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

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# FORM 20-F

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

# Or

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

# For the fiscal year
ended December 31, 2006

# 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:

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

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

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

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

|                    |                                          
|------------------- | -----------------------------------------
|Title of each class | Name of each exchange on which registered
|                    |                                          
|None                | None                                     

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

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

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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.

3,222,785

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

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This Annual Report on Form 20-F
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended.The use of the words projects, expects,
may, plans or intends, or words of similar import,
identifies a statement as forward-looking. The forward-looking statements
included herein are based on current expectations that involve a number of risks and
uncertainties. These forward-looking statements are based on the assumption that Pointer
Telocation Limited (we or the Company or Pointer) will
not lose a significant customer or customers or experience increased fluctuations of
demand or rescheduling of purchase orders, that our markets will grow, that our products
will remain accepted within their respective markets and will not be replaced by new
technology, that competitive conditions within our markets will not change materially or
adversely, that we will retain key technical and management personnel, that our forecasts
will accurately anticipate market demand, and that there will be no material adverse
change in our operations or business. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic, competitive and market
conditions, and future business decisions, all of which are difficult or impossible to
predict accurately and many of which are beyond our control. In addition, our business and
operations are subject to substantial risks which increase the uncertainty inherent in the
forward-looking statements. In light of the significant uncertainties inherent in the
forward-looking information included herein, the inclusion of such information should not
be regarded as a representation by us or any other person that our objectives or plans
will be achieved. Factors that could cause actual results to differ from our expectations
or projections include the risks and uncertainties relating to our business described in
this annual report at Item 3.Risk Factors.

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

3

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|                                                                |   
|--------------------------------------------------------------- | --
|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                              | 14
|                                                               
|A.      HISTORY AND DEVELOPMENT OF THE COMPANY                  | 14
|                                                               
|B.      BUSINESS OVERVIEW                                       | 18
|                                                               
|C.      ORGANIZATIONAL STRUCTURE                                | 24
|                                                               
|D.      PROPERTY, PLANTS AND EQUIPMENT                          | 25
|                                                               
|ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS            | 26
|                                                               
|A.      OPERATING RESULTS                                       | 26
|                                                               
|B.      LIQUIDITY AND CAPITAL RESOURCES                         | 34
|                                                               
|C.      RESEARCH AND DEVELOPMENT                                | 35
|                                                               
|D.      TREND INFORMATION                                       | 37
|                                                               
|E.      OFF BALANCE SHEET ARRANGEMENTS                          | 39
|                                                               
|F.      CONTRACTUAL OBLIGATIONS                                 | 39
|                                                               
|ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES             | 40
|                                                               
|A.      DIRECTORS AND SENIOR MANAGEMENT                         | 40
|                                                               
|B.      COMPENSATION                                            | 41
|                                                               
|C.      BOARD PRACTICES                                         | 41
|                                                               
|D.      EMPLOYEES                                               | 44
|                                                               
|E.      SHARE OWNERSHIP                                         | 45
|                                                               
|ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS       | 45
|                                                               
|A.      MAJOR SHAREHOLDERS                                      | 45
|                                                               
|B.      RELATED PARTY TRANSACTIONS                              | 47
|                                                               
|C.      INTERESTS OF EXPERTS AND COUNSEL                        | 49
|                                                               
|ITEM 8. FINANCIAL INFORMATION                                   | 49
|                                                               
|A.      CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION | 49
|                                                               
|B.      SIGNIFICANT CHANGES                                     | 49

4

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|                                                                                  |   
|--------------------------------------------------------------------------------- | --
|ITEM 9. THE OFFER AND LISTING                                                     | 50
|                                                                                 
|A.     OFFER AND LISTING DETAILS                                                  | 50
|                                                                                 
|B.     PLAN OF DISTRIBUTION                                                       | 51
|                                                                                 
|C.     MARKETS                                                                    | 51
|                                                                                 
|D.     SELLING SHAREHOLDERS                                                       | 51
|                                                                                 
|E.     DILUTION                                                                   | 51
|                                                                                 
|F.     EXPENSES OF THE ISSUE                                                      | 51
|                                                                                 
|ITEM 10. ADDITIONAL INFORMATION                                                   | 51
|                                                                                 
|A.     SHARE CAPITAL                                                              | 51
|                                                                                 
|B.     MEMORANDUM AND ARTICLES OF ASSOCIATION                                     | 51
|                                                                                 
|C.     MATERIAL CONTRACTS                                                         | 56
|                                                                                 
|D.     EXCHANGE CONTROLS                                                          | 57
|                                                                                 
|E.     TAXATION AND GOVERNMENT PROGRAMS                                           | 57
|                                                                                 
|F.     DIVIDENDS AND PAYING AGENTS                                                | 59
|                                                                                 
|G.     STATEMENT BY EXPERTS                                                       | 59
|                                                                                 
|H.     DOCUMENTS ON DISPLAY                                                       | 59
|                                                                                 
|I.     SUBSIDIARY INFORMATION                                                     | 60
|                                                                                 
|ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK               | 60
|                                                                                 
|ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                   | 61
|                                                                                 
|PART II                                                                           | 62
|                                                                                 
|ITEM 13. DEFAULTS, DIVIDEND AVERAGES AND DELINQUENCIES                            | 62
|                                                                                 
|ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND             |   
|USE OF PROCEEDS                                                                   | 62
|                                                                                 
|ITEM 15. CONTROLS AND PROCEDURES                                                  | 62
|                                                                                 
|ITEM 16. [RESERVED]                                                               | 62
|                                                                                 
|ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                        | 62
|                                                                                 
|ITEM 16B. CODE OF ETHICS                                                          | 62
|                                                                                 
|ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                  | 63
|                                                                                 
|ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES              | 63
|                                                                                 
|ITEM 16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS | 63
|                                                                                 
|PART III                                                                          | 63
|                                                                                 
|ITEM 17. FINANCIAL STATEMENTS                                                     | 63
|                                                                                 
|ITEM 18. FINANCIAL STATEMENTS                                                     | 63
|                                                                                 
|ITEM 19. EXHIBITS                                                                 | 63

5

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# PART I.

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

# Not applicable.

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

# Not applicable.

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

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

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

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

Not
applicable.

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

Not
applicable.

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

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

General
Risks Factors Relating to Our Company

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

We
have a history of net losses

With
the exception of the years 2006 and 2003, we have incurred a net loss in each year of our
existence. 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 our company as well
as Shagrir are 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 4 Recent Developments) 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

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The
majority of our business operations are based in Israel

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

Our
future operations depend on our ability to obtain additional financing

We
have historically financed our operations through public and private placements of equity
and debt securities, cash generated from the sales of our systems, grants for research and
development projects and bank credit lines. 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 $35 million, and in February 2005 our subsidiary
Shagrir received approximately NIS 200 million in loans and convertible debt as part of
Shagrirs acquisition of the road-side assistance and towing services of Shagrir
Towing Services. 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 and as a result we currently have outstanding effective
registration statements covering 1,824,754 of our securities (for further information
regarding the private placement transactions see Item 10  Material
Contracts). We are currently filing a registration statement on form F-3, 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. 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.

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.

7

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

In
order to finance Shagrirs acquisition of the road-side assistance and towing
services of Shagrir Towing Services, it received a NIS 100 million credit facility from
Bank Hapoalim, a NIS 40 million loan from Shagrir Towing Services and approximately NIS 50
million was loaned to it from a group of investors led by Gandyr Investments Ltd. and
Egged Holdings Ltd., of which NIS 87 million as of March 31, 2007 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. This may have a material adverse affect
on our financial condition. For further information on these loans, see Item 4 
Recent Developments and Item 10  Material Contracts.

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

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

In Israel, our primary competitors
are 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
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.

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

We
depend on a small number of customers

We
depend on a small number of customers located mainly in Israel and South America, 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. While in 2006 only one customer comprised over 10% of our
revenues, since our business model relies on a relatively low number of customers the loss
of even a small number of customers could materially affect our financial condition.

8

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If
the creditworthiness or the financial strength of the customers were to decline, there
could be an adverse effect on our operating results and cash flows. Should geopolitical
situations change in the countries where our customers operate, there could be additional
credit risks.

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

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

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

We
use fixed price contracts with our customers

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

The
majority 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 (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 a single-source supplier to manufacture end units for our Locations Based Solution systems

While
we have commenced diversifying our product base through our combination of cellular units
together with GPS devices in our location based services, we are still principally reliant
on our traditional Pointerware suite of products, formerly known as the Nexusphere, which
we do not manufacture ourselves. Most of the components of our LBS end unit devices are
manufactured for us by independent manufacturers abroad and are assembled by a turn-key
subcontractor located in Israel, and there is no certainty that this subcontractor will be
able to continue to provide us with manufacturing and assembly services in the future.
Furthermore, while cellular, GPS and car alarm devices are manufactured by several
sub-contractors located in Israel, we currently only use the services of one such company.
Our reliance on independent contractors, especially those located in foreign countries,
involves a number of risks, including:

9

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

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

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

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

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

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

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

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

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

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

| |  | Venezuela
has in recent years imposed foreign exchange controls which have effectively led to the
cessation of purchase orders of our SVR products and services from our main customer in
Venezuela during 2003. 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 industry in which we operate
change rapidly and the introduction of products using new technology and the emergence of
new industry standards and practices could negatively impact our business

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

10

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Although
during 2006 we introduced the Cellular / GPS Monitoring Unit as one of our products 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.

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

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

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

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

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

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

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

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

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

While
the use of our Cellular Monitoring Units, or CMUs, and services does not require
regulatory approvals, the use of our traditional LBS systems is subject to regulatory
approvals of government agencies in each of the countries in which our systems are
operated, including the State of Israel. We thus obtained in 2001a 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.

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 22% of our issued
and outstanding shares, or 17% on a fully diluted basis. As a result, DBSI has the ability
to control material decisions requiring the approval of our shareholders.

11

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Risk Factors Relating to
our Ordinary Shares

We
do not expect to distribute cash dividends.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our
ordinary shares are traded on the Nasdaq Capital Market 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, 2007 to May 1, 2007, on the Nasdaq Capital Market was
110,044 shares and on the TASE was 4,340 shares. The high and low bid price of our
ordinary shares for since January 1, 2007 to May 1, 2007, has been $14.55 and $10.01,
respectively on the Nasdaq Capital Market and between NIS 58 and NIS 42 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.

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

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

12

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Risk Factors Relating to
Our Operations in Israel

Political
and Military Conditions in Israel affect our operations.

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

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

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

A
large part of our costs in Israel is not denominated in dollars and may be influenced by
the rate of devaluation of the New Israeli Shekel. Should inflation in Israel impact our
costs at a rate that exceeds the rate of devaluation of the New Israeli Shekel against the
U.S. dollar our dollar costs in Israel will increase, thus reducing our profitability. In
the twelve months ended December 31, 2006, the Israeli economy recorded deflation of
approximately 0.1% and the U.S. dollar devalued against the NIS by approximately 0.8%.
However, in the last 15 years the Israeli economy recorded inflation of approximately 115%
and the NIS devalued against the U.S. dollar by approximately 85%. For further discussion
of such devaluation, see Item 5  Impact of Exchange Rate Fluctuations on Results
of Operations, Liabilities and Assets, and Item 11  Quantitative and
Qualitative Disclosures About Market Risk. There can be no assurance that we will not
incur losses from such fluctuations in the future.

13

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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 and the Exchange Act in original actions instituted
in Israel. However, subject to certain time limitations, Israeli courts may enforce United
States final executory judgments for liquidated amounts in civil matters obtained after
due trial before a court of competent jurisdiction (according to the rules of private
international law currently prevailing in Israel) which enforces similar Israeli
judgments, provided that: (i) due service of process has been effected; (ii) such
judgments or the enforcement thereof are not contrary to the law, public policy, security
or sovereignty of the State of Israel; (iii) such judgments were not obtained by fraud and
do not conflict with any other valid judgment in the same matter between the same parties;
and (iv) an action between the same parties in the same matter is not pending in any
Israeli court at the time the lawsuit is instituted in the foreign court.

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

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

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

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

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

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

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

14

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

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

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

# Recent Developments

Since
January 1, 2006, 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, or the April
Investment, 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, hold more than 5% of our
issued and outstanding share capital.

Potential acquisition of
Cellocator Ltd.

In
March 2007, we announced the execution of a non-binding Memorandum of Understanding to
acquire the assets and liabilities of Cellocator Ltd., or Cellocator, a private Israeli
company active in the field of cellular location-based services and technology. The
closing of the transaction is subject to the completion of a full due diligence review to
our full satisfaction. We will pay Cellocator and its shareholders approximately US$18.5
million in cash, shares and a convertible debenture. Following the completion of the
transaction and upon conversion of the debenture, Cellocator and/or its shareholders will
hold approximately 5.37% of our issued and outstanding share capital (on a fully diluted
basis). We cannot guarantee that this transaction will be consummated.

