trade payables                           |                        
|Increase (decrease) in other accounts payable and accrued       |                        
|expenses                                                        |                        
|                                                                |                        
|                                                                |                        
|Net cash provided by operating activities                       |                        
|                                                                |                        
|                                                                |                        
|Cash flows from investing activities:                           |                        
|                                                                |                        
|Proceeds from short-term bank deposits                          |                        
|Purchase of property and equipment                              |                        
|Proceeds from sale of property and equipment                    |                        
|Proceeds from realization of investment in subsidiary           |                        
|Acquisition of Cellocator (a)                                   |                        
|Acquisition of activities and assets of Shagrir Towing Services |                        
|Ltd. and ADACH Property Ltd. (formerly: Shagrir (1985) Ltd.)    |                        
|("ADACH") (b)                                                   |                        
|Acquisition of other intangible assets                          |                        
|                                                                |                        
|                                                                |                        
|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                        |                        
|Proceeds from issuance of shares and exercise of warrants, net  |                        
|Receipts on account of shares                                   |                        
|Short-term bank credit, net                                     |                        
|                                                                |                        
|                                                                |                        
|Net cash provided by (used in) financing activities             |                        
|                                                                |                        
|                                                                |                        
|Effect of exchange rate changes 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                |                        
|                                                                |                        
|                                                                |                        

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

F - 7

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES
|--------------------------------------------
|                                            
|CONSOLIDATED STATEMENTS OF CASH FLOWS       
|                                            
|U.S. dollars in thousands                   

|    |                                                          | Year ended December 31,
|--- | -------------------------------------------------------- | -----------------------
|
|
|
|
|(a) | Acquisition of Cellocator and Matan activities:          |                        
|    |                                                          |                        
|    | Fair value of assets acquired and liabilities assumed at |                        
|    | date of acquisition:                                     |                        
|    |                                                          |                        
|    | Working capital                                          |                        
|    | Property and equipment                                   |                        
|    | Customer related intangibles                             |                        
|    | Brand name                                               |                        
|    | Developed technology                                     |                        
|    | Goodwill                                                 |                        
|    | Accrued severance pay, net                               |                        
|    |                                                          |                        
|    |                                                          |                        
|    |                                                          |                        
|    |                                                          |                        
|    |                                                          |                        
|    | Fair value of shares issued                              |                        
|    | Fair value of convertible debentures                     |                        
|    | Accrued expenses                                         |                        
|    |                                                          |                        
|    |                                                          |                        
|    |                                                          |                        
|    |                                                          |                        
|    |                                                          |                        
|    |                                                          |                        
|    |                                                          |                        
|    |                                                          |                        
|(b) | Acquisition of activities and assets of Shagrir Towing   |                        
|    | Services Ltd. and ADACH:                                 |                        
|    |                                                          |                        
|    | Fair value of assets acquired and liabilities assumed at |                        
|    | date of acquisition:                                     |                        
|    |                                                          |                        
|    | Working capital                                          |                        
|    | Property and equipment                                   |                        
|    | Customer related intangibles                             |                        
|    | Brand name                                               |                        
|    | Goodwill                                                 |                        
|    | Long-term loan                                           |                        
|    | Accrued severance pay, net                               |                        
|    |                                                          |                        
|    |                                                          |                        
|    |                                                          |                        
|    | Fair value of shares and warrants issued                 |                        
|    |                                                          |                        
|    |                                                          |                        
|    |                                                          |                        
|    |                                                          |                        
|    |                                                          |                        
|(c) | Supplemental disclosure of cash flow activity:           |                        
|    |                                                          |                        
|    | Cash paid during the period for interest                 |                        
|    |                                                          |                        

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

F - 8

---

---

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

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

| | a. | Pointer
Telocation Ltd., (the Company) was incorporated in Israel                and
commenced operations in July 1991. The Company provides a range of services
               and products toinsurance companies and automobile owners, including
               road-side assistance, vehicle towing, stolen vehicle retrieval, fleet
management                location based 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 in Latin America,                Europe and ROW utilizing the Companys
technology and operational know-how.                The Companys shares are traded
on the NASDAQ Capital Market and the                Tel-Aviv Stock Exchange.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | On
September 18, 2007, the Company completed the acquisition of all of the
               assets and assumed substantially all of the liabilities and operations of
               Cellocator Ltd and Matan Y. Communication and Tracking
               Systems (Cellocator transaction) which were engaged in
selling                automatic vehicle location technology. The consideration for the
acquisition                consisted of (i) $15.1 million (ii) 160,000 Ordinary shares of
the Company; and                (iii) a non-tradable debenture with a fair value of
$1,951 convertible into                160,000 of the Company Ordinary shares (see note
11). In addition, the Company                paid Cellocator approximately $1.6 million
in connection with the post closing                working capital adjustment as part of
the acquisition.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
recpect of the acquisition, the Company entered into $ 5,000 million loan agreement with
Bank Hapoalim
B.M. (See Note 9)
| | ---------------------------------------------------------------------------------------------------------------------------

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

| |                                      | 
| | ------------------------------------ | 
|
|
|
|
| | Cash                                 | 
| | Issuance of shares                   | 
| | Issuance of Convertible debenture    | 
| | Transactions costs                   | 
| |                                      | 
| |                                      | 
| | Total consideration - purchase price | 
| |                                      | 
| |                                      | 

F - 9

---

---

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

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

| | The
acquisition was accounted under the purchase method of accounting as determined by
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 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:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                              | U.S. dollars
in thousand
| | ---------------------------- | ------------------------
|
|
|
|
| | Working capital              |                         
| | Property and equipment       |                         
| | Customers related intangible |                         
| | Brand name                   |                         
| | Developed technology         |                         
| | Goodwill                     |                         
| | Accrued severance pay, net   |                         
| |                              |                         
| |                              |                         
| |                              |                         
| |                              |                         
| |                              |                         

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

| | For
estimated amortization periods related to intangible assets, see Note 2g.
| | -----------------------------------------------------------------------------

