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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549



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FORM 20-F

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

|                                              |  |                           
|--------------------------------------------- |  | --------------------------
|For the fiscal year
  ended December 31, 2004 |  | Commission File
  File No.



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NEXUS TELOCATION SYSTEMS LIMITED(Exact name of
Registrant as specified in its charter 
and translation of Registrants name into English)



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Israel(Jurisdiction
of incorporation 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: None

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

Ordinary Shares, NIS 0.03 nominal value per share(Title of Class)

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



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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:

170,450,516

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 xNoo

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

Item 17 oItem
18x

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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 Nexus
Telocation Systems Limited (we or the Company or Nexus) 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.

2

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|       |         |                                                         |                                                           |   
|------ | ------- | ------------------------------------------------------- | --------------------------------------------------------- | --
|PART I |         |                                                         |                                                           | 5 
|       | ITEM 1. | IDENTITY
  OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS | 5                                                        
|       | ITEM 2. | OFFER
  STATISTICS AND EXPECTED TIME TABLE              | 5                                                        
|       | ITEM 3. | KEY
  INFORMATION                                       | 5                                                        
|       |         | A.                                                      | SELECTED
  FINANCIAL DATA                                 | 5 
|       |         | B.                                                      | CAPITALIZATION
  AND INDEBTEDNESS                         | 5 
|       |         | C.                                                      | REASONS
  FOR THE OFFER AND USE OF PROCEEDS               | 5 
|       |         | D.                                                      | RISK
  FACTORS                                            | 5 
|       | ITEM 4. | INFORMATION
  ON THE COMPANY                            | 14                                                       
|       |         | A.                                                      | HISTORY AND
  DEVELOPMENT OF THE COMPANY                  | 14
|       |         | B.                                                      | BUSINESS
  OVERVIEW                                       | 18
|       |         | C.                                                      | ORGANIZATIONAL
  STRUCTURE                                | 24
|       |         | D.                                                      | PROPERTY,
  PLANTS AND EQUIPMENT                          | 24
|       | ITEM 5. | OPERATING
  AND FINANCIAL REVIEW AND PROSPECTS          | 25                                                       
|       |         | A.                                                      | OPERATING
  RESULTS                                       | 25
|       |         | B.                                                      | LIQUIDITY
  AND CAPITAL RESOURCES                         | 34
|       |         | C.                                                      | RESEARCH
  AND DEVELOPMENT                                | 35
|       |         | D.                                                      | TREND
  INFORMATION                                       | 37
|       |         | E.                                                      | OFF
  BALANCE SHEET ARRANGEMENTS                          | 38
|       |         | F.                                                      | CONTRACTUAL
  OBLIGATIONS                                 | 38
|       | ITEM 6. | DIRECTORS,
  SENIOR MANAGEMENT AND EMPLOYEES            | 39                                                       
|       |         | A.                                                      | DIRECTORS
  AND SENIOR MANAGEMENT                         | 39
|       |         | B.                                                      | COMPENSATION                                              | 40
|       |         | C.                                                      | BOARD
  PRACTICES                                         | 41
|       |         | D.                                                      | EMPLOYEES                                                 | 42
|       |         | E.                                                      | SHARE
  OWNERSHIP                                         | 43
|       | ITEM 7. | MAJOR
  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS     | 44                                                       
|       |         | A.                                                      | MAJOR
  SHAREHOLDERS                                      | 44
|       |         | B.                                                      | RELATED
  PARTY TRANSACTIONS                              | 45
|       |         | C.                                                      | INTERESTS
  OF EXPERTS AND COUNSEL                        | 47
|       | ITEM 8. | FINANCIAL
  INFORMATION                                 | 48                                                       
|       |         | A.                                                      | CONSOLIDATED
  STATEMENTS AND OTHER FINANCIAL INFORMATION | 48
|       |         | B.                                                      | SIGNIFICANT
  CHANGES                                     | 49