MOU with a leading
provider of Road Side Assistance in Argentina

In
March 2007, we also executed a Memorandum of Understanding, or MOU, with a leading
provider of road side assistance in Argentina, or the Argentinian 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 Argentinian Provider in reaching an
agreement with a leading automotive manufacturer in Argentina. Based on the MOU, upon
closing, the Argentinian Provider shall transfer to Pointer Argentina all of its location
based services and SVR business in consideration for 11% of the outstanding share capital
of Pointer Argentina. Thereafter, contingent upon the success of the project during the
two years following the closing, the Argentinian Provider will increase its holdings in
Pointer Argentina, and we will provide Pointer Argentina with certain of our products,
free of charge, during these two years.

15

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Potential acquisition of
the Argentinian Provider

In
March 2007, we executed a non-binding Letter of Intent to acquire controlling ownership of
the Argentinian Provider, in consideration for $9 million.

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. Under the terms of his employment, Mr. Fried was
granted 20,000 options at an exercise price of $11.24, in accordance with our 2003 option
plan.

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 $4.7M. 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.

Dual Listing

On
December 19, 2006, we commenced the listing of our ordinary shares on the Tel Aviv Stock
Exchange, or TASE, under the ticker symbol PNTR.

Agreement with Latin
American customer

On
May 26, 2006, we entered into a settlement agreement, which related to past claim against
a Latin American customer pursuant to which we received, after payment of related
expenses, a net amount of approximately $1.3 million.

Name Change

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

On
March 2007 our subsidiary Shagrir changed its name 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 transaction through a credit line of NIS 100 million,
made available by Bank Hapoalim B.M., a loan of NIS 40 million provided by Shagrir Towing
Services, a loan of approximately NIS 50 million provided by a group of investors led by
Gandyr Investments Ltd. and Egged Holdings Ltd., or Egged, and a loan of NIS 10 million
provided by the Company and the investors.

On
May 1, 2006,  Shagrir repaid a $2 million  convertible  loan to Egged, and in October
2006, it repaid Egged an additional approximately NIS 2.7 million. As of March 31, 2007
of NIS 5.4 million of the sums loaned by Egged are to be repaid by July 2008.

16

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Reverse Stock Split

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

Termination of
Shareholders Agreement between DBSI and Egged Holdings Ltd.

Following
an investment in our company in 2005 by a group of investors, including Egged Holdings
Ltd., or Egged, DBSI and Egged consummated a shareholders agreement, pursuant to which
they agreed to vote their shares jointly in respect of certain matters relating to our
company and Shagrir. In December 2006, following the sale by Egged of all of its
shareholdings in our company, Egged and DBSI terminated the Shareholders Agreement. For
further information relating to the Shareholders Agreement see Item 10.

Legal
Claim

In
February 2002, we executed (i) an agreement with Sino Telocation Ltd., or Sino, pursuant
to which we were to provide Sino with a car localization system, or the System, in
consideration for $900,000; and (ii) an agreement with Sino and the China National
Electronics Import Export Beijing Company, or CEIEC, for the funding of the acquisition of
the System. Pursuant to the agreements we received a down payment of $300,000 from CEIEC
against a bank guarantee in favor of CEIEC from Bank Hapoalim B.M. We requested that CEIEC
issue a letter of credit to insure the shipment of the System. CEIEC did not issue the
letter of credit and as a result the System was not provided. As the System was unique and
adapted for the Chinese market, we were not able to sell the System to others. CEIEC and
Sinos breach of the agreements caused us extensive damages, in particular due to the
failure to pay the remainder of consideration, in the amount of $600,000.

On
November 26, 2002, we filed a claim with the Tel-Aviv Magistrates Court for a
permanent injunction against Bank Hapoalim B.M. and CEIEC requesting that the court
prohibit Bank Hapoalim from paying CEIEC any amount, pursuant to the guarantee. The Court
ruled in our favor. CEIEC commenced proceedings in China, against Bank Hapoalim, to which
we are not a party, for the payment of the guarantee. In August 2004, Bank Hapoalim
informed us that it may pay to CEIEC the guaranteed amount plus interest at a rate of 0.5%
per week, commencing March 2002 and, in such an event, will request that we indemnify it
for the amount paid.

In
March 2005, we filed a claim against CEIEC and against Sino, with the China International
Economic and Trade Arbitration Commission Beijing, China, or CIETAC, for approximately
$557,000 representing the damages caused to us by the breach of the contract by CEIEC and
Sino in respect of the China transaction.

As
a result of the filing of the claim with CIETAC, the proceedings which had been initiated
by CEIEC against Bank Hapoalim, in China, for payment of the guarantee, were suspended.

In
January 2006, CIETAC provided a ruling in our favor, pursuant to which CEIEC and Sino are
to pay us $557,000 representing most of the damages caused to us plus interest rate of 6%
per annum from April 2003 and additional costs incurred by us.

In
February and in June 2006, Sino and CEIEC, respectively, petitioned the Beijing No. 2
Intermediate Peoples Court to overturn the ruling of CIETAC.

In
December, 2006 the Beijing No. 2 Intermediate Peoples Court ruled that CIETAC should
issue a new ruling and grant a new arbitration award accordingly. No grounds were given.
As a result of the Courts decision CIETAC issued a Notice of Re-arbitration.

17

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In
March, 2007 CEIEC petitioned the CIETAC for the replacement of the arbitration panel, on
the grounds that the previous decisions was biased and against the interests of the state.
An objection to the petition was filed. The petition and objection have yet to be
addressed.

As
of May 1, 2007, no dates have been set and no further information has been received from
CIETAC.

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.

Grant of Options to Bank
Hapoalim, Shagrir Towing Services and ADACH Property Ltd.

On
February 15, 2007, our board of directors resolved to extend the warrants granted to Bank
Hapoalim, Shagrir Towing Services and ADACH Property Ltd., formerly Shagrir (1985) Ltd.,
until June 30, 2007.

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

General

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

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

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

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

We
currently provide such services mainly in Israel and in addition, but to a lesser extent,
in Argentina and Mexico through subsidiaries in each country: Pointer Argentina (we
currently hold approximately 93% of the issued share capital of Pointer Argentina) and
Pointer SA (we currently hold 74% of the issued share capital of Pointer SA),
respectively.

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

18

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Pointers
Products and Services

| | Our
products and services are provided based on spread spectrum technology (SPSP) intended
for wide area networks (WAN) and Cellular / GPS technology.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following are some of the available applications when using our products and systems:
| | -----------------------------------------------------------------------------------------

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

| |  | Fleet
Management 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, or by discrete (on or off) wirelines. The sensors monitor various vehicle
operating systems, and the end unit will report the results to the fleet owners and
managers.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
system is comprised of three major parts:
| | ---------------------------------------------

| |  | Command
&Control Center (CCC)
| | - | -----------------------------

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

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

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

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

| | Communication
is accomplished by either the cellular network in each territory of operations or RF
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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

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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.

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

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

Services and Operations

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

Shagrir
is the leader in Israel in providing road-side assistance and towing services. Shagrir
provides services to 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.

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

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

| | 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.

20

---

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Equipment, Subcontractors
and Supplies

As
of January 2007, Shagrir owned approximately 100 service cars, mobile garages and towing
vehicles and owned approximately 92 replacement vehicles.

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

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

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.

For
SVR and location based services, Shagrir mainly uses the Pointerware 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.

Sales and Marketing

For
the provision of its road-side assistance and towing services, Shagrir sales and marketing
team directs its sales and marketing efforts to promoting its subscriptions mainly to
Israeli insurance companies, and to lesser extent fleet vehicle customers. 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 safety 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 90 authorized installers across Israel.

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

Patent and Licenses

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

Government Regulations

Shagrir
has the following licenses:

| |  | a business license to render towing and retrieval/extrication services under the Control
of Commodities and Services (Vehicle Towing and Extrication) Order, 5734-1974, which is
valid until December, 31 2007;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 2007;
and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

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| |  | 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 2007.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

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
services market.

Seasonality

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.

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

We
currently hold approximately 93% of the issued share capital of Pointer Argentina and 74%
of the issued share capital of Pointer SA. Pointer Argentina provides mainly stolen
vehicle retrieval services based on our proprietary technology. 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. Pointer
S.A in Mexico provides both stolen vehicle retrieval services and fleet management
services, based on Cellular / GPS technology.

In
both these territories, we 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.

Sales and Marketing

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

22

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Patent and Licenses

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

Government Regulations

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

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

Since
2006 our services in Mexico through Pointer S.A are based entirely upon Cellular
Monitoring Units and therefore require no specific governmental licenses.

Competition

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

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).

Seasonality

Our
business provided in Latin America is not materially seasonal.

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

We
also sell our Pointerware sub-systems and products to third party local operators
primarily in Russia, Venezuela and to a lesser extent China and Chile, who, like our
subsidiaries, Shagrir, Pointer Argentina and Pointer SA, provide mainly stolen vehicle
retrieval or other services using our Pointerware system and technology. Recently we have
started to sell to our customer in Russia, CMUs for SVR and fleet management applications.
The Cellular monitoring Units are fully integrated to our Pointerware system.

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

23

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

# Geographical breakdown
of our revenues:

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

|              | 2006 | 2005 | 2004
|------------- | ---- | ---- | ----
|
|
|
|
|Israel        |      |      |     
|              |      |     
|Latin America |      |      |     
|              |      |     
|Other         |      |      |     
|              |      |     
|Total         |      |      |     
|              |      |      |     

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

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

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

|NAME OF SUBSIDIARY    | JURISDICTION OF INCORPORATION
|--------------------- | -----------------------------
|Pointer Argentina (1) | Argentina                    
|Shagrir (2)           | Israel                       
|Pointer SA (3)        | Mexico                       

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

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

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

24

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

Our
executive offices, research and development and laboratory facilities are located in
Givatayim, Israel (a suburb of Tel Aviv). We currently lease approximately 609 square
meters and our annual lease payments are approximately $70,000. Pointer Argentinas
offices and operations facility are located in Buenos Aires. Pointer Argentina currently
leases 2,246 square meters (including 1,526 square meters used by its installation
centers) with an annual lease payment of $107,000. Shagrirs offices and main
operations facility are located in Holon, Israel. Shagrir currently leases 5,320 square
meters in Holon with annual rental fees of approximately $125,000. In addition, Shagrir
purchased from Shagrir (1985) its Haifa property (2,100 square meters) for approximately
$389,000; and leases an additional property in Jerusalem, Israel (approximately 606
square meters) with annual rental fees of approximately $34,000. Pointer SAs
offices and operations facility are located in Mexico City, Mexico. Pointer SA currently
leases 480 square meters with an annual lease payment of $79,000. For further
information, see Note 11d of our consolidated financial statements.

25

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

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

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

# Overview

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

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

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

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

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

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

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

# Critical Accounting
Policies

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

Revenue recognition

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

26

---

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

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

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.

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. As of December 31, 2006, we have determined that no impairment with
respect to goodwill exists. During 2006, we reduced our goodwill in the amount of $1.489
million due to the realization of tax loss carryforward, that at the date of acquisition
was not more-likely-than-not to be realized.

Intangible
assets consist of the brand name, customer list 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-year period and an eight year period.

The customer lists are amortized over
a five-year and an eight year periods.

Patents
are amortized over an eight-year period.

Our
long lived assets are reviewed for impairment in accordance with SFAS No.144,
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
No.144) whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the assets to the future undiscounted
cash flows expected to be generated by the assets. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell. Due to
requirement of increased territory coverage in Mexico and to the increased costs of
communication services to the proprietary system, we decided to change communication
technology and infrastructure from the traditional RF system to Cellular / GPS. This
necessitated dismantling of 9 base-stations and replacing about 500 RMU vehicle units with
CMU vehicle units. This process required us to impair equipment valued at about USD
372,000 recorded in 2006.

27

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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 2006 was $251,000. For fiscal 2005 and fiscal
2004, stock-based compensation expense of $126,000 and $657,000, respectively 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.

# Significant Expenses

Cost of Revenues.

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

Research and Development
Expenses.

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

Selling & Marketing
Expenses.

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

General and
Administrative Expenses.

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

28

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Amortization of
intangible assets.

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

Financial Income
(Expenses), Net.

Financial
expenses consist mainly of bank charges and interest expenses, foreign currency
translation adjustments, amortizations of compensation related to warrants issued to a
bank and others. Financial income consists of interest on short-term bank deposits.

Other Expenses, Net.

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

# Selected Financial Data

We
derived the following selected consolidated financial data presented below for each of the
years ended December 31, 2004, 2005 and 2006 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, 2002
and 2003 have been derived from audited financial statements not included in this annual
report.