F - 10

---

---

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

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

| | The
unaudited pro forma information below assumes that the Cellocator transaction had been
consummated on January 1, 2007 and 2006 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 income                    |                        
| |                               |                        
| |                               |                        
| | Basic net earning per share   |                        
| |                               |                        
| |                               |                        
| | Diluted net earning per share |                        
| |                               |                        

| | 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 ADACH (Shagrir transaction) by the Companys
          subsidiary Shagrir Systems Ltd, formerly Shagrir Motor Vehicle Systems
          (Shagrir ) in consideration of approximately $ 44 million. 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 (see Note 13c(3)) | 
| | Transactions costs                                          | 
| |                                                             | 
| |                                                             | 
| | Total consideration - purchase price                        | 
| |                                                             | 
| |                                                             | 

| | The
acquisition was accounted under the purchase method of accounting as determined by 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---

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

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

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

| |                                         | 
| | --------------------------------------- | 
|
|
|
|
| | Net working capital                     | 
| | Property and equipment and other assets | 
| | Long-term liabilities                   | 
| | Customers related intangible            | 
| | Brand name                              | 
| | Goodwill                                | 
| |                                         | 
| |                                         | 
| | Total purchase price                    | 
| |                                         | 
| |                                         | 

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

| | For
estimated amortization periods related to intangible assets, see Note 2g.
| | -----------------------------------------------------------------------------

| | Shagrir
funded the Shagrir transaction through a credit line of $ 23,000, made available by Bank
Hapoalim B.M., a loan of $ 9,000 provided by Shagrir Towing Services ( the seller) (see
Note 10d(3)), a loan of approximately $ 10,000 provided by a group of investors led by
Gandyr Investments Ltd. (Gandyr group) (see Note 10d(4)) and Egged Holdings
Ltd. (Egged) (see Note 10d(1)), a loan of $ 2,000 provided by the Company and
Gandyr group and Egged (see Note 10d(1) and 10d(2)) and $ 1,000 invested by the Company
in equity, which was financed by the Companys issuance of shares and warrants (see
Note 13c(1)).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
November 30, 2005, Gandyr group exercised its options to convert the loan, of
approximately $ 6,000, into 43.44% of the shares of Shagrir As a result, the Company
recorded in 2005 a gain from the decrease in holdings of Shagrir of $ 359.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2006, a convertible loan from Egged at the amount of $ 2,065 was repaid and other loans
were modified (see Note 10d(1)).
| | -------------------------------------------------------------------------------------------------------------------------------

| | d. | During
2001, the Company purchased 92.5% of Pointer Localization Y Asistencia           SAs
(formerly: Tracsat S.A.) (Pointer Argentina) share capital.           Pointer
Argentina is the operator of the Companys systems and products           that
provides stolen vehicle recovery services in Buenos Aires, Argentina.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2003 and 2004, Pointer Argentina issued 280 and 560 shares to two employees,
respectively. As a result, the Companys holdings in Pointer Argentina were reduced
to 86.45%. In 2006 the Company repurchase 840 shares from Pointer Argentinas
employees. As a result, the Company holds in Pointer Argentina 93%.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | 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.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

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

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

| | 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. In February
2007, 2,895 shares were transferred to the Company from its local partners in
consideration of their par value. As of December 31, 2007 the Company and its Mexican
local partners hold 74% and 26% of Pointer Mexico respectively. Pointer Mexico is
providing location, tracking and recovery of stolen vehicles services to its customers in
Mexico.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | On
May 26, 2006, the Company entered into a settlement with respect to a past
          claim against a Latin American customer, pursuant to which the Company received
          a net amount of approximately $ 1,292.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | In
March 2007, the Company executed a binding Memorandum of understanding           (MOU),
with the Argentinean service provider to cooperate in offering location           based
services and stolen vehicle retrieval services. The closing of the           transaction
is subject to the success of the Argentinean provider in reaching an           agreement
with a leading automotive manufacturer in Argentina. Based on the MOU,           upon
closing, the Argentinean provider shall transfer to Pointer Argentina all           of
its location based services and stolen vehicle retrieval business in
          consideration of 11% of the outstanding share capital of Pointer Argentina.
          Thereafter, based on the success of the cooperation during the two years
          following the closing, the Argentinean provider may increase its holdings in
          Pointer Argentina. As part of this agreement, based on the success of the
          cooperation, the Company undertook to provide certain financing to Pointer
          Argentina during the first two years of the project. As of December 31, 2007
the           closing did not take place yet.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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               
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

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

| | For
Pointer Argentina, 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 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 (loss), 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. | 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, work in process 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 2007, 2006 and 2005, the Company and its subsidiaries wrote off approximately $ 150,
$ 127 and $ 199, respectively. The write-offs are included in cost of revenues.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | 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 electronic 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
| |                                    |                           

F - 14

---

---

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

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

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

| | Goodwill
reflects the excess of the purchase price of the acquired business 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, 2007, 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 in 2005 (see Note 1c) is $ 5,279. During 2007 and 2006,
the Company reduced the goodwill at the amount of $ 532 and $1,489, respectively due to
the realization of tax loss carryforward of subsidiary, that at the date of acquisition
of the subsidiary were not more-likely-than-not to be realized.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Intangible
assets consist of the brand name, customers related intangible, developed technology and
acquired patents. 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
brand names are amortized over a two to nine years period,
| | --------------------------------------------------------------

| | The
Customers related intangibles are amortized over a five to nine years period.
| | ---------------------------------------------------------------------------------

| | The
developed technology is amortized over a five-year period.
| | --------------------------------------------------------------

| | Patents
are amortized over an eight-year period.
| | ------------------------------------------------

| | h. | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year ended December 31, 2007 and 2006, an impairment loss of $36 and $ 372
respectably has been recognized (see Note 5c).
| | ------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

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

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

| | i. | 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 2007
are as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | j. | 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 sell the systems primarily through
their 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 collectibility is probable.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Service
revenues including subscriber fees are recognized as services are performed, 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

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

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

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

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

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

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

| | Research
and development costs, are charged to expenses as incurred.
| | --------------------------------------------------------------------

| | l. | Advertising
expenses:
| | -- | ---------------------

| | Advertising
expenses are charged to the statement of operations as incurred. Advertising expenses for
the years ended December 31, 2007, 2006 and 2005 were $ 439, $ 344 and $ 408,
respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | m. | 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 and its subsidiaries provide a
valuation allowance, if necessary, to reduce deferred tax assets to their estimated
realizable value, if it is more likely than not that a portion or all of the deferred tax
assets will not be realized.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes an Interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being recognized in the financial
statements. FIN 48 utilizes a two-step approach for evaluating tax positions. Recognition
(step one) occurs when an enterprise concludes that a tax position, based solely on its
technical merits, is more-likely-than-not to be sustained upon examination. Measurement
(step two) is only addressed if step one has been satisfied (i.e., the position is
more-likely-than-not to be sustained). Under step two, the tax benefit is measured as the
largest amount of benefit, determined on a cumulative probability basis that is
more-likely-than-not to be realized upon ultimate settlement FIN
48 applies to all tax positions related to income taxes subject to the Financial
Accounting Standard Board Statement No. 109, Accounting for Income Taxes
(FAS 109). This includes tax positions considered to be routine as
well as those with a high degree of uncertainty.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

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

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

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

| | FIN
48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN
48 has no significant effect on the Companys financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n. | 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).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment (SFAS 123(R)) which requires
the measurement and recognition of compensation expense based on estimated fair values
for all share-based payment awards made to employees and directors. SFAS 123(R)
supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), under which the Company previously
accounted for its share based awards granted to employees and directors, for periods
beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123(R). The
Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
123(R) requires companies to estimate the fair value of equity-based payment awards on
the date of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as an expense over the requisite
service periods in the Companys consolidated income statement. Prior to the
adoption of SFAS 123(R), the Company accounted for equity-based awards to employees and
directors using the intrinsic value method in accordance with APB 25 as allowed under
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation(SFAS 123).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

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

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

| | The
Company adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard starting from January 1, 2006,
the first day of the Companys fiscal year 2006. Under that transition method,
compensation cost recognized in 2006, includes: (a) compensation cost for all share-based
payments granted prior to, but not yet vested as of January 1, 2006, based on the grant
date fair value estimated in accordance with the original provisions of Statement 123,
and (b) compensation cost for all share-based payments granted subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the provisions of
Statement 123(R). Results for prior periods have not been restated.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recognizes compensation expenses for the value of its awards, which have graded
vesting, based on the accelerated attribution method over the vesting period, net of
estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting
forfeitures.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of adopting SFAS 123(R) on January 1, 2006, the Companys income before
income taxes and net income for the year ended December 31, 2006, is approximately $ 250
lower than if it had continued to account for stock-based compensation under APB 25.
Basic and diluted net earnings per share for the year ended December 31, 2006, are $ 0.08
lower than if the Company had continued to account for share-based compensation under APB
25.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Prior
to January 1, 2006, the Company applied the intrinsic value method of accounting for
stock options as prescribed by APB 25, whereby compensation expense is equal to the
excess, if any, of the quoted market price of the stock over the exercise price at the
grant date of the award.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the years ended December 31, 2007, 2006 and 2005, the Company recognized stock-based
compensation expenses related to employee stock options in the amounts of $ 783, $ 251
and $ 126, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company estimates the fair value of stock options granted using the Black-Scholes-Merton
option-pricing model. The option-pricing model requires a number of assumptions, of which
the most significant are expected stock price volatility and the expected option term.
Expected volatility was calculated based upon actual historical stock price movements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
expected option term represents the period that the Companys stock options are
expected to be outstanding and was determined based on the simplified method permitted by
SAB 107 and SAB 110 as the average of the vesting period and the contractual term. The
risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with
an equivalent term. The Company has historically not paid dividends and has no
foreseeable plans to pay dividends.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

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

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

| | p. | Data
related to options to purchase the Company shares:
| | -- | -------------------------------------------------------

| | 1. | The
fair value of the Companys stock options granted to employees and
          directors for the years ended December 31, 2007, 2006 and 2005 was estimated
          using the following weighted average assumptions:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                          | Year ended December 31,
| | ------------------------ | -----------------------
|
|
|
|
| | Risk free interest       |                        
| | Dividend yields          |                        
| | Volatility               |                        
| | Expected term (in years) |                        
| |                          |                        

| | A
summary of employee option activity under the Companys Stock Option Plans as of
December 31, 2007 and changes during the year ended December 31, 2007 are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                  | Number of
options | Weighted-average
exercise
price | Weighted-
average
remaining
contractual
term (in
years) | Aggregate
intrinsic
value (in
thousands)
| | -------------------------------- | ----------------- | ------------------------------- | ------------------------------------------------------- | ----------------------------------------
|
|
|
|
| | Outstanding at January 1, 2007   |                   |                                 |                                                         | 165,842                                 
| | Granted                          |                   |                                 |                                                         | 155,000                                 
| | Exercised                        |                   |                                 |                                                         | -                                       
| | Forfeited                        |                   |                                 |                                                         | (64,697                                 
| |                                  |                   |                                 |                                                         |                                         
| |                                  |                   |                                
| | Outstanding at December 31, 2007 |                   |                                 |                                                         | 256,145                                 
| |                                  |                   |                                 |                                                         |                                         
| |                                  |                   |                                
| | Exercisable at December 31, 2007 |                   |                                 |                                                         | 70,895                                  
| |                                  |                   |                                 |                                                         |                                         
| |                                  |                   |                                
| | Vested and expected to vest at   |                   |                                
| | December 31, 2007                |                   |                                 |                                                         | 253,645                                 
| |                                  |                   |                                 |                                                         |                                         
| |                                  |                   |                                 |                                                         |                                         

| | The
weighted-average grant-date fair value of options granted during the years ended December 31,
2007, 2006 and 2005 was $ 4.36, $ 2.6 and $ 4.1, respectively. The aggregate intrinsic
value in the table above represents the total intrinsic value (the difference between the
Companys closing stock price on the last trading day of the fourth quarter of
fiscal 2007 and the exercise price, multiplied by the number of in-the-money options)
that would have been received by the option holders had all option holders exercised
their options on December 31, 2007. This amount changes based on the fair market
value of the Companys stock.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