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

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

29

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|                                                  | 2006 | 2005 | 2004 | 2003    | 2002
|------------------------------------------------- | ---- | ---- | ---- | ------- | ----
|
|
|
|
|Statement of Income Data:                         |      |      |      |         |     
|Revenues, products                                |      |      |      | 9,701   |     
|Revenues, services                                |      |      |      | 32,211  |     
|Total Revenues                                    |      |      |      | 41,912  |     
|                                                  |      |     
|Cost of revenues, products                        |      |      |      | 5,602   |     
|                                                  |      |     
|Cost of revenues, services                        |      |      |      | 20,786  |     
|Total Cost of Revenues                            |      |      |      | 26,388  |     
|Gross profit                                      |      |      |      | 15,524  |     
|Research and development costs, net               |      |      |      | 1,170   |     
|                                                  |      |     
|Selling, general and administrative expenses      |      |      |      | 8,676   |     
|Amortization of deferred stock based compensation |      |      |      | -       |     
|Amortization of intangible assets                 |      |      |      | 1,740   |     
|Other income, net                                 |      |      |      | (1,292  | )   
|Impairment of long lives assets                   |      |      |      | 372     |     
|Operating income (loss)                           |      |      |      | 4,858   |     
|Financial expenses                                |      |      |      | 2,577   |     
|Other income (expenses)                           |      |      |      | 14      |     
|                                                  |      |     
|Income (loss) before tax on income                |      |      |      | 2,295   |     
|Taxes on income                                   |      |      |      | 82      |     
|                                                  |      |     
|Income (loss) before Minority interest            |      |      |      | 2,213   |     
|                                                  |      |     
|Minority interest                                 |      |      |      | 1,044   |     
|Income (loss) from continuing operations          |      |      |      | 1,169   |     
|Income(Loss) from discontinued operations         |      |      |      | -       |     
|                                                  |      |     
|Net income (loss)                                 |      |      |      | 1,169   |     
|                                                  |      |     
|Basic net earning (loss) per share from           |      |     
|continuing operations                             |      |      |      | 0.39    |     
|Diluted net earning (loss) per share from         |      |     
|continuing operations                             |      |      |      | 0.31    |     
|                                                  |      |     
|Basic net earning (loss) per share                |      |      |      | 0.39    |     
|Diluted net earning (loss) per share              |      |      |      | 0.31    |     
|Weighted average number of shares                 |      |     
|outstanding (in thousands)                        |      |      |      | 2,983   |     
|                                                  |      |     
|Balance Sheet Data:                               |      |     
|Total assets                                      |      |      |      | 76,399  |     
|Net assets (liabilities) of continuing operations |      |      |      | 19,430  |     
|Working capital (deficit)                         |      |      |      | (10,874 | )   
|Convertible debentures                            |      |      |      | -       |     
|Shareholders' equity (deficiency)                 |      |      |      | 19,430  |     
|Share capital                                     |      |      |      | 2,140   |     
|Additional paid-in capital                        |      |      |      | 103,880 |     

# Operating Results

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.

30

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

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.

Impairment of long lived
assets. During 2006, we have dealt with the service coverage demanded by
potential customers in the market. During 2006, the service which we provided to customers
in Mexico offered regional coverage while major potential Mexican 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, with respect to
Mexico, 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.

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.

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

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

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

31

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

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

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

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

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

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

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

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

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

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

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

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

32

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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 CPI, and other expenses, which are paid in New Israeli Shekels. On the
other hand, a devaluation of the NIS against the US dollar will reduce our NIS denominated
revenues and expenses in US dollar terms and therefore may increase our consolidated net
losses.

The
exchange rate fluctuated during 2006 from a low of NIS 4.176 to the U.S. dollar to a high
of NIS 4.725 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         | HIGH1 U.S. dollar = | LOW1 U.S. dollar =
|------------- | ------------------- | ------------------
|November 2006 | 4.331               | 4.247             
|December 2006 | 4.234               | 4.176             
|January 2007  | 4.260               | 4.187             
|February 2007 | 4.254               | 4.183             
|March 2007    | 4.222               | 4.155             
|April 2007    | 4.135               | 4.014             

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, 2002 - December 31, 2002 | 4.7363 NIS/$1
|January 1, 2003 - December 31, 2003 | 4.5124 NIS/$1
|January 1, 2004 - December 31, 2004 | 4.4833 NIS/$1
|January 1, 2005 - December 31, 2005 | 4.5026 NIS/$1
|January 1, 2006 - December 31, 2006 | 4.4565 NIS/$1

In
2002, the rate of inflation was about 6.5% and the NIS was devalued against the dollar by
7.3%. In 2003, the Israeli economy recorded negative inflation of approximately 1.9% where
the U.S. dollar devalued against the NIS by approximately 7.6%. In 2004, the Israeli
economy recorded inflation of approximately 1.4% where the U.S. dollar devalued against
the NIS by approximately 1.6%. As a result of the differential between the rate of
inflation and the rate of valuation of the NIS, we experienced increases and decreases in
the costs of our Israel operations, as expressed in U.S. dollars in 2004, but they did not
materially affect our results of operations in such periods.In 2005, the Israeli
economy recorded inflation of approximately 2.4% where the NIS devalued against the U.S.
dollar by approximately 6.8%. As a result of the differential between the rate of
deflation and the rate of valuation of the NIS, we experienced increases and decreases in
the costs of our Israel operations, as expressed in U.S. dollars, in 2005.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 differential
between the rate of deflation and the rate of valuation of the NIS, we experienced
increases and decreases in the costs of our Israel operations, as expressed in U.S.
dollars, in 2006.

33

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Regarding
our operation in Argentina, the fact that most of Pointer Argentinas revenues are
not denominated in US dollars, we believe that inflation in Argentina and fluctuations in
the exchange rate between U.S. dollar and Argentinian Peso may have a significant effect
on the business and overall profitability of Pointer Argentina and as a consequence, on
the results of our operations. In 2002, a severe and rapid currency devaluation in
Argentina adversely affected Pointer Argentinas US dollar results. This was mainly
due to Pointer Argentinas inability to increase its Argentinian Peso-denominated
prices to its customers, while its major costs of inventory and infrastructure were
denominated in US dollars. In 2004, the U.S. dollar  Argentinian Peso exchange rate
fluctuated between 2.92 and 2.98 Pesos to the dollar. From January 1, 2004 to December 31,
2004, the value of the Argentinian Peso increased by approximately 2.02% against the US
dollar. This increase had no material effect on our business during 2004. In 2005 the U.S.
dollar  Argentinian Peso exchange rate fluctuated between 2,979 and 3,032 Pesos to
the dollar. From January 1, 2005 to December 31, 2005, the value of the Argentinian Peso
increased by approximately 1.78% against the US dollar. In 2006 the U.S. dollar 
Argentinian 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 Argentinian Peso increased by
approximately 2.79% against the US dollar. This increase had no material effect on our
business during 2006.

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,
we may in the future undertake such transactions if management determines that such is
necessary to offset such risks.

Governmental and Fiscal
Policies which May Affect Our Business

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

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

In
Venezuela, the prevailing foreign currency restrictions imposed by the Venezuelan
government and the recent economic political situation in Venezuela which caused our
Venezuelan customer to suspend its orders from us in the past, continue to prevail.
Additionally there is currently discussion of the Venezuelan government instituting a
nationalization program, which could further adversely affect our operations there.

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

As of December 31, 2006, we had a negative
working capital of $10.9  million, our current assets to current liabilities ratio was 0.61 we had cash
and cash equivalents of $5.9 million and an unused credit facility of $2.5 million.

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

As
of December 31, 2006, we had a long-term credit facility for approximately $32.1 million,
of which $29.9 was provided to our subsidiary Shagrir. $2.2 million are long-term loans in
or linked to the US dollar from banks, $10.2 million are NIS long-term loans from a bank
and others. $19 million are long-term loans in NIS adjusted to the CPI from banks and
others. A $0.7 million loan is in Mexican pesos. For further information regarding our
consolidated long term loans see notes 9 and 10 to our financial statements.

34

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As
of December 31, 2006, we had a short term credit facility for approximately $6.5 million.
$2.5 million of the short term credit facility remains as of December 31, 2006 available
for our use.

In
2006, net cash provided by our continuing operating activities amounted to $5.4 million as
compared to net cash provided from continuing operating activities of $5.8 million in
2005. In 2006, net cash used in our continuing investing activities was $1.2 million as
compared to $39.1 million net cash used in our continuing investment activities in 2005.
In 2006, net cash used by financing activities was $10,000 as compared to $34.7 million
provided by continuing financing activities in 2005.

Current
liabilities increased from $24.2 million in 2005 to $27.9 million as of December 31, 2006,
mainly due to the liabilities acquired in connection with the acquisition of the road side
assistance and towing services business and loans provided to finance these transactions.
Long-term liabilities decreased from $32.2 million in December 31, 2005 to $28 million as
of December 31, 2006 mainly due loans provided to Shagrir to fund the acquisition of the
road side assistance and towing services.

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

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

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

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

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

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

We
invest a significant amount of our resources on our internal research and development
operations. We believe that continued and timely development of new 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.

35

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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 Pointerware network. Our net expenditures for
research and development programs during the years ended December 31, 2006 and December
31, 2005, totaled approximately $1.2 million and $892,000 respectively. We expect that we
will continue to commit substantial resources to research and development in the future.
As of December 2006, the Company employed 12 persons in research and development. Our
research and development expenses constituted approximately 2.8% and 2.4% of such sales,
in the respective years ended December 31, 2006 and 2005. 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.

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, 2006, our contingent
obligation to the BIRD Foundation was $2.1 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.

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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 and issued patent applications for Pointerware
communications technology. Although software protection is currently available in the
United States, there can be no assurance that the software patents will continue to be the
subject of patent protection in the United States. Also, foreign patent protection for
software is generally afforded lesser protection than in the United States.

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

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

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

In
Israel, in June 2004 we acquired Shagrir, our primary customer and operator in Israel. In
February 2005 Shagrir acquired certain of the activities and assets of Shagrir Towing
Services. These two acquisitions expanded our operations and increased our revenues in
Israel such that approximately 89% of our revenues are now derived from the Israeli
market. Such transactions reflect our strategy not only to serve as a technology company
but also as an operator, providing operating services to insurance companies and
automobile owners. Due to very intense competition in our field we expect prices for our
services to drop during 2007.

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

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

In
February 2005, our subsidiary, Pointer SA, commenced operations in Greater Mexico City.
Since Pointer SAs operations are in the development phase, we (we currently hold 74%
of the issued and outstanding shares of Pointer SA) will still need to provide it with
financing until it has sufficient cash flows to run its operations. In 2007, we expect to
materially dilute the holdings of our Mexican partners in Pointer SA pursuant to agreement
with our partners there.

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In
2005 we consolidated our financial reports in order to reflect 100% of Shagrirs
financial results. On November 30, 2005, a group of investors, led by Gandyr Investments
Ltd., exercised their options to convert their loan of approximately NIS 29.1 million into
43.44% of the shares of Shagrir 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.

In
2006 we introduced the Cellular Monitoring Units which provide high functionality for
location based services, utilizing advanced cellular modems with GPS. 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.

In
2007 and thereafter we believe the increasing demand for high-quality services from
automotive manufacturers, importers and dealers 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 major acquisitions and partnerships that should
enable us to capitalize on economies of scale to sustain our growth strategy.

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

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

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

|Contractual ObligationsDecember 31,
2006 (in thousands USD) |  | Total | Less
than 1
Year | 1-3
Years | 3-5
Years | More
than 5
Years
|----------------------------------------------------------- |  | ----- | ---------------- | --------- | --------- | -----------------
|
|
|
|
|Short term debt and other current liabilities               |  |       |                  | 1         |           |                  
|                                                            |  |      
|Long-term loans                                             |  |       |                  | 2         |           |                  
|                                                            |  |      
|Accrued severance pay, net                                  |  |       |                  | 3         |           |                  
|                                                            |  |      
|Management fees to DBSI                                     |  |       |                  | 4         |           |                  
|                                                            |  |      
|Operating lease obligations                                 |  |       |                  | 5         |           |                  
|                                                            |  |      
|Purchase Obligations                                        |  |       |                  |           |           |                  
|                                                            |  |      
|Royalties to BIRD                                           |  |       |                  | 6         |           |                  
|                                                            |  |      
|Total contractual obligations                               |  |       |                  |           |           |                  
|                                                            |  |       |                  |           |           |                  

---

1
          Short term debt and other current liabilities include short term bank credits,
          trade accounts payable for equipment and services that have already been
          supplied and other accrued expenses. 2  Long term loans include principal and interest payments in accordance with the
          terms of the agreements with Banks and other third parties. For further
          information please see Item 11  Liquidity and Capital
          Resources.3 Accrued severance pay
maturity depends on the date our employees will actually cease being employed. The amount
is net of outstanding severance pay funds.4 We 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.5 Operating
lease obligations include rental payments of offices, cars, and other premises and
equipment.6 Royalties to BIRD include the amount received by BIRD foundation indexed as per
          the agreement, which the Company has undertaken to pay based on sales of a
          specific product.  The Company does not anticipate selling this product and
          therefore, does not anticipate paying these contingent royalties (See Note 11c
          to our Financial Statements).

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|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 | 51  |  | Chairman of Board of Directors                    
| | Danny Stern      | 55  |  | President and CEO                                 
| | Alicia Rotbard   | 61  |  | External Director                                 
| | Gov Ben Ami      | 80  |  | External Director                                 
| | Barak Dotan      | 39  |  | Director                                          
| | Ken Lalo         | 50  |  | Director                                          
| | Yoel Rosenthal   | 52  |  | Director                                          
| | Ofer Kelman      | 50  |  | Vice President, Research and Development          
| | Zvi Fried        | 42  |  | Vice President and Chief Financial Officer        
| | Gideon Rossman   | 47  |  | Vice President, Business Development and Marketing

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

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

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

Barak Dotan was
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.

40

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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 Rosenthal was 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.

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.

Ofer Kelman  was
appointed our Vice President of Research and Development in September 2006. Prior to his
appointment, Mr. Kelman served as Development Manager of the WipLL department at Airspan
Networks Israel Ltd. Mr. Kelman is an active member of the IEEE 802.16 committee
developing the Standard for Wireless Metropolitan Area Networks and represented Airspan in
the Technical Working Group of the WiMAX forum. Mr. Kelman holds a B.Sc. in Computer
Sciences from the Hebrew University in Jerusalem since 1986.

| | 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, 2006, was approximately
$605,000, 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 $483,000.

In
addition, during 2006 a total of 12,000 options were granted to all persons as a group who
served in the capacity of director or executive officer, at an exercise price of $7.60.

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

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

41

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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. These regulations do not appear
to relate to external directors currently serving.

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

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

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.

42

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

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

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

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

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

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

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

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

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

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

43

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

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

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

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

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

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

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

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

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.

44

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

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

Some
of our directors and officers own ordinary shares in our company and/or options to
purchase ordinary shares. As of May 1, 2007, none of our directors and officers,
beneficially owned shares and/or options amounting to 1% or more of the outstanding
Ordinary Shares, excluding Messers. Barak Dotan and Yossi Ben Shalom, who, as office
holders of DBSI, may be considered to be the beneficial holders of the 22% of our issued
share capital held by DBSI.

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

# Employee Share Option
Plans

For information concerning our
employee share option plans, see as incorporated by reference, Note 12d 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, May 1, 2007,
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 Shares Beneficially Owned*[issued] | Percent of SharesBeneficially Owned
|--------------------------------------- | -------------------------------------------- | -----------------------------------
|
|
|
|
|DBSI Investment Ltd.(1)                 |                                              |                                    
|LB I Group Inc.(2)                      |                                              |                                    
|Portside Growth and Opportunity Fund(4) |                                              |                                    
|Fort Mason Master, LP(6)                |                                              |                                    
|Fort Mason Partners, LP(6)              |                                              |                                    

45

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|* | Percent
of shares beneficially owned prior to and after this offering has been determined based
on 4,452,875 shares outstanding as of May 1, 2007. 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,
notwithstanding the Issuance Limitation as defined in footnote 1 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, Messrs. Barak Dotan and Yossi Ben Shalom may be
          considered to be the beneficial holders of the 21.86% of our issued share
          capital 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Ramius Capital Group, L.L.C. (Ramius Capital) is the investment
          adviser of Portside Growth and Opportunity Fund (Portside) and
          consequently has voting control and investment discretion over securities held
          by Portside. Ramius Capital disclaims beneficial ownership of the shares held by
          Portside. Peter A. Cohen, Morgan B. Stark, Thomas W. Strauss and Jeffrey M.
          Solomon are the sole managing members of C4S & Co., L.L.C., the sole
          managing member of Ramius Capital. As a result, Messrs. Cohen, Stark, Strauss
          and Solomon may be considered beneficial owners of any shares deemed to be
          beneficially owned by Ramius Capital. Messrs. Cohen, Stark, Strauss and Solomon
          disclaim beneficial ownership of these shares.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
investment advisor to Portside Growth and Opportunity Fund is Ramius Capital Group, L.L.C.
An affiliate of Ramius Capital Group, L.L.C. is a NASD member. However, this affiliate
will not sell any shares to be offered by Portside Growth and Opportunity Fund through the
prospectus and will receive no compensation whatsoever in connection with sales of shares
by Portside Growth and Opportunity Fund through the prospectus.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes 45,000 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 Portside Growth and Opportunity Fund, or Portside, of more than
          4.99% of our outstanding shares. This mechanism is termed the Issuance
          Limitation. Portside has the express right to waive the Issuance Limitation upon
          sixty-one (61) days written notice to us.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Fort Mason Capital, LLC serves as the general partner of each of Master and
          Partners (collectively the Fort Mason Funds) and, in such capacity,
          exercises sole voting and investment authority with respect to ordinary shares
          owned by the Fort Mason Funds. Mr. Daniel German serves as the sole managing
          member of Fort Mason Capital, LLC. Fort Mason Capital, LLC and Mr. German each
          disclaim beneficial ownership of shares owned by the Fort Mason Funds, except to
          the extent of its or his pecuniary interest therein, if any.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

46

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|(7) | The number of shares listed as beneficially owned by Fort Mason Master, L.P.
          (Master) includes 167,500 shares of ordinary shares underlying
          warrants exercisable as of May 1, 2007. A provision in the warrants held by
          Master prevents it from exercising the warrants, if Master and its affiliates,
          which such affiliates include Fort Mason Partners, L.P. (Partners),
          would hold more than 4.99% of Pointer Telocation Ltd.s ordinary shares
          (the 4.99% Master Blocker). The 4.99% Master Blocker is waivable by
          Master with 61 days notice to Pointer Telocation Ltd.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | The number of shares listed as beneficially owned by Partners includes 10,201
          shares of ordinary shares underlying warrants exercisable as of May 1, 2007. A
          provision in the warrants held by Partners prevents it from exercising the
          warrants, if Partners and its affiliates, which such affiliates include Master,
          would hold more than 4.99% of Pointer Telocation Ltd.s ordinary shares
          (the 4.99% Partners Blocker). The 4.99% Partners Blocker is waivable
          by Partners with 61 days notice to Pointer Telocation Ltd.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
of May 24, 2007 there were approximately 69 record holders of our ordinary shares,
including approximately 14 record holders in the United States (who held approximately 68%
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
| | -- | --------------------------

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

Agreements with Mr. Ofer
Lior and his affiliates

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

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

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

47

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Agreements with Shagrir

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

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

In
February 2005 we consummated a loan agreement with Shagrir pursuant to which we loaned
Shagrir NIS 3,916,536 in connection with certain infrastructure and equipment expenses.
Interest repayments and repayments of the principal shall be repaid on a pro rata basis
with the loans of Shagrir with its other shareholders. Interest under the loan is payable
at a rate of 4% per year.

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

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

Management Agreement with
DBSI Investments Ltd.

Pursuant
to the share purchase agreement with DBSI Investments Ltd., we entered a management
services agreement with DBSI in April 2003. Pursuant to the management agreement, DBSI
will provide us with management services with respect to our business for a period of
three years, in consideration for a management fee of $180,000 per annum for a period of
three years commencing April 2003, to be paid in equal quarterly installments of $45,000.
In April 2006, the agreement was renewed for an additional 12 month period which may be
automatically renewed for additional 12 month terms unless terminated by either of the
parties.

Cooperation and Share
Exchange Agreements with Shagrir

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

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

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

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

48

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---

In
addition, in January 2007, Mr. Rossman was granted in January 2007, 10,000 options at an
exercise price of $11.24, in accordance with our 2003 option plan. 25% of these options
will vest each year, over the next four years beginning in January 2008 and ending in
January 2010 (provided that he remains employed by us throughout that period).

Employment
of Mr. Ofer Kelman, Vice President of Research and Development

In
September 2006, Mr. Kelman was appointed our Vice President of Research and Development.
Under the terms of his employment, Mr. Kelman was granted 10,000 options at an exercise
price of $11.24, in accordance with our 2003 option plan. 25% of these options will vest
each year, over the next four years beginning in January 2008 and ending in January 2010
(provided that he remains employed by us throughout that period).

Employment
of Mr. Danny Stern President and CEO of the Company and Mr. Zvi Fried, Vice President and
CFO of the Company.

See
Item 4A  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

For
information concerning legal proceedings with CEIEC see Item 4 above: "Information on the
Company"- "Legal Claim".

As
of December 31, 2006, several claims were filed against Shagrir Systems, mainly by
customers. The claims are in an amount aggregating to approximately NIS 680,000. 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.

Legal
proceedings brought against Yossi Ben-Shalom and Barak Dotan in 2005 have been terminated.

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

For
a description of significant events, which took place since the year ending December 31,
2005, see as incorporated by reference in Item 4  Information on the Company
 Recent Developments above.

49

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|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
|------------------- | ---- | ---
|
|
|
|
|2007 April          |      |    
|2007 March          |      |    
|2007 February       |      |    
|2007 January        |      |    
|2006 December       |      |    
|2006 November       |      |    
|2006 Fourth Quarter |      |    
|2006 Third Quarter  |      |    
|2006 Second Quarter |      |    
|2006 First Quarter  |      |    
|2005 Fourth Quarter |      |    
|2005 Third Quarter  |      |    
|2005 Second Quarter |      |    
|2005 First Quarter  |      |    
|                    |      |    
|2006                |      |    
|2005                |      |    
|2004                |      |    
|2003                |      |    
|2002                |      |    

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
|------------- | ---- | ---
|
|
|
|
|2007 April    |      |    
|2007 March    |      |    
|2007 February |      |    
|2007 January  |      |    
|2006 December |      |    

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

# Not applicable

50

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

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

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

# Not applicable

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

# Not applicable

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

# Not applicable

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

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

# Not applicable

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

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

# Articles of Association;
Israeli Companies Law

# Articles of Association

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

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

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

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

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:

51

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| |  | 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.

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:

52

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(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.

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;
| | - | ------------------------------------------------------

53

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| |  | 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.

54

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Nasdaq Marketplace Rules
and Home Country Practices

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

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

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

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

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

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

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

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

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

55

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

Private Placements with
U.S. Institutional Investors

On April 2, 2007, we entered into and
consummated a share purchase agreement, or the April Investment, 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, hold more than 5% of our issued and outstanding share capital.

Potential acquisition of
Cellocator Ltd.

In
March 2007, we announced the execution of a non-binding Memorandum of Understanding to
acquire the assets and liabilities of Cellocator, a private Israeli company active in the
field of cellular location-based services and technology. The closing of the transaction
is subject to the completion of a full due diligence review to our full satisfaction. We
will pay Cellocator and its shareholders approximately US$18.5 million in cash, shares and
a convertible debenture. Following the completion of the transaction and upon conversion
of the debenture, Cellocator and/or its shareholders will hold approximately 5.37% of our
issued and outstanding share capital (on a fully diluted basis). We cannot guarantee that
this transaction will be consummated.

MOU with a leading
provider of Road Side Assistance in Argentina

In
March 2007, we also executed a MOU with a leading provider of road side assistance in
Argentina, or the Argentinian 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 Argentinian Provider in reaching an agreement with a leading automotive
manufacturer in Argentina. Based on the MOU, upon closing, the Argentinian Provider shall
transfer to Pointer Argentina all of its location based services and SVR business in
consideration for 11% of the outstanding share capital of Pointer Argentina. Thereafter,
contingent upon the success of the project during the two years following the closing, the
Argentinian Provider will increase its holdings in Pointer Argentina, and we will provide
Pointer Argentina with certain of our products, free of charge, during these two years.

Potential acquisition of
the Argentinian Provider

In
March 2007, we executed a non-binding Letter of Intent to acquire controlling ownership of
the Argentinian Provider, in consideration for $9 million.

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 $4.7M, out of which, an amount of $2.586 million was received
by 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.

56

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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.

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

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

# Tax Benefits and Grants
for Research and Development

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

57

---

---

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

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

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

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

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

(d)
          Accelerated depreciation rates on equipment and buildings.

Israeli
Capital Gains Tax

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

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. The rate on
the gains from publicly traded shares applicable to gains that were realized before
January 1, 2006 was 15%.

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.

58

---

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# Israeli Tax on Dividend
Income

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

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

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

# Not Applicable

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

# Not Applicable

| | 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.

59

---

---

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 Pointer
Argentina, 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, 2006, accumulated other comprehensive loss decreased by $1,236
million compared to December 31, 2005. As of December 31, 2005, accumulated
other comprehensive loss increased by $785,000 compared to December 31, 2004.

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,
2006 we had net assets of $1.8 million and net income of $1.4 million, 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 $50,000 net decrease in our earnings

Our
revenues and expenses generated by Pointer Argentina are mostly denominated in Argentinian
Pesos and are therefore exposed to exchange rate fluctuations between the Argentinian Peso
and the Dollar. As of December 31, 2006 we had net assets of $4,000 and net expenses of
$139,000, 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 $14,000 net decrease in our earnings.