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

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

| | As
of December 31, 2007, there was approximately $ 491 of total unrecognized
compensation costs related to non-vested share-based compensation arrangements granted
under the Companys stock option plans.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | That
cost is expected to be recognized over a weighted-average period of 2.22 years. Total
grant-date fair value of options that vested during the year ended December 31, 2007
was approximately $ 65.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Data
related to options to purchase Shagrir shares:
| | -- | ---------------------------------------------------

| | As
of December 31, 2007, 1,690 options to purchase Shagrir shares are outstanding (non are
exercisable). Weighted average exercise price of these outstanding options is $ 170.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
weighted average fair values of options granted during the year ended December 31,
2006 was $ 200. No options were granted during 2005 and 2007.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | Those
options vest primarily over four years. The fair value for these options was estimated
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                          | Year ended
December 31,
2006
| | ------------------------ | ----------------------------
|
|
|
|
| | Risk free interest       |                             
| | Dividend yields          |                             
| | Volatility               |                             
| | Expected term (in years) |                             
| |                          |                             

| | As
of December 31, 2007, there was approximately $ 145 of total unrecognized
compensation costs related to non-vested share-base compensation arrangements granted
under Shagrir stock option plans.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---

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

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

| | 3. | The
following table illustrates the effect on the net income (loss) and net
          earnings (loss) per share, assuming that the Company and its subsidiaries had
          applied the fair value recognition provision of SFAS 123 on its stock-based
          employee compensation:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                           | Year ended
December 31
2005
| | --------------------------------------------------------- | ---------------------------
|
|
|
|
| | Net 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 loss                                        |                            
| |                                                           |                            
| |                                                           |                            
| | Basic and diluted net loss per share as reported          |                            
| |                                                           |                            
| |                                                           |                            
| | Pro forma basic and diluted net loss per share            |                            
| |                                                           |                            

| | 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, 2007, 2006 and 2005 were $ 534 $ 428
and $ 635, 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

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

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

| | Trade
receivables include amounts billed to clients located mainly in Israel and Latin America
and Europe. 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 17c.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | t. | Derivatives
and hedging activities:
| | -- | -----------------------------------

| | Financial
Accounting Standard Board Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133), as amended, requires the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives are either
offset against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivatives change in
fair value is immediately recognized in earnings. The Company uses derivatives to hedge
certain cash flow foreign currency exposures, in order to further reduce the Companys
exposure to foreign currency risks.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | u. | 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

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

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

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

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

| | In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159), which permits
companies to choose to measure certain financial instruments and other items at fair
value that are not currently required to be measured at fair value. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. The Company will adopt SFAS
No. 159 no later than January 1, 2008. The Company has not yet determined the effect that
the adoption of SFAS No. 159 will have on its consolidated financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 141
(Revised 2007) (SFAS 141R), Business Combinations. SFAS 141R will change the
accounting for business combinations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value with limited
exceptions. SFAS 141R will change the accounting treatment and disclosure for certain
specific items in a business combination. SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. SFAS 141R will have an
impact on accounting for future business combinations once adopted and not on prior
acquisitions.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (SFAS 160). SFAS 160 establishes
accounting and reporting standards for ownership interests in subsidiaries held by
parties other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parents ownership interest
and the valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 also establishes reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | This
standard is effective for fiscal years beginning after December 15, 2008 and should be
applied prospectively. However, the presentation and disclosure requirements of the
statement shall be applied retrospectively for all periods presented. The adoption of the
provisions of Statement No. 160 is not anticipated to materially impact the Companys
consolidated financial position and results of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---

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

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

| |                        | December 31,
| | ---------------------- | ------------
|
|
|
|
| | Government authorities |             
| | Employees              |             
| | Prepaid expenses       |             
| | Deferred income taxes  |             
| | Others                 |             
| |                        |             
| |                        |             
| |                        |             
| |                        |             

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

| |                 |  | 
| | --------------- |  | 
|
|
|
|
| | Raw materials   |  | 
| | Work in process |  | 
| | Finished goods  |  | 
| |                 |  | 
| |                 |  | 
| |                 |  | 
| |                 |  | 
| |                 |  | 

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

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

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

F - 25

---

---

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

|NOTE 5: |  | PROPERTY
AND EQUIPMENT (Cont.)
|------- | - | ------------------------------

| | b. | Depreciation
expenses for the years ended December 31, 2007, 2006 and 2005           were $ 2,623
(including impairment of $ 36), $ 2,750 (including           impairment of $ 372),
and $ 2,533, respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | During
2006, due to the requirement of certain major potential customers in
               Mexico to increase the territorial coverage to a nationwide coverage and
due to                the increased costs of communication services with respect to the
proprietary                system that was used, Pointer Mexicos management has
decided to migrate                from the Companys traditional radio frequency
(RF) system communication                technology to Cellular/GPS technology in Mexico.
Therefore, Pointer                Mexicos management has recognized an impairment
loss related to its base                stations (network installation), which constitute
the base of its former                installed technology to provide its services, and
installed products                (RMUs) which are the devices used to locate the
vehicles. This group of                assets has been reduced to its fair value as
determined by the management based                on present value of future net cash
flows. Impairment loss has been recognized                in a separate caption within
the statement of operations in the amount of $ 372                for the year ended
December 31, 2006 and $ 36 for the year ended December 31,                2007.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

---

---

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

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

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

| |                             | December 31,
| | --------------------------- | ------------
|
|
|
|
| | Cost:                       |             
| | Patents                     |             
| | Developed technology        |             
| | Customer related intangible |             
| | Brand name                  |             
| |                             |             
| |                             |             
| |                             |             
| |                             |             
| | Accumulated amortization:   |             
| | Patents                     |             
| | Developed technology        |             
| | Customer related intangible |             
| | Brand name                  |             
| |                             |             
| |                             |             
| |                             |             
| |                             |             
| |                             |             
| | Amortized cost              |             
| |                             |             

| | b. | Amortization
expenses for the years ended December 31, 2007, 2006 and 2005 were           $ 2,118 $ 1,740
and $ 2,464, respectively.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------