Our
revenues and expenses generated by Pointer Recuperación de México are
denominated mainly in Mexican Pesos and are therefore exposed to exchange rate
fluctuations between the Mexican Peso and the U.S. dollar. As of December 31, 2006 we had
net assets of $22,000 and net expenses of $1.8 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 $178,000 net decrease in our
earnings.

60

---

---

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 2006 we have not used interest derivative
financial instruments. As of December 31, 2006, we had total loans borrowed bearing
variable interest rates of $ 2.7 million.

The
net decrease in our earnings for the next year resulting from an increase of 10% in
variable interest rates will be approximately $14,000 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, 2006, we had total loans borrowed linked to CPI of $ 19 million. The net
decrease in our earnings for the next year resulting from an increase of 10% in variable
interest rates will be approximately $19,000 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 currency:                       |  |                        
|                                               |  |                        
|Liabilities:                                   |  |                        
|                                               |  |                        
|Short-term bank credit                         |  |                        
|In NIS:                                        |  |                        
|In other currency                              |  |                        
|                                               |  |                        
|Long-term loans (including current maturities) |  |                        
|In U.S. dollars:                               |  |                        
|In NIS linked to CPI:                          |  |                        
|In NIS                                         |  |                        
|In other currency                              |  |                        

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

# Not Applicable.

61

---

---

# PART II

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

# Not applicable.

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

# Not applicable.

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

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

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

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

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

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

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

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

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

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

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

62

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|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, 2006 and 2005.

|                      | 2006 | 2005
|--------------------- | ---- | ----
|
|
|
|
|Audit Fees(1)         |      |     
|Audit-Related Fees(2) |      |     
|Tax Fees(3)           |      |     
|All Other Fees        |      |     

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

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

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

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 2006 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 AND AFFILIATED 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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

63

---

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|4.1 |  | English
summary of Hebrew language Non-Binding Memorandum of Understanding summarizing the main
terms and conditions of the purchase agreement between the Company and Cellocator Ltd.,
dated March 15, 2007.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|4.5 |  | English Translation of Hebrew Language Order Form and Warrant issued in Israeli Private Placement in January 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).
|---- |  | --------------------------------------------------------------------------------------

64

---

---

SIGNATURE

The Registrant hereby certifies that
it meets all of the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf.

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

May 31, 2007.

65

---

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# POINTER TELOCATION
LTD. AND ITS SUBSIDIARIES

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2006

# IN U.S. DOLLARS

# INDEX

|                                                           | Page      
|---------------------------------------------------------- | ----------
|
|
|
|
|Report of Independent Registered Public Accounting Firm    | F-2       
|                                                          
|Consolidated Balance Sheets                                | F-3 - F-4 
|                                                          
|Consolidated Statements of Operations                      | F-5       
|                                                          
|Statements of Changes in Shareholders' Equity (Deficiency) | F-6       
|                                                          
|Consolidated Statements of Cash Flows                      | F-7 - F-8 
|                                                          
|Notes to Consolidated Financial Statements                 | F-9 - F-46



---

---

# 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, 2006 and 2005 and the
related consolidated statements of operations, changes in shareholders equity
(deficiency) and cash flows for each of the three years in the period ended December 31,
2006. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our
audits. We did not audit the financial statements of two subsidiaries, whose financial
statements reflect total assets constituting 2.6% and 3.7% as of December 31, 2006 and
2005, respectively, and total revenues constituting 5.2%, 5.7% and 16.6% of the related
consolidated totals for the years ended December 31, 2006, 2005 and 2004,
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,
2006 and 2005 and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2006, in conformity with U.S.
generally accepted accounting principles.

As
discussed in note 2p to the consolidated financial statements, in 2006 the Company adopted
statement of Financial Accounting Standard Board No. 123 (revised 2004) share based
payment.

|                 |                                 
|---------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|May 31, 2007     | A Member of Ernst & Young Global

F - 2

---

---



Auditores y Consultores

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of Pointer Localización y Asistencia S.A.(Previously named Tracsat S.A.)

We have audited the accompanying
balance sheets of Pointer Localización y Asistencia S.A. (Previously named Tracsat
S.A.) as of December 31, 2006 and 2005, 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, 2006. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial
statements based on our audit.

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

In our opinion, based on our audit,
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, 2006 and 2005 and the results of its operations and cash
flows for each of the three years in the period ended December 31, 2006, in accordance
with generally accepted accounting principles in the United States.

GRANT THORNTON ARGENTINA
S.C.

Buenos Aires, Argentina
January 30, 2007



---

---

# Report of Independent
Registered Public Accounting Firm

To the Shareholders ofPointer 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. as of December
31, 2006 and 2005, and the related statements of operations, changes in shareholders
equity and cash flows, for the yearsended December 31, 2006 and 2005, and for the period
from June 17, to December 31, 2004. These financial statements are the responsibility of
the Companys management.

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. An
audit includes examining, on a test basis, evidence supporting the amount and disclosures
in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position of Pointer Recuperación de México, S. A. de C. V. as of December
31, 2006 and 2005, and the related statements of operations, changes in shareholders
equity and cash flows, for the years ended December 31, 2006 and 2005, and for the period
from June 17, to December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.

SALLES, SAINZ  GRANT THORNTON,
S.C.

Rogelio AvalosPartnerMexico CityJanuary 30, 2007



---

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders of

# SHAGRIR MOTOR VEHICLE SYSTEMS
LTD.

We
have audited the accompanying balance sheets of Shagrir Motor Vehicle Systems Ltd.
(the Company) as of December 31, 2006 and 2005 and the related statements of
operations, changes in shareholders equity (deficiency) and cash flows for each of
the three years in the period ended December 31, 2006. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the
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. An audit includes consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys
internal control over the financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits 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 the Company as of December 31, 2006 and 2005, and the
results of its operations and cash flows for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles generally accepted in the
United States.

|                  |                                 
|----------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel  | KOST FORER GABBAY & KASIERER    
|February 11, 2007 | A Member of Ernst & Young Global



---

---

|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 $302 and |             
|$ 363 at December 31, 2006 and 2005, respectively)                    |             
|Other accounts receivable and prepaid expenses (Note 3)               |             
|Inventories (Note 4)                                                  |             
|                                                                      |             
|                                                                      |             
|Total current assets                                                  |             
|                                                                      |             
|                                                                      |             
|LONG-TERM ASSETS:                                                     |             
|Long-term accounts receivable                                         |             
|Severance pay fund                                                    |             
|Property and equipment, net (Note 5)                                  |             
|Goodwill                                                              |             
|Other intangible assets, net (Note 6)                                 |             
|Deferred income taxes                                                 |             
|                                                                      |             
|                                                                      |             
|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)                    |             
|Accrued severance pay                                                     |             
|                                                                          |             
|                                                                          |             
|                                                                          |             
|                                                                          |             
|                                                                          |             
|MINORITY INTEREST                                                         |             
|                                                                          |             
|                                                                          |             
|SHAREHOLDERS' EQUITY:                                                     |             
|Share capital (Note 12) -                                                 |             
|Ordinary shares of NIS 3 par value -                                      |             
|Authorized: 8,000,000 shares at December 31, 2006 and 2005;               |             
|Issued and outstanding: 3,222,875 and 2,479,020 shares at                 |             
|December 31, 2006 and 2005, respectively                                  |             
|Additional paid-in capital                                                |             
|Deferred stock-based compensation                                         |             
|Receipts on account of shares                                             |             
|Accumulated other comprehensive income (loss)                             |             
|Accumulated deficit                                                       |             
|                                                                          |             
|                                                                          |             
|Total shareholders' equity                                                |             
|                                                                          |             
|                                                                          |             
|Total liabilities and shareholders' equity                                |             
|                                                                          |             

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

F - 4

---

---

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

|                                                | Year ended December 31,
|----------------------------------------------- | -----------------------
|
|
|
|
|Revenues (Note 16b):                            |                        
|Products                                        |                        
|Services                                        |                        
|                                                |                        
|                                                |                        
|Total revenues                                  |                        
|                                                |                        
|                                                |                        
|Cost of revenues:                               |                        
|Products                                        |                        
|Services                                        |                        
|                                                |                        
|                                                |                        
|Total cost of revenues                          |                        
|                                                |                        
|                                                |                        
|Gross profit                                    |                        
|                                                |                        
|                                                |                        
|Operating expenses:                             |                        
|Research and development, net (Note 17a)        |                        
|Selling and marketing                           |                        
|General and administrative                      |                        
|Amortization of intangible assets               |                        
|Other income, net (Note 1h)                     |                        
|Impairment of long-lived assets (Note 5c)       |                        
|                                                |                        
|                                                |                        
|Total operating expenses                        |                        
|                                                |                        
|                                                |                        
|Operating income (loss)                         |                        
|Financial expenses, net (Note 17b)              |                        
|Other expenses (income), net (Note 17c)         |                        
|                                                |                        
|                                                |                        
|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 13)   |                        
|                                                |                        
|                                                |                        
|Diluted net earnings (loss) per share (Note 13) |                        
|                                                |                        

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 (DEFICIENCY)
|                                                          
|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
(deficiency)
|---------------------------------------------------------------------------------------------------------------------- | ---------------- | ------------- | -------------------------- | --------------------------------- | ----------------------------- | ------------------------------------ | ------------------- | --------------------------------- | ---------------------------------------
|
|
|
|
|Balance as of January 1, 2004                                                                                          |                  |               |                            | 1,145,300                         |                               | $                                    | 773                 |                                   | $                                      
|                                                                                                                       |                  |              
|Issuance of shares, warrants and options for the                                                                       |                  |              
|acquisition of additional interest in a subsidiary, net                                                                |                  |               |                            | 429,154                           |                               |                                      | 286                 |                                   |                                        
|Deferred stock-based compensation                                                                                      |                  |               |                            | -                                 |                               |                                      | -                   |                                   |                                        
|Amortization of deferred stock-based compensation                                                                      |                  |               |                            | -                                 |                               |                                      | -                   |                                   |                                        
|Exercise of warrants and options                                                                                       |                  |               |                            | 130,051                           |                               |                                      | 86                  |                                   |                                        
|Comprehensive loss:                                                                                                    |                  |              
|Foreign currency translation adjustments                                                                               |                  |               |                            | -                                 |                               |                                      | -                   |                                   |                                        
|Net loss                                                                                                               |                  |               |                            | -                                 |                               |                                      | -                   |                                   |                                        
|                                                                                                                       |                  |               |                            |                                   |                               |                                      |                     |                                   |                                        
|Total comprehensive loss                                                                                               |                  |               |                            |                                   |                               |                                      |                     |                                   |                                        
|                                                                                                                       |                  |               |                            |                                   |                               |                                      |                     |                                   |                                        
|                                                                                                                       |                  |              
|Balance as of December 31, 2004                                                                                        |                  |               |                            | 1,704,505                         |                               |                                      | 1,145               |                                   |                                        
|                                                                                                                       |                  |              
|Issuance of shares and warrants, net                                                                                   |                  |               |                            | 722,587                           |                               |                                      | 500                 |                                   |                                        
|Deferred stock-based compensation                                                                                      |                  |               |                            | -                                 |                               |                                      | -                   |                                   |                                        
|Amortization of deferred stock-based compensation                                                                      |                  |               |                            | -                                 |                               |                                      | -                   |                                   |                                        
|Exercise of warrants and stock options                                                                                 |                  |               |                            | 51,928                            |                               |                                      | 35                  |                                   |                                        
|Comprehensive loss:                                                                                                    |                  |              
|Foreign currency translation adjustments                                                                               |                  |               |                            | -                                 |                               |                                      | -                   |                                   |                                        
|Net loss                                                                                                               |                  |               |                            | -                                 |                               |                                      | -                   |                                   |                                        
|                                                                                                                       |                  |               |                            |                                   |                               |                                      |                     |                                   |                                        
|Total comprehensive loss                                                                                               |                  |               |                            |                                   |                               |                                      |                     |                                   |                                        
|                                                                                                                       |                  |               |                            |                                   |                               |                                      |                     |                                   |                                        
|                                                                                                                       |                  |              
|Balance as of December 31, 2005                                                                                        |                  |               |                            | 2,479,020                         |                               |                                      | 1,680               |                                   |                                        
|                                                                                                                       |                  |              
|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 (Note 18b)                                                                               |                  |               |                            | -                                 |                               |                                      | -                   |                                   |                                        
|Comprehensive income:                                                                                                  |                  |              
|Foreign currency translation adjustments                                                                               |                  |               |                            | -                                 |                               |                                      | -                   |                                   |                                        
|Net income                                                                                                             |                  |               |                            | -                                 |                               |                                      | -                   |                                   |                                        
|                                                                                                                       |                  |               |                            |                                   |                               |                                      |                     |                                   |                                        
|Total comprehensive income                                                                                             |                  |               |                            |                                   |                               |                                      |                     |                                   |                                        
|                                                                                                                       |                  |               |                            |                                   |                               |                                      |                     |                                   |                                        
|                                                                                                                       |                  |              
|Balance as of December 31, 2006                                                                                        |                  |               |                            | 3,222,875                         |                               | $                                    | 2,140               |                                   | $                                      
|                                                                                                                       |                  |               |                            |                                   |                               |                                      |                     |                                   |                                        