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

| | December 31, | 
| | ------------ | 
|
|
|
|
| | 2008         | 
| | 2009         | 
| | 2010         | 
| | 2011         | 
| | 2012         | 
| | Thereafter   | 
| |              | 
| |              | 
| |              | 
| |              | 
| |              | 

F - 27

---

---

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

|NOTE 7: |  | SHORT-TERM
BANK CREDIT AND CURRENT MATURITIES OF LONG-TERM LOANS FROM BANKS,SHAREHOLDERS AND OTHERS
|------- | - | ---------------------------------------------------------------------------------------------------

| | 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                          |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| | Short-term bank credit:         |               |             
| | In, or linked to, dollars       |               |             
| | In NIS                          |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| | Current maturities of long-term |               |             
| | loans from banks, shareholders  |               |             
| | and others:                     |               |             
| | In, or linked to, dollars       |               |             
| | In, or linked to, dollars       |               |             
| | In NIS linked to CPI            |               |             
| | In NIS                          |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| |                                 |               |             
| | Unutilized credit lines         |               |             
| |                                 |               |             

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

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

F - 28

---

---

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

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

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

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

| | b. | As
of December 31, 2007, the aggregate annual maturities of the long-term loans
          are as follows:
| | -- | ---------------------------------------------------------------------------------------------------------

| |                           | 
| | ------------------------- | 
|
|
|
|
| | 2008 (current maturities) | 
| | 2009                      | 
| | 2010                      | 
| | 2011                      | 
| | 2012                      | 
| | Thereafter                | 
| |                           | 
| |                           | 
| |                           | 
| |                           | 
| |                           | 

| | 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, during 2007, all of the warrants expired.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the credit facility from Bank Hapoalim B.M., Shagrir is required to meet financial
covenants, as follows:
| | ---------------------------------------------------------------------------------------------------------------

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

| | 1. | The
ratio of the debt to the bank to the annual EBITDA will not exceed 5.5.
| | -- | ---------------------------------------------------------------------------

| | 2. | 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.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | The
shareholders equity, including loans from shareholders, will not be           less
than NIS 25 million, at any time.
| | -- | -------------------------------------------------------------------------------------------------------------------------

| | 4. | Shagrir
will not distribute dividends without a written pre-approval from the           bank.
| | -- | ---------------------------------------------------------------------------------------------

| | As
of December 31, 2007, Shagrir meets the financial covenants.
| | ---------------------------------------------------------------

F - 29

---

---

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

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

| | d. | In
respect of the bank loans that funded the Cellocator transaction (see Note
               1b), the company is required to meet certain financial covenants as
follow:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 1. | The
ratio of the shareholders equity to the total assets will not be less than
               20% and the shareholders equity will not be less than $ 20,000, starting
               December 31, 2007.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | The
ratio of the Companys debt (debt to banks, convertible debenture and
               loans from others that are not subordinated to the bank less cash) to the
annual                EBITDA will not exceed 5 in 2008, 4.5 in 2009 and 4 in 2010 and
thereafter.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | The
ratio of Pointer Telocation Ltd.s debt (debt to banks, convertible
               debenture and loans from others hat not subordinated to the bank less
cash) to                the annual EBITDA will not exceed 4 in 2008, 3.5 in 2009 and 2.5
in 2010 and                thereafter.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007, the Company 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 NIS linked to CPI (see d1 |               |             
| | below)                       |               |             
| |                              |               |             
| |                              |               |             
| |                              |               |             
| |                              |               |             
| | Less - current maturities    |               |             
| |                              |               |             
| |                              |               |             
| |                              |               |             
| |                              |               |             

F - 30

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES               
|-----------------------------------------------------------
|                                                           
|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 |               |             
| | d2-d3 below)              |               |             
| | In NIS (see d4 below)     |               |             
| | In Mexican pesos          |               |             
| |                           |               |             
| |                           |               |             
| |                           |               |             
| | Less - current maturities |               |             
| | Less - discount           |               |             
| |                           |               |             
| |                           |               |             
| |                           |               |             
| |                           |               |             

| | c. | As
of December 31, 2007, the aggregate annual maturities of the long-term loans
          from shareholders and others are as follow:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------

| |                           | 
| | ------------------------- | 
|
|
|
|
| | 2008 (current maturities) | 
| | 2009                      | 
| | 2010                      | 
| | 2011                      | 
| | Thereafter                | 
| |                           | 
| |                           | 
| |                           | 
| |                           | 

| | d. | 1. | On October 1, 2006 Shagrir entered into an agreement to replace two           long-term
loans from Egged bearing an annual interest rate of 4% to 7.5%, at the
          aggregate amount of approximately $ 2,392, into two long-term loans to mature
in           two years. The new loans bear an annual interest rate of 4% to 6.5% and are
          linked to the Israeli CPI. The option granted to Egged to purchase
          Shagrirs Ordinary shares or the Companys Ordinary shares was
          cancelled.
| | -- | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
outstanding loan balance as of December 31, 2007 is $ 728.
| | --------------------------------------------------------------

| | The
replacement of the loans was accounted for as an extinguishment in accordance with EITF
Issue No. 96-19, Debtors Accounting for Modification or Exchange of Debt
Instruments. The extinguishment resulted in an immaterial gain.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---

|POINTER TELOCATION LTD. AND ITS SUBSIDIARIES               
|-----------------------------------------------------------
|                                                           
|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 | Loans
in the amount of $ 2,932 (NIS 11,276) from Gandyr group are linked to the Israeli CPI and
bear an annual interest rate of 6.5%. The loans shall be repaid in nine quarterly
installments, commencing six months from February 28, 2005, in accordance with the Companys
financial ability. Until December 31, 2007, no amounts were repaid in respect to these
loans.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3 | A
loan of $ 7,582 (NIS 29,162) is to be repaid by Shagrir to Shagrir Towing Services
Ltd.(the seller). The loan is being 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 ADACH jointly a warrant to
purchase up to 250,000 of its Ordinary shares. During 2007, all of the warrants expired.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4 | A
loan of $ 7,540 (NIS 29.1 million) related to the Shagrir transaction was funded by
Gandyr group.
| | - | ---------------------------------------------------------------------------------------------------

|NOTE 11: |  | CONVERTIBLE
DEBENTURE
|-------- | - | ---------------------

| | Debentures
at the principle amount of $1,922 convertible into 160,000 Ordinary shares of the
Company, nominal value NIS 3.00 each. The debenture bears interest at the annual LIBOR
rate to accrue from the later of: (1) the date on which the holder provided an
irrevocable written notice to the Company that it does not wish to convert the debenture
into Ordinary shares of the Company, or (2) in the event that by 33 months from the date
of issuance, the holder did not provide the Company with notice of conversion. The
interest shall accrue until the date of repayment. During 2008 the seller notified the
Company that he does not wish to convert the debenture into Ordinary shares of the
Company. The debenture shall be matured in September 2010.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 12: |  | 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
recorded a first priority charge on all of its assets in favor of           banks, and
Shagrir Towing Services has a second priority fixed charge over           Shagrirs
rights to proceeds from several of its customers.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---

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

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

| | b. | Collateral:
| | -- | -----------

| | 1. | To
secure Shagrir obligations for providing services to several of its
          customers, Shagrir provided a bank guarantee in the amount of about $ 426, in
          force until December 2007  August 2010.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | The
Company obtained bank guarantees in the amount of $ 211 in favor of its           lessor,
supplier and customs.
| | -- | -------------------------------------------------------------------------------------------------------------------

| | 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, 2007 is $ 2,230. No royalties were accrued or paid during 2007, 2006 and 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |      | 
| | ---- | 
|
|
|
|
| | 2008 | 
| | 2009 | 
| | 2010 | 
| | 2011 | 
| |      | 
| |      | 
| |      | 
| |      | 

| | Rent
expenses for the years ended December 31, 2007, 2006 and 2005, were $ 1,428 $ 1,328
and $ 1,438, respectively.
| | -------------------------------------------------------------------------------------------------------------------

| | e. | Litigation:
| | -- | -----------

| | 1. | In
February 2008 the Company finalized the settlement of outstanding litigation
          with China National Electronics Import & Export Beijing Co, or CEIEC,
          regarding the alleged breach of agreements regarding CEIECs customer Sino
          Telocation Ltd. for the purchase of a car localization system. Pursuant to the
          settlement, both parties withdrew the claims against each other and against
Bank           Hapoalim B.M., used in connection with the agreement.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | No
provision was recorded in the financial statements in prior years in respect of the
potential claim.
| | -------------------------------------------------------------------------------------------------------

F - 33

---

---

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

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

| | 2. | As
of December 31, 2007, several claims were filed against Shagrir, mainly by
          customers. The claims are in an amount aggregating to approximately $ 300.
          The substance of the claims is the malfunction of Shagrirs products,
which           occurred during the ordinary course of business. Shagrirs
management,           based on the opinion of its legal counsel, is of the opinion that
no material           costs will arise to Shagrir in respect to these claims and,
therefore, no           provision was recorded in the financial statements in respect of
the claims.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Commitments:
| | -- | ------------

| | 1. | The
Company and DBSI Investment Ltd. (DBSI) (see Note 16) have           entered
into a management services agreement pursuant to which DBSI shall           provide
management services in consideration of annual management fees of $ 180           for a
period of three years commencing on April 6, 2003.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | This
agreement is 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. | During
1998, the Company entered into an agreement with Shagrir , 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.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with the agreement, Shagrir 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 shall pay the Company the difference between the minimal amount and
the amount actually purchased. As of the date of these financial statements, Shagrir is
meeting its minimal purchase commitment as it undertook in the aforesaid agreement.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Shagrir
entered into a management services agreement with the Company, pursuant           to
which the Company will provide Shagrir with management services with respect           to
its business for a period of two years starting February 28, 2005, in
          consideration of management fees of $260 (NIS 1 million) per year, subject to
          certain conditions.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Shagrir
entered into a management services agreement with Gandyr group and           Egged,
pursuant to which Gandyr group and Egged will grant management services           to
Shagrir beginning at the end of a period of 24 months from February 28, 2005,
          in consideration of approximately $260 (NIS 1 million) per year. Pursuant to
the           management services agreement, in the event that Gandyr Group or Egged will
not           exercise the entire options, the parties shall negotiate the management
fees. As           of December 31, 2006, Egged did not convert its options, and on
February 28,           2007 all of its options expired.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 34

---

---

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

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

| | 5. | Under
the credit facility from Bank Hapoalim B.M., Shagrir is required to meet
          financial covenants (see Note 9c).
| | -- | ---------------------------------------------------------------------------------------------------------------------------

|NOTE 13: |  | SHAREHOLDERS EQUITY
|-------- | - | --------------------

| | a. | In
August 2005, a 100:1 to 1 reverse stock split of the Companys Ordinary
          shares was affected. As a result of the reverse stock split, each 100 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
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 were exercisable 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. All the warrants expired.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Out
of the total number of shares and warrants issued, Egged was issued 309,524 shares and
68,095 warrants.
| | -----------------------------------------------------------------------------------------------------------

| | 2. | 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.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | During
2006, 806,918 warrants and stock options were exercised into 743,855 of           the
Companys Ordinary shares. Out of the 806,918 warrants and stock           options,
95,455 warrants were exercised by way of cashless exercise into 32,392           Ordinary
shares, and 711,463 warrants and stock options were exercised into           Ordinary
shares, for a consideration of $ 3,481.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 35