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 |                        
|Decrease (increase) in inventories                                    |                        
|Write-off of inventories                                              |                        
|Increase in deferred income taxes                                     |                        
|Decrease (increase) in long-term accounts receivable                  |                        
|Increase (decrease) in trade payables                                 |                        
|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 additional interest in Shagrir Motor Vehicle           |                        
|Systems, net of cash acquired (a)                                     |                        
|Acquisition of activities and assets of Shagrir Towing                |                        
|Services Ltd. and ADACH Property Ltd.                                 |                        
|(formerly: Shagrir (1985) Ltd.) ("ADACH") (b)                         |                        
|                                                                      |                        
|                                                                      |                        
|Net cash used in investing activities                                 |                        
|                                                                      |                        
|                                                                      |                        
|Cash flows from financing activities:                                 |                        
|                                                                      |                        
|Receipt of long-term loans from banks                                 |                        
|Repayment of long-term loans from banks                               |                        
|Receipt of long-term loans from shareholders and others               |                        
|Repayment of long-term loans from others                              |                        
|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 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) |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|(b) |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|    |  |                        
|(c) |  |                        
|    |  |                        
|    |  |                        
|    |  |                        

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 to                      insurance  companies  and  automobile  owners,
 including  road-side  assistance,                      vehicle  towing,  stolen  vehicle
 retrieval,  fleet  management  and other value                      added  services.
 The Company  provides  services,  for the most part, in Israel,
                     Argentina  and Mexico,  through  its local  subsidiaries.
 Independent  operators                      provide similar  services mainly in Russia
and Venezuela  utilizing the Company's                      technology and operational
 know-how.  The Company's  shares are traded on on the                      NASDAQ
Capital Market and the Tel-Aviv Stock Exchange.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Sellers,  who provided  loans to Shagrir  Motor  Vehicle  Systems in the past,
                     assigned  these loans to the  Company.  The Company  also  undertook
to indemnify                      the  Sellers  who  provided  Shagrir  Motor  Vehicle
 Systems with  guarantees  in                      respect  of  Shagrir  Motor  Vehicle
 System's  loans from banks in the event the                      banks will  exercise
 such  guarantees.  In order to secure such  indemnification
                     undertaking,  the  Company  issued to the  Sellers  options  to
 purchase,  at no                      consideration,  32,889  of  the  Company's
 Ordinary  shares,  in the  event  the                      Company  does  not  meet  its
 indemnification   obligations.  The  consideration                      comprises the
following:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
warrants were exercisable at an exercise price of $ 4.4 per share and were exercisable
during the period which ended by the earlier of (i) April 6, 2006; or (ii) a merger or
consolidation of the Company into any other corporation or corporations where the Company
is not the surviving entity, or the sale of substantially all of the assets of the
Company, in which the shareholders of the Company hold less than 33% of the outstanding
voting power of the successor or surviving corporation immediately following such
consolidation, merger, sale of assets or reorganization. As of December 31, 2006,  non of the options are
outstanding.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

| | In
accordance with SFAS No. 142, Goodwill and Other Intangible Asset (SFAS
No. 142), goodwill will not be amortized. In lieu of amortization, the Company
is required to perform an annual impairment review. If the Company will determine,
through the impairment review process, that goodwill has been impaired, it will record
the impairment charge in its statement of operations. The Company will also assess the
impairment of goodwill whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. As of December 31, 2006, the Company has
determined that no impairment with respect to goodwill exists.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 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 Motor Vehicle Systems, in consideration for approximately
NIS           200 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 12c(3)) | 
| | Transactions costs                                              | 
| |                                                                 | 
| |                                                                 | 
| | Total consideration - purchase price                            | 
| |                                                                 | 

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

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

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

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

| | Shagrir
Motor Vehicle Systems funded the Shagrir transaction through a credit line of NIS 100
million, made available by Bank Hapoalim B.M., a loan of NIS 40 million provided by
Shagrir Towing Services (see Note 10d(4)), a loan of approximately NIS 45 million
provided by a group of investors led by Gandyr Investments Ltd. (Gandyr group)
(see Note 10d(5)) and Egged Holdings Ltd. (Egged) (see Note (10d(1) and
10d(2)), a loan of NIS 10 million provided by the Company and Gandyr group and Egged (see
Note 10d(2) and 10d(3)) and NIS 5 million invested by the Company in equity, which was
financed by the Companys issuance of shares and warrants (see Note 12c(3)).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | During
2006, a convertible loan was repaid (see Note 10d(1)) and other loans were modified (see
Note 10d(2)).
| | -------------------------------------------------------------------------------------------------------------

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

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

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

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

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

| | On
December 2004 and January 25, 2005, the Company sold to its local partners a total of
28.5% of its holdings in Pointer Mexico in consideration of its par value. In February
2007 2,895 shares were transferred to the Company from its local partners in
consideration of their par value. Total held by the Company and its Mexican local
partners 74% and 26% respectively. Pointer Mexico is providing location, tracking and
recovery of stolen vehicles services to its customers in Mexico.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | h. | On
May 26, 2006, the Company entered into a settlement agreement, with respect           to
past claim against a Latin American customer, pursuant to which the Company
          received a net amount of approximately $ 1.3 thousand.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 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 Motor Vehicle
Systems whose functional currency has been determined to be its local currency, the new
Israeli shekel (NIS), assets and liabilities are translated at year-end
exchange rates and statement of operations items are translated at average exchange rates
prevailing during the year. Such translation adjustments are recorded as a separate
component, other comprehensive income (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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Inventories
are stated at the lower of cost or market value. Cost is determined using the moving
average method. Inventory consists of raw materials and finished products.
Inventory write-offs are provided to cover risks arising from slow-moving items,
technological obsolescence, excess inventories, and for market prices lower than cost. In
2006, 2005 and 2004, the Company and its subsidiaries wrote off approximately $ 127,
$ 199 and $ 479, respectively. The write-offs are included in cost of revenues.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| |                                    | %                         
| | ---------------------------------- | --------------------------
|
|
|
|
| | Installed products                 | 20-33                     
| | Computers and 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

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

| | Goodwill
reflects the excess of the purchase price of the acquired subsidiary or activities over
the fair value of net assets acquired. Pursuant to SFAS 142, Goodwill and Other
Intangible Assets, goodwill is not amortized but rather tested for impairment at
least annually. As of December 31, 2006, the Company has determined that no
impairment with respect to goodwill exists. The amount of goodwill included in the
computation of the gain from the decrease in holdings of Shagrir Motor Vehicle Systems in
2005 (see Note 1c) is $ 5,279. During 2006, the Company reduced the goodwill at the
amount of $ 1,489 due to the realization of tax loss carryforward, that at the date of
acquisition were not more-likely-than-not to be realized.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Intangible
assets consist of the brand name, customer list 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-year period and an eight year period. The customer
lists are amortized over a five-year and an eight year periods. Patents are amortized
over an eight-year period.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Companys long-lived assets other than goodwill are reviewed for impairment in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144) whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of the assets to the future undiscounted cash flows expected to be generated by
the assets. If such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | The
Company and its subsidiaries generally grant a one-year to three-year warranty for their
products. The Company and its subsidiaries estimate the costs that may be incurred under
its basic limited warranty and records a liability in the amount of such costs at the
time which product revenue is recognized. Factors that affect the warranty liability
include the number of installed units, historical and anticipated rates of warranty
claims and cost per claim. The Company and its subsidiaries periodically assess the
adequacy of its recorded warranty liabilities and adjust the amounts as necessary.
Changes in the Companys and its subsidiaries product liabilities during 2006
are as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | The
Company and its subsidiaries generate revenues mainly from the provision of services,
subscriber fees and sales of systems and products, mainly in respect of road-side
assistance services, automobile repair and towing services, stolen vehicle recovery and
other value added services. To a lesser extent, revenues are also derived from technical
support services. The Company and its subsidiaries 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 - 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.)
|------- | - | ---------------------------------------

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

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

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

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

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

| | Advertising
expenses are charged to the statement of operations as incurred. Advertising expenses for
the years ended December 31, 2006, 2005 and 2004 were $ 344, $ 408 and $ 177,
respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes (SFAS No. 109). SFAS No. 109 prescribes the use of the
liability method whereby deferred tax assets and liability account balances are
determined based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The Company 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | p. | 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).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | During  the years ended  December 31,  2006,  2005
                     and 2004,  the  Company  recognized  stock-based  compensation  expenses  related  to
                     employee stock options in the amounts of $ 251, $ 126 and $ 465, 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 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | Data
related to options to purchase the Company shares:
| | -- | -------------------------------------------------------

| | The
fair value of the Companys stock options granted to employees and directors for the
years ended December 31, 2006, 2005 and 2004 was estimated using the following weighted
average assumptions:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | A
summary of employee option activity under the Companys Stock Option Plans as of
December 31, 2006 and changes during the year ended December 31, 2006 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, 2006                   |                   |                                 |                                                         | 263,753                                 
| | Granted                                          |                   |                                 |                                                         | 12,000                                  
| | Exercised                                        |                   |                                 |                                                         | (103,522                                
| | Forfeited                                        |                   |                                 |                                                         | (6,389                                  
| |                                                  |                   |                                 |                                                         |                                         
| |                                                  |                   |                                
| | Outstanding at December 31, 2006                 |                   |                                 |                                                         | 165,842                                 
| |                                                  |                   |                                 |                                                         |                                         
| |                                                  |                   |                                
| | Exercisable at December 31, 2006                 |                   |                                 |                                                         | 81,092                                  
| |                                                  |                   |                                 |                                                         |                                         
| |                                                  |                   |                                
| | Vested and expected to vest at December 31, 2006 |                   |                                 |                                                         | 132,069                                 
| |                                                  |                   |                                 |                                                         |                                         

| | The  weighted-average  grant-date  fair  value  of
                            options  granted during the years ended  December 31,  2006, 2005 and 2004 was
                            $ 2.6, $ 4.1 and $ 11,  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  2006  and  the  exercise  price,   multiplied  by  the  number  of
                            in-the-money  options)  that would have been  received  by the option  holders
                            had all option holders  exercised  their options on  December 31,  2006.  This
                            amount  changes based on the fair market value of the Company's  stock.  Total
                            intrinsic  value of options  exercised  for the year ended  December  31, 2006
                            was  approximately  $ 348.  As of December 31, 2006,  there was  approximately
                            $ 113  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  1.85  years.  Total  grant-date  fair  value  of
                            options   that   vested   during   the  year  ended   December 31,   2006  was
                            approximately $ 98.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | As
of December 31, 2006, 3,383 options to purchase Shagrir Motor Vehicle Systems shares are
outstanding (non are exercisable). Weighted average exercise price of these outstanding
options is NIS 783.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
weighted average fair values of options granted during the years ended December 31,
2006 and 2005 were NIS 921 and NIS 197, respectively. No options were granted during 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 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 for 2006 and 2005:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                          | 2006 | 2005
| | ------------------------ | ---- | ----
|
|
|
|
| | Risk free interest       |      |     
| | Dividend yields          |      |     
| | Volatility               |      |     
| | Expected term (in years) |      |     

| | As
of December 31, 2006, there was approximately $ 478 of total unrecognized
compensation costs related to non-vested share-base compensation arrangements granted
under Shagrir Motor Vehicle Systems stock option plans.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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,
| | -------------------------------------------------------------------------------------------- | -----------------------
|
|
|
|
| | 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                                               |                        
| |                                                                                              |                        

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

| | 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, 2006, 2005 and 2004 were $ 428, $ 635
and $ 172, respectively.
| | ----------------------------------------------------------------------------------------------------------------------

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

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

| | Trade
receivables include amounts billed to clients located mainly in Israel and South America.
Management periodically evaluates the collectibility of these trade receivables to
reflect the amounts estimated to be collectible. An allowance is determined in respect of
specific debts whose collection, in managements opinion, is doubtful. As for major
customers, see Note 16c.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

| | The
Company is currently evaluating the effect of the adoption of FIN 48 on its financial
statements, and expects that the adoption of FIN 48 will not have a significant effect on
its financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In
 February  2007,  the FASB issued SFAS No. 159, "The Fair Value Option for  Financial
 Assets and Financial  Liabilities"  ("SFAS No. 159"),  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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| |                |  | 
| | -------------- |  | 
|
|
|
|
| | Raw materials  |  | 
| | 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 - 23