---

---

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

|NOTE 13: |  | SHAREHOLDERS EQUITY
(Cont.)
|-------- | - | ----------------------------

| | 4. | On
December 28, 2006 the Company entered into a Share Purchase Agreement with a
          group of Israeli institutional investors for the purchase of 425,000 of the
          Companys Ordinary shares for an aggregate price of $ 4,700. The
          transaction was consummated on January 12, 2007. Pursuant to the transaction,
          the investors were also issued warrants to purchase 212,500 Ordinary shares,
          such that for each one share purchased, the investors acquired a warrant to
          purchase half an Ordinary share. The warrants are exercisable into Ordinary
          shares, at an exercise price of $13.00 per share and are exercisable for a
          period of four years.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | On
April 2, 2007, the Company entered into a share purchase agreement, with a
               group of U.S institutional investors for the purchase of 805,000 of the
               Companys Ordinary shares for an aggregate price of $ 8,500. Pursuant
to                the transaction, the investors were also issued warrants to purchase
402,500                Ordinary shares, such that for each one share purchased, the
investors acquired                a warrant to purchase half an Ordinary share. The
warrants are exercisable into                Ordinary shares, at an exercise price per
share of $ 12.60 and are exercisable                for a period of five years
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Options:
| | -- | --------

| | 1. | The
Company grants, under various option plans (mainly under the 2003 Employee
          share option plan), 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 four years. As of December 31, 2007, no options of the 2003
          Employee Share Option Plan are available for future grant.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2 | A
summary of the status of the Companys employee stock options as of December 31,
2007, 2006 and 2005, 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 - 36

---

---

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

|NOTE 13: |  | SHAREHOLDERS EQUITY
(Cont.)
|-------- | - | ----------------------------

| | The
following table summarizes information relating to employees stock options
outstanding as of December 31, 2007, according to exercise price range:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Options outstanding | Options exercisable
| |  | ------------------- | -------------------
|
|
|
|
| |  |                     | $                  
| |  |                     | $                  
| |  |                     | $                  
| |  |                     | $                  
| |  |                     | $                  
| |  |                     | $                  
| |  |                     |                    
| |  |                    
| |  |                     |                    
| |  |                     |                    

| | e. | Warrants:
| | -- | ---------

| | 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
and have expired on April 6, 2006 (see 3 above) 250,000 warrants were issued to Shagrir
Towing Services Ltd. and ADACH and 100,000 warrants were issued to Bank Hapoalim B.M., at
an exercise price of $ 18, as of December 31, 2007 these warrants have expired.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
January 2007, the Company completed a round of financing of $ 4,675, out of which,
an amount of $ 2,586 was received as of December 31, 2006, in consideration of 425,000 of
the Companys Ordinary shares at a price per share of $ 11.0. Under the terms of the
investment agreements, the investors were issued warrants to purchase up to 212,500
shares of the Company, with an exercise price of $ 13.0 per share. The warrants may be
exercised at any time until December 31, 2010.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 2, 2007, the Company entered into and consummated a share purchase agreement with a
group of United States institutional investors for the purchase of 805,000 of the Company
Ordinary shares for an aggregate price of approximately $ 8,500. Pursuant to the
transaction, the investors were also issued warrants to purchase 402,500 of the Company
Ordinary shares, such that for each one share purchased, the investors were entitled to a
warrant to purchase half a share. The warrants are exercisable into Ordinary shares, at
an exercise price per share of $ 12.6 and will be exercisable for a period of five
years.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 5, 2007, the Board of Directors resolved to modify the terms of the options granted
to its former CFO on November 23, 2005, by accelerating the vesting of the options and
extending the exercise period after his resignation until June 30, 2008. As a result, the
company recorded an amortization of stock compensation in the amount of $100.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | as
for the issuance of Convertible debenture and shares in respect to 2007 acquisition
transaction see Note 11.
| | ---------------------------------------------------------------------------------------------------------------

F - 37

---

---

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

|NOTE 13: |  | SHAREHOLDERS EQUITY
(Cont.)
|-------- | - | ----------------------------

| | f. | Dividends:
| | -- | ----------

| | Any
dividend distributed by the Company will be declared and paid in dollars.
| | -----------------------------------------------------------------------------

|NOTE 14: |  | 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:                                        |                        
| |                                                   |                        
| | Numerator for basic net earnings per share -      |                        
| | Net income (loss)                                 |                        
| | Effect of diluting securities                     |                        
| |                                                   |                        
| |                                                   |                        
| | Numerator for diluted net earnings per share -    |                        
| | Net income (loss)                                 |                        
| |                                                   |                        
| |                                                   |                        
| | Denominator:                                      |                        
| |                                                   |                        
| | Denominator for basic net earnings per share -    |                        
| | weighted-average number of shares outstanding (in |                        
| | thousands)                                        |                        
| | Effect of diluting securities (in thousands)      |                        
| |                                                   |                        
| |                                                   |                        
| | Denominator for diluted net earnings per share -  |                        
| | adjusted weighted average shares and assumed      |                        
| | exercises (in thousands)                          |                        
| |                                                   |                        
| |                                                   |                        
| | Basic net earnings (loss) per share               |                        
| |                                                   |                        
| |                                                   |                        
| | Diluted net earnings (loss) per share             |                        
| |                                                   |                        

F - 38

---

---

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

|NOTE 15: |  | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2008, the Knesset (Israeli parliament) passed an amendment to the
Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law
starting 2008 and thereafter. Starting 2008, the results for tax purposes will be
measured in nominal values, excluding certain adjustments for changes in the Consumer
Price Index carried out in the period up to December 31, 2007. The amended law includes,
inter alia, the elimination of the inflationary additions and deductions and the
additional deduction for depreciation starting 2008.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. | Income
(loss) before taxes on income:
| | -- | -------------------------------------

| |          | Year ended December 31,
| | -------- | -----------------------
|
|
|
|
| | Domestic |                        
| | Foreign  |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        

F - 39

---

---

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

|NOTE 15: |  | 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:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | Provided
in respect of the following:
| | -- | -------------------------------------

| |                                                    | December 31,
| | -------------------------------------------------- | ------------
|
|
|
|
| | Reserves and accruals                              |             
| | Carryforward tax losses                            |             
| | Goodwill                                           |             
| | Other temporary differences, net                   |             
| |                                                    |             
| |                                                    |             
| | Net deferred tax assets before valuation allowance |             
| | Valuation allowance (3)                            |             
| |                                                    |             
| |                                                    |             
| | Net deferred tax assets                            |             
| |                                                    |             
| |                                                    |             
| | Domestic                                           |             
| | Foreign                                            |             
| |                                                    |             
| |                                                    |             
| |                                                    |             
| |                                                    |             

| | 2. | Deferred
taxes are included in the consolidated balance sheets, as follows:
| | -- | ---------------------------------------------------------------------------

| |                  | December 31,
| | ---------------- | ------------
|
|
|
|
| | Current assets   |             
| | Long-term assets |             
| |                  |             
| |                  |             
| |                  |             
| |                  |             

| | 3. | The
Company and its subsidiaries (except Shagrir) 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 (except for Shagrir) 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.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Shagrir
has reduced its valuation allowance by $ 524 since it is more likely than not that
certain deferred tax assets will be realized in the foreseeable future.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 40

---

---

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

|NOTE 15: |  | INCOME
TAXES (Cont.)
|-------- | - | --------------------

| | 4. | Reconciling
items between the statutory tax rate of the Company and the           effective tax rate:
| | -- | -----------------------------------------------------------------------------------------------------

| |                                            | Year ended December 31,
| | ------------------------------------------ | -----------------------
|
|
|
|
| | Income (loss) before taxes, as reported in |                        
| | the consolidated statements of operations  |                        
| |                                            |                        
| |                                            |                        
| | Statutory tax rate                         |                        
| |                                            |                        
| |                                            |                        
| | Theoretical tax expenses (benefit) on the  |                        
| | above amount at the Israeli statutory      |                        
| | tax rate                                   |                        
| | Tax adjustment in respect of different tax |                        
| | rates                                      |                        
| | Reduction in deferred taxes due to         |                        
| | reduction in future tax rates              |                        
| | Realization of carryforward tax losses for |                        
| | which a valuation allowance was provided   |                        
| | and change in valuation allowance in       |                        
| | respect of deferred taxes                  |                        
| | Nondeductible expenses and other permanent |                        
| | differences                                |                        
| |                                            |                        
| |                                            |                        
| |                                            |                        
| |                                            |                        

| | f. | Carryforward
tax losses and deductions:
| | -- | ---------------------------------------

| | Carryforward
tax losses of the Company totaled approximately $ 74,075 (including a capital loss
in the amount of approximately $ 30,038) as of December 31, 2007. The carryforward
tax losses have no expiration date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Carryforward
tax losses of Pointer Argentina are approximately $ 1,114 as of December 31, 2007. The
carryforward tax losses will expire from 2009 to 2010.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | Carryforward
tax losses of Shagrir totaled approximately $ 23,921 as of December 31, 2007. The
carryforward tax losses have no expiration date.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

| | Carryforward
tax losses of Pointer Mexico totaled approximately $ 3,387 as of December 31, 2007. The
carryforward tax losses will expire from 2014 to 2017.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

F - 41

---

---

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

|NOTE 15: |  | INCOME
TAXES (Cont.)
|-------- | - | --------------------

| | g. | Taxes
on income (tax benefit) included in the consolidated statements of           operations:
| | -- | ----------------------------------------------------------------------------------------------

| |          | Year ended December 31,
| | -------- | -----------------------
|
|
|
|
| | Current  |                        
| | Deferred |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        
| | Domestic |                        
| | Foreign  |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        

|NOTE 16: |  | BALANCES
AND TRANSACTIONS WITH RELATED PARTIES
|-------- | - | ----------------------------------------------

| | a. | Balances
with related parties:
| | -- | ------------------------------

| |                                               | December 31,
| | --------------------------------------------- | ------------
|
|
|
|
| | Other accounts payable and accrued expenses:  |             
| | DBSI (see Note 12f(1))                        |             
| |                                               |             
| | Long-term loans from shareholders and others: |             
| | Egged Holdings Ltd. (see Note 12f(1))         |             

| | b. | Transactions
with related parties:
| | -- | ----------------------------------

| |                                             | Year ended December 31,
| | ------------------------------------------- | -----------------------
|
|
|
|
| | Management fees to DBSI (see Note 12f(1))   |                        
| |                                             |                        
| | Interest on long-term loans from Egged (see |                        
| | Note 10a)                                   |                        

| | *) | During
2007, Egged Holdings Ltd. ceased to be a shareholder of the Company.
| | -- | ---------------------------------------------------------------------------

F - 42

---

---

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

|NOTE 17: |  | 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 |                        
| |    | Europe        |                        
| |    | Other         |                        
| |    |               |                        
| |    |               |                        
| |    |               |                        
| |    |               |                        

| | *) | Revenues
are attributed to geographic areas based on the location of the           end-customers.
| | -- | -------------------------------------------------------------------------------------------------

| |    |                    | December 31,
| | -- | ------------------ | ------------
|
|
|
|
| | 2. | Long-lived assets: |             
| |    |                    |             
| |    | Israel             |             
| |    | Argentina          |             
| |    | Mexico             |             
| |    |                    |             
| |    |                    |             
| |    |                    |             
| |    |                    |             

| | c. | In
2007 and 2006, one customer accounted for 10.5% and 12% of the           Companys
revenues, respectively.
| | -- | -------------------------------------------------------------------------------------------------------------

F - 43

---

---

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

|NOTE 18: |  | SELECTED
STATEMENTS OF OPERATIONS DATA
|-------- | - | --------------------------------------

| |    |                                             | Year ended December 31,
| | -- | ------------------------------------------- | -----------------------
|
|
|
|
| | a. | Financial expenses, net:                    |                        
| |    |                                             |                        
| |    | Income:                                     |                        
| |    | Interest on short-term bank deposits        |                        
| |    |                                             |                        
| |    |                                             |                        
| |    | Expenses:                                   |                        
| |    | 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 |                        
| |    | Interest on convertible debenture           |                        
| |    | Other                                       |                        
| |    |                                             |                        
| |    |                                             |                        
| |    |                                             |                        
| |    |                                             |                        
| |    |                                             |                        
| |    |                                             |                        
| |    |                                             |                        
| | b. | Other expenses (income), net:               |                        
| |    |                                             |                        
| |    | Capital loss (gain)                         |                        
| |    | Gain from realization of investment in      |                        
| |    | subsidiary, net                             |                        
| |    | Other                                       |                        
| |    |                                             |                        
| |    |                                             |                        
| |    |                                             |                        
| |    |                                             |                        

F - 44

---

---