---

---

|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, 2006, 2005 and 2004           were $ 2,750
(including impairment of $ 372), $ 2,533 and $ 1,134,           respectively.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | During
2006, Pointer Mexicos management have decided to migrate from the           current
technology (radio platform) to a new technology (cellular phone           platform) for
the Company to provide services that allow nationwide coverage,           which is being
demanded by major potential customers such as insurance           companies, car
manufacturers/dealers and fleet companies. Therefore, Pointer           Mexicos
management has recognized an impairment loss related to its base           stations
(network installation), which constitute the base of its former           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.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | b. | Amortization
expenses for the years ended December 31, 2006, 2005 and 2004 were           $ 1,740,
$ 2,464 and $ 931, respectively.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------

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 6: |  | OTHER INTANGIBLE ASSETS, NET (Cont.)
|------- | - | ------------------------------------

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

| | December 31, | 
| | ------------ | 
|
|
|
|
| | 2007         | 
| | 2008         | 
| | 2009         | 
| | 2010         | 
| | 2011         | 
| | Thereafter   | 
| |              | 
| |              | 
| |              | 
| |              | 

|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 linked to the Israeli Consumer Price |               |             
|Index ("CPI")                               |               |             
|In NIS                                      |               |             
|                                            |               |             
|                                            |               |             
|                                            |               |             
|                                            |               |             
|                                            |               |             
|Short-term bank credit:                     |               |             
|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                     |               |             
|                                            |               |             

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

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

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

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

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

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

| |                           | 
| | ------------------------- | 
|
|
|
|
| | 2007 (current maturities) | 
| | 2008                      | 
| | 2009                      | 
| | 2010                      | 
| | 2011                      | 
| | 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, at a price per share of $ 18 exercisable until
          February 28, 2007. On February 15, 2007, the Companys board extended the
          exercise period of the warrants until June 30, 2007, at an exercise price of $
          19 per share, effective from March 1, 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 9: |  | LONG-TERM
LOANS FROM BANKS (Cont.)
|------- | - | ----------------------------------

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

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

| | 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. | The
Company will not decide on any distribution of dividends from Shagrir Motor
          Vehicle Systems without a written pre-approval from the bank.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006, Shagrir Motor Vehicle Systems meets the financial covenants.
| | -------------------------------------------------------------------------------------

|NOTE 10: |  | LONG-TERM
LOANS FROM SHAREHOLDERS AND OTHERS
|-------- | - | --------------------------------------------

| | a. | Long-term
loans from shareholders  composition:
| | -- | ------------------------------------------------

| |                                          | Interest rate | December 31,
| | ---------------------------------------- | ------------- | ------------
|
|
|
|
|
| | In, or linked to, dollars (see d1 below) |               |             
| | In NIS linked to CPI (see d2 below)      |               |             
| |                                          |               |             
| |                                          |               |             
| |                                          |               |             
| |                                          |               |             
| | Less - current maturities                |               |             
| |                                          |               |             
| |                                          |               |             
| |                                          |               |             
| |                                          |               |             

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 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 d3-d4 below) |               |             
| | In NIS (see d5 below)                  |               |             
| | In Mexican pesos                       |               |             
| |                                        |               |             
| |                                        |               |             
| |                                        |               |             
| | Less - current maturities              |               |             
| | Less - discount                        |               |             
| |                                        |               |             
| |                                        |               |             
| |                                        |               |             
| |                                        |               |             

| | c. | As
of December 31, 2006, the aggregate annual maturities of the long-term loans
          from shareholders and others are as follow:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------

| |                           | 
| | ------------------------- | 
|
|
|
|
| | 2007 (current maturities) | 
| | 2008                      | 
| | 2009                      | 
| | 2010                      | 
| | 2011                      | 
| | Thereafter                | 
| |                           | 
| |                           | 
| |                           | 
| |                           | 

| | d. | 1. | In May 2006, Shagrir Motor Vehicle Systems exercised its right to an early
          repayment of the convertible loan of $ 2,065 from Egged and fully repaid the
          loan.
| | -- | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | On
October 1, 2006, Shagrir Motor Vehicle Systems entered into an agreement to
          replace two long-term loans from Egged bearing an annual interest rate between
          4% to 7.5%, in an amount aggregating to approximately NIS 9.2 million, into two
          long-term loans to mature in two years. The new loans bear an annual interest
          rate between 4% to 6.5% and are linked to the Israeli CPI. The option granted
to           Egged to purchase Shagrir Motor Vehicle Systemss Ordinary shares or
the           Companys Ordinary shares was cancelled.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
outstanding loan balance as of December 31, 2006 is $ 1,505.
| | ----------------------------------------------------------------

| | 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 - 28

---

---

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

| | 3. | Loans  in the amount of $ 1,091 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, 2006, no amounts were repaid in respect to these loans.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | A
loan of $ 8,520 is to be repaid by Shagrir Motor Vehicle Systems to Shagrir
          Towing Services Ltd. The loan will be repaid in 20 quarterly payments
commencing           one year from February 28, 2005, linked to the Israeli CPI and bears
an annual           interest rate of 6.5%.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Company granted Shagrir Towing Services Ltd. and ADACH jointly a warrant to
purchase up to 250,000 of its Ordinary shares at a price per share of $ 18, for a period
of 24 months. exercisable until February 28, 2007. On February 15, 2007, the Companys
board extended the exercise period of the warrants until June 30, 2007, at an exercise
price of $19 per share, effective from March 1, 2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | A
loan of NIS 29.1 million of the Shagrir transaction was funded by Gandyr           group.
| | -- | -------------------------------------------------------------------------------------------

| | On   November   30,   2005,   Gandyr   group
                            exercised  its  options to purchase  38,479  shares of Shagrir  Motor  Vehicle
                            Systems (43.44%) in consideration  of NIS 29.1 million.  Correspondingly,  the
                            loans were repaid.  The  remaining  balance as of December  31,  2006,  in the
                            amount of $ 280  representing  the interest  accumulated  as of the conversion
                            date that has not yet been paid.  The amount  bears no interest and is payable
                            upon demand.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | a. | Charges:
| | -- | --------

| | 1. | As
collateral for its liabilities, the Company has recorded floating charges on
          all of its assets, including the intellectual property and equipment, in favor
          of banks.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Shagrir
Motor Vehicle Systems recorded a first priority charge on all of its           assets in
favor of banks, and Shagrir Towing Services has a second priority           fixed charge
over Shagrir Motor Vehicle Systems rights to proceeds from           several of its
customers.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 1. | To
secure Shagrir Motor Vehicle Systems obligations for providing           services
to several of its customers, Shagrir Motor Vehicle Systems provided a           bank
guarantee in the amount of about $ 123, in force until December 2006           August
2010.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | The
Company obtained bank guarantees in the amount of $ 22 in favor of its           lessor.
| | -- | --------------------------------------------------------------------------------------------

| | 3. | The
Company obtained bank guarantees in the amount of $ 100 in favor of a           supplier.
| | -- | ---------------------------------------------------------------------------------------------

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

| | 4. | The
Company obtained a bank guarantee in the amount of $ 300, pursuant to           the
litigation as described in e1 below.
| | -- | ----------------------------------------------------------------------------------------------------------------------------

| | c. | Royalties:
| | -- | ----------

| | The
Company has undertaken to pay royalties to the BIRD Foundation (BIRD), at the
rate of 5% on sales proceeds of products developed with the participation of BIRD up to
the amount received, linked to the U.S. dollar. The contingent obligation as of December
31, 2006 is $ 2,142. No royalties were accrued or paid during 2006 ,2005 and 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |      | 
| | ---- | 
|
|
|
|
| | 2007 | 
| | 2008 | 
| | 2009 | 
| | 2010 | 
| |      | 
| |      | 
| |      | 
| |      | 

| | Rent
expenses for the years ended December 31, 2006, 2005 and 2004, were $ 1,328, $ 1,438
and $ 690, respectively.
| | ------------------------------------------------------------------------------------------------------------------

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

| | 1. | In February 2002,  the Company  executed (i)
                            an  agreement  with  Sino  Telocation  Ltd.,  or Sino,  pursuant  to which the
                            Company was to provide  Sino with a car  localization  system,  or the System,
                            in  consideration  for $ 900;  and (ii) an  agreement  with Sino and the China
                            National  Electronics  Import  Export  Beijing  Company,  (CEIEC),  for  the
                            funding of the  acquisition  of the  System.  Pursuant to the  agreements  the
                            Company  received a down payment of $ 300 from CEIEC against a bank  guarantee
                            in favor of CEIEC from Bank  Hapoalim  B.M. The Company  requested  that CEIEC
                            issue a letter of credit to insure the  shipment of the System.  CEIEC did not
                            issue the letter of credit and as a result  the  System was not  provided.  As
                            the System was unique and  adapted  for the  Chinese  market,  the Company was
                            not  able to sell the  System  to  others.  CEIEC  and  Sino's  breach  of the
                            agreements  caused the Company  extensive  damages,  in particular  due to the
                            failure to pay the remainder of consideration, in the amount of     $ 600.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | On
November 26, 2002, the Company filed a claim with the Tel-Aviv Magistrates
Court for a permanent injunction against Bank Hapoalim B.M. and CEIEC requesting that the
court prohibit Bank Hapoalim from paying CEIEC any amount, pursuant to the guarantee. The
Court ruled in the Company favor. CEIEC commenced proceedings in China, against Bank
Hapoalim, to which the Company is not a party, for the payment of the guarantee. In
August 2004, Bank Hapoalim informed the Company that it may pay to CEIEC the guaranteed
amount plus interest at a rate of 0.5% per week, commencing March 2002 and, in such an
event, will request that the Company indemnify it for the amount paid.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In  March 2005,  the Company filed a claim against
                            CEIEC and  against  Sino,  with the  China  International  Economic  and Trade
                            Arbitration  Commission  Beijing,  China  (CIETAC),  for approximately $ 557
                            representing  the damages  caused to the Company by the breach of the contract
                            by CEIEC and Sino in respect of the China transaction.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the filing of the claim with CIETAC, the proceedings which had been initiated
by CEIEC against Bank Hapoalim, in China, for payment of the guarantee, were suspended.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In  January 2006,  CIETAC provided a ruling in the
                            Company  favor,  pursuant to which CEIEC and Sino are to pay the Company $ 557
                            representing  most of the damages  caused to the Company plus interest rate of
                            6% per annum from April 2003 and additional costs incurred by the Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February and in June 2006, Sino and CEIEC, respectively, petitioned the Beijing No. 2
Intermediate Peoples Court to overturn the ruling of CIETAC.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2006 the Beijing No. 2 Intermediate Peoples Court ruled that CIETAC should
issue a new ruling and grant a new arbitration award accordingly. No grounds were given.
As a result of the Courts decision CIETAC issued a Notice of Re-arbitration.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March, 2007 CEIEC petitioned the CIETAC for the replacement of the arbitration panel, on
the grounds that the previous decisions was biased and against the interests of the
state. An objection to the petition was filed. The petition and objection have yet to be
addressed.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of May 1, 2007, no dates have been set and no further information has been received from
CIETAC.
| | ---------------------------------------------------------------------------------------------------

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

| | In
light of the permanent injunction ordered in the Companys favor in 2002, in the
above ruling and without the Companys knowledge of the exact nature of the legal
proceedings underway between the bank and CEIEC, since it is not a party to these
proceedings, the Company is of the opinion that it has defense claims rejecting any
possible demands by Bank Hapoalim for indemnification.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Therefore,
no provision was recorded in the financial statements in respect of the potential claim
from Bank Hapoalim.
| | ----------------------------------------------------------------------------------------------------------------------

| | 2. | As
of December 31, 2006, several claims were filed against Shagrir Motor           Vehicle
Systems mainly by customers. The claims are in an amount aggregating to
          approximately $ 161. The substance of the claims is the malfunction of
          Shagrir Motor Vehicle Systems products, which occurred during the
ordinary           course of business. Shagrir Motor Vehicle Systems Management, based on
the           opinion of its legal counsel, is of the opinion that no material costs will
          arise to Shagrir Motor Vehicle Systems in respect to these claims and,
          therefore, no provision was recorded in the financial statements in respect of
          the claims.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 1. | The
Company and DBSI Investment Ltd. (DBSI) (see Note 15) have           entered
into a management services agreement pursuant to which DBSI shall           provide
management services in consideration 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 Motor Vehicle           Systems,
for the supply of the services and equipment required to set up           reception bases
to be positioned throughout Israel (the agreement).           The agreement
is for a period of 10 years with an option to extend it by an           additional 10
years.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | In
accordance with the agreement, Shagrir Motor Vehicle Systems committed to           the
Company, as determined in the aforesaid agreement, to exclusively purchase a
          minimum amount of products each year, until the end of 2007. In the event it
          does not purchase the minimal amount as it committed, Shagrir Motor Vehicle
          Systems shall pay the Company the difference between the minimal amount and the
          amount actually purchased. As of the date of these financial statements,
Shagrir           Motor Vehicle Systems is meeting its minimal purchase commitment as it
undertook           in the aforesaid agreement.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | b) | According
to the agreement, it was determined that 36.4% of the price for the           site will
be paid to the Company by Shagrir Motor Vehicle Systems beginning with           the
first year in which Shagrir Motor Vehicle Systems has pre-tax income           (the
income), in an amount equal to 15.2% of the aforesaid income           until it
completes the full payment of the consideration in respect of the           sites.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Following
the Shagrir transaction, the contingent liability toward the Company in respect to sites,
in the original amount of NIS 3.9 thousand was converted into a loan.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c) | According
to the aforesaid agreement, Shagrir Motor Vehicle Systems will pay           annual
royalties to the Company, which will be computed as 2% of Shagrir Motor           Vehicle
Systemss revenues in each year, but up to 5% of the annual income           before
taxes. Shagrir Motor Vehicle Systems will pay royalties up to a total           aggregate
amount of $ 1,200.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Following
the Shagrir transaction (see Note 1c), the aforesaid payments stated in b and c above,
were cancelled.
| | ----------------------------------------------------------------------------------------------------------------

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

| | 4. | Shagrir Motor Vehicle  Systems  entered into
                            a  management  services  agreement  with Gandyr  group and Egged,  pursuant to
                            which Gandyr group and Egged will grant  management  services to Shagrir Motor
                            Vehicle  Systems  beginning at the end of a period of 24 months from  February
                            28, 2005, in consideration of approximately  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 all of its options expired.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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: |  | 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
2004, 143,195 warrants were exercised into 130,051 of the Companys
          Ordinary shares. Out of the 143,195 warrants, 110,518 warrants were exercised
by           way of cashless exercise into 97,374 Ordinary shares, and 32,677 warrants
were           exercised into Ordinary shares, for a consideration of $ 143.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Following
the closing of the transaction for the purchase of the outstanding           and issued
share capital of Shagrir Motor Vehicle Systems, as described in Note           1b, the
Company issued 429,154 Ordinary shares.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | 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 were forfeited.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 4. | 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.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | 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 stock options were exercised into Ordinary           shares,
for a consideration of $ 3,481.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | 1. | The
Company grants, under various option plans (mainly under 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, 2006, no options of the 2003
          Employee Share Option Plan are available for future grant.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | On
June 1, 2004, the Board of Directors resolved to issue to the Companys
          employees options to purchase 21,900 of the Companys Ordinary shares at
an           exercise price of $ 13.3 per share. 44% of the options granted to each
          employee were vested on December 31, 2004. An additional 7% of the options
          granted to each employee shall vest at the end of each of eight consecutive
          quarters, ending December 31, 2006. The options are subject to the terms of the
          2003 Employee Share Option Plan.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | During
2004, following the closing of the transactions for the purchase of the
          outstanding and issued share capital of Shagrir Motor Vehicle Systems, as
          described in Note 1b, the Company issued 75,896 fully vested employee stock
          options at an exercise price of $ 13.3 per share to employees of Shagrir
          Motor Vehicle Systems who held Shagrir Motor Vehicle Systems options before the
          transaction. The options are exercisable over a period of five years.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | On
May 23, 2005, the Company entered into an employment agreement with a new           CEO,
pursuant to which the Company granted to the new CEO warrants to purchase
          40,000 Ordinary shares of the Company, at an exercise price of $ 10.6 per
          share. Such options can be exercised in full after 48 months of continuous
          service, with 25% of the options vesting after each 12 month-period of
          continuous service.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | On
November 23, 2005, the Company issued to its employees options to purchase
          59,000 of the Companys Ordinary shares, at an exercise price of $ 9.5
          per share. The options shall vest in four equal annual installments, over a
          period of four years, commencing on November 23, 2006. The options shall expire
          on November 23, 2010.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | On
January 17, 2006, according to the Board of Directors decision, the Company
          granted four of its directors options to purchase 3,000 Ordinary shares of the
          Company of NIS 3 par value each, to vest in three equal installments over a
          period of three years, commencing as of the date of the grant, at an exercise
          price of $ 7.6 per share.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 7. | A
summary of the status of the Companys employee stock options as of
          December 31, 2006, 2005 and 2004, 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                          |                        
| |                                      |                        

| | The
following table summarizes information relating to employees stock options
outstanding as of December 31, 2006, according to exercise price range:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

| |               | Options outstanding | Options exercisable
| | ------------- | ------------------- | -------------------
|
|
|
|
| | $         7.6 |                     |                    
| | $ 9.5-10.6    |                     |                    
| | $        13.3 |                     |                    
| | $ 103.0-160.0 |                     |                    
| | $     1,650.0 |                     |                    
| |               |                     |                    
| |               |                     |                    
| |               |                     |                    
| |               |                     |                    

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

| | 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 has expired
                            on April 6, 2006 (see Note  12c(3)).  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,  exercisable  until February 28,
                            2007. On February 15, 2007, the Company's  board extended the exercise  period
                            of the warrants  until June 30, 2007, at an exercise  price of $ 19 per share,
                            from March 1, 2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Any
dividend distributed by the Company will be declared in NIS and paid in dollars on the
basis of the exchange rate prevailing at the date of payment.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

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: |  | 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                                                                          |                        
| |                                                                                                                |                        

|NOTE 14: |  | INCOME
TAXES
|-------- | - | ------------

| | a. | Measurement
of taxable income under the Income Tax (Inflationary Adjustments)           Law, 1985 (the
Law):
| | -- | --------------------------------------------------------------------------------------------------------------

| | Under
the Law, the Companys results for tax purposes are measured in terms of earnings in
NIS after certain adjustments for changes in the Israeli CPI. As explained in Note 2b,
the financial statements are measured in dollars. The difference between the annual
change in the Israeli CPI and in the NIS/dollar exchange rate causes a difference between
taxable income and the income before taxes shown in the financial statements. In
accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred
income taxes on the difference between the functional currency and the tax bases of
assets and liabilities.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 14: |  | INCOME
TAXES (Cont.)
|-------- | - | --------------------

| | 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 14: |  | INCOME
TAXES (Cont.)
|-------- | - | --------------------

| | e. | Deferred
taxes:
| | -- | ---------------

| | Deferred
income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes, and amounts used for
income tax purposes. Significant components of the deferred tax liabilities and assets of
the Company and its subsidiaries are as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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:                                                                   |             
| |    |                                                                            |             
|
|
|
| |    | Current assets                                                             |             
| |    | Long-term assets                                                           |             
| |    |                                                                            |             
| |    |                                                                            |             
| |    |                                                                            |             
| |    |                                                                            |             

| | 3. | The
Company and its subsidiaries (except Shagrir Motor Vehicle Systems) have
          provided full 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 Motor Vehicle Systems) 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 (a portion of the  reduction  was  recorded as a
reduction of goodwill, see Note 2h).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Shagrir
Motor Vehicles Systems has reduced its valuation allowance by $ 1,588 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 14: |  | 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 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 $ 67,201 (including a capital loss
in the amount of approximately $ 27,450) as of December 31, 2006. The carryforward
tax losses have no expiration date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Carryforward
tax losses of Pointer Argentina are approximately $ 1,645 as of December 31, 2006. The
carryforward tax losses will expire from 2007 to 2010.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | Carryforward
tax losses of Shagrir Motor Vehicle Systems totaled approximately $ 25,325 as of December 31,
2006. The carryforward tax losses have no expiration date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Carryforward
tax losses of Pointer Mexico totaled approximately $ 2,723 as of December 31, 2006. The
carryforward tax losses will expire from 2014 to 2016.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

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 14: |  | 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 15: |  | BALANCES
AND TRANSACTIONS WITH RELATED PARTIES
|-------- | - | ----------------------------------------------

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

| |                                               | December 31,
| | --------------------------------------------- | ------------
|
|
|
|
| | Other accounts payable and accrued expenses:  |             
| | DBSI (see Note 11f(1))                        |             
| |                                               |             
| | Long-term loans from shareholders and others: |             
| | Egged Holdings Ltd. (see Note 10a)            |             

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

| |                                                       | Year ended December 31,
| | ----------------------------------------------------- | -----------------------
|
|
|
|
|
| | Management fees to DBSI (see Note 11f(1))             |                        
| |                                                       |                        
| | Purchases from AMS *)                                 |                        
| |                                                       |                        
| | Interest on long-term loans from Egged (see Note 10a) |                        

| | *) | AMS
is not a related party commencing 2005.
| | -- | -------------------------------------------

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 16: |  | SEGMENT,
CUSTOMER AND GEOGRAPHIC INFORMATION
|-------- | - | --------------------------------------------

| | a. | General:
| | -- | --------

| | The
Company operates in one segment, value added services provided to insurance companies and
automobile owners.
| | ----------------------------------------------------------------------------------------------------------------

| | The
Company applies SFAS 131, Disclosures About Segments of an Enterprise and Related
Information.
| | ----------------------------------------------------------------------------------------------------

| | b. | Summary
information about geographical areas:
| | -- | ---------------------------------------------

| |    |               | Year ended December 31,
| | -- | ------------- | -----------------------
|
|
|
|
| | 1. | Revenues *):  |                        
| |    |               |                        
| |    | Israel        |                        
| |    | Latin America |                        
| |    | Other         |                        
| |    |               |                        
| |    |               |                        
| |    |               |                        
| |    |               |                        

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

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

| | c. | In
2006, one customer accounted for 12% of the Companys revenues, and in
          2004, another customer accounted for 11% of the Companys revenues:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------

F - 43

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---

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

|NOTE 17: |  | SELECTED
STATEMENTS OF OPERATIONS DATA
|-------- | - | --------------------------------------

| |    |                                                    | Year ended December 31,
| | -- | -------------------------------------------------- | -----------------------
|
|
|
|
| | a. | Research and development, net:                     |                        
| |    |                                                    |                        
| |    | Total expenses                                     |                        
| |    | Less - grants and participation                    |                        
| |    |                                                    |                        
| |    |                                                    |                        
| |    |                                                    |                        
| |    |                                                    |                        
| | b. | Financial expenses, net:                           |                        
| |    |                                                    |                        
| |    | Income:                                            |                        
| |    | Interest on short-term bank deposits               |                        
| |    |                                                    |                        
| |    |                                                    |                        
| |    | Expenses:                                          |                        
| |    | 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        |                        
| |    | Other                                              |                        
| |    |                                                    |                        
| |    |                                                    |                        
| |    |                                                    |                        
| |    |                                                    |                        
| |    |                                                    |                        
| |    |                                                    |                        
| |    |                                                    |                        
| | c. | Other income (expenses), net:                      |                        
| |    |                                                    |                        
| |    | Capital gain (loss)                                |                        
| |    | Gain from partial sale of investment in subsidiary |                        
| |    | Other                                              |                        
| |    |                                                    |                        
| |    |                                                    |                        
| |    |                                                    |                        
| |    |                                                    |                        

F - 44

---

---

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

|NOTE 18: |  | SUBSEQUENT
EVENTS
|-------- | - | -----------------

| | a. | On
January 28, 2007, according to the board of directors decision, the Company
          granted to its employees options to purchase up to 63,000 Ordinary shares of
the           Company of NIS 3 par value each, to vest in four equal installments over a
          period of four years, commencing as of the date of the grant, at an exercise
          price of $ 11.24 per share.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | 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.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | 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.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | During
2005, the Company issued to Shagrir Towing Services Ltd. and ADACH           warrants to
purchase up to 250,000 shares of the Company, and issued to Bank           Hapoalim B.M.
warrants to purchase up to 100,000 shares of the Company. The           warrants were
exercisable at a price of $18 per share until February 28, 2007.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
February 15, 2007 the Companys board extended the exercise period of the warrants
until June 30, 2007, at an exercise price of $ 19 per share, effective from March 1, 2007.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | f. | In
February 2007, the Company purchased 2,895 shares of Pointer Mexico (see           Note
1f) from its local partner in consideration of their par value.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | In
March 2007, the Company announced the execution of a non-binding Memorandum           of
Understanding to acquire the assets and liabilities of Cellocator Ltd.           (Cellocator),
a private Israeli company active in the field of           cellular location-based
services and technology. The closing of the transaction           is subject to the
completion of a full due diligence review to the           Companys full
satisfaction. The Company will pay Cellocator and its           shareholders
approximately $ 18.5 thousand in cash, shares and a           convertible debenture.
Following the completion of the transaction and upon           conversion of the
debenture, Cellocator and/or its shareholders will hold           approximately 5.37% of
the Companys issued and outstanding share capital           (on a fully diluted
basis). The Company cannot guarantee that this transaction           will be consummated.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 45

---

---

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

|NOTE 18: |  | SUBSEQUENT
EVENTS (Cont.)
|-------- | - | -------------------------

| | h. | In  March  2007,  The  Company   executed  a
                     non-binding Letter of Intent to acquire  controlling  ownership of a leading provider
                     of roadside assistance in Argentina in consideration of approximately $ 9,000.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | i. | In March 2007,  the Company also  executed a
                     binding MOU, with 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 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 project  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 project,  the Company  undertook to provide  certain  financing to
                     Pointer Argentina during the first two years of the project.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 46

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