3

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|         |           |                                                                                |                                          |   
|-------- | --------- | ------------------------------------------------------------------------------ | ---------------------------------------- | --
|         | ITEM 9.   | THE OFFER
  AND LISTING                                                        | 49                                      
|         |           | A.                                                                             | OFFER AND
  LISTING DETAILS              | 49
|         |           | B.                                                                             | PLAN OF
  DISTRIBUTION                   | 50
|         |           | C.                                                                             | MARKETS                                  | 50
|         |           | D.                                                                             | SELLING
  SHAREHOLDERS                   | 50
|         |           | E.                                                                             | DILUTION                                 | 50
|         |           | F.                                                                             | EXPENSES
  OF THE ISSUE                  | 50
|         | ITEM 10.  | ADDITIONAL
  INFORMATION                                                       | 50                                      
|         |           | A.                                                                             | SHARE
  CAPITAL                          | 50
|         |           | B.                                                                             | MEMORANDUM
  AND ARTICLES OF ASSOCIATION | 50
|         |           | C.                                                                             | MATERIAL
  CONTRACTS                     | 54
|         |           | 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                       | 60                                      
|PART II  |           |                                                                                |                                          | 60
|         | ITEM 13.  | DEFAULTS,
  DIVIDEND AVERAGES AND DELINQUENCIES                                | 60                                      
|         | ITEM 14.  | MATERIAL
  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 61                                      
|         | ITEM 15.  | CONTROLS
  AND PROCEDURES                                                      | 61                                      
|         | ITEM 16.  | [RESERVED]                                                                     | 61                                      
|         | ITEM 16A. | AUDIT
  COMMITTEE FINANCIAL EXPERT                                             | 61                                      
|         | ITEM 16B. | CODE OF
  ETHICS                                                               | 61                                      
|         | ITEM 16C. | PRINCIPAL
  ACCOUNTANT FEES AND SERVICES                                       | 61                                      
|         | ITEM 16D. | EXEMPTIONS
  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 62                                      
|         | ITEM 16E. | PURCHASES
  OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 62                                      
|PART III |           |                                                                                |                                          | 62
|         | ITEM 17.  | FINANCIAL
  STATEMENTS                                                         | 62                                      
|         | ITEM 18.  | FINANCIAL
  STATEMENTS                                                         | 62                                      
|         | ITEM 19.  | EXHIBITS                                                                       | 63                                      

4

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PART I.

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

Not applicable.

|        |                                           
|------- | ------------------------------------------
|ITEM 2. | OFFER
  STATISTICS AND EXPECTED TIME TABLE

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.

Our
strategic decision to focus on being a service provider, providing a range of
services to automobile owners and the insurance industry could result in
operating difficulties and other adverse consequences.

Between
June 2004 and February 2005, we made two acquisitions in Israel becoming a
leading service provider to automobile owners and insurance companies in
Israel, through our currently wholly owned subsidiary Shagrir Motor Vehicle
Systems Ltd. (formerly known as Pointer (Eden Telecom Group) Ltd.), or Shagrir:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In June 2004
  we purchased all of the outstanding and issued shares of Pointer (Eden
  Telecom Group) Ltd. (renamed in January 2005, Shagrir Motor Vehicle Systems
  Ltd.) not already held by us. Shagrir was our local Israeli operator which
  provided a broad scope of services, based on our technology and know-how
  relating mainly to location based services, stolen vehicle retrieval and
  security markets.

5

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| |                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                        | In February
  2005, pursuant to an Asset Purchase Agreement, our subsidiary, Shagrir,
  purchased certain of the activities and assets of Shagrir Towing Services
  Ltd. and its subsidiary, Shagrir (1985) Ltd. (together, Shagrir Towing
  Services). The business activities acquired by Shagrir constitute
  all of the road-side assistance and towing services of Shagrir Towing
  Services, which are sold to insurance companies and are provided to
  approximately 700,000 subscribers throughout Israel and include a fleet of
  approximately 120 service cars, mobile garages and towing vehicles.The assets and activities of Shagrir
  Towing Services have been integrated into our wholly-owned subsidiary
  Shagrir.
| |                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Currently
  Shagrirs business is expected to materially influence our business and is
  expected to account for the majority of our business and revenues in the
  foreseeable future.

In
June 2004, we also incorporated a Mexican company, Pointer recuperacion de
Mexico S.A. de C.V., or Pointer SA, to serve as our local Mexican operator and
service provider, which would provide stolen vehicle retrieval and road-side
assistance services, targeting Mexican corporations. Pointer SA became
operational in February 2005 and is still in its development stage.

The
process of integrating Shagrir and Pointer SA into our business is risky and
may create unforeseen operating difficulties and expenses resulting from
management time and efforts required to ensure successful integration. As we
have limited experience in managing such processes, the anticipated benefits of
these acquisitions and the incorporation of Pointer SA may not be realized.
Failure to integrate the operations of Shagrir and Pointer SA into our business
may have a material adverse affect on our financial condition.

We
have a history of net losses.

With
the exception of 2003, we have incurred a net loss in each year of our
existence. While in 2003, we had net income of $5.3 million, this resulted from
a one-time non-cash capital gain of $8.5 million from the disposal of
discontinued operations, offset by a $3.3 million loss from continuing
operations. In December 2004, our accumulated deficit was approximately $87.7
million. As a result of our acquisition in June 2004 of Shagrir, we have consolidated
into our financial reports the results of a company which, prior to 2004, had
never recorded net profits and which had at the time of the acquisition and
continues to have a working capital deficiency. Although the business
activities of Shagrir Towing Services acquired by Shagrir are profitable and
are currently being integrated into
Shagrir,  we expect to continue
to sustain net losses in the foreseen future following the acquisition mainly
as a result of the amortization of intangible assets acquired in connection
with the acquisition of Shagrir and the acquisition of the activities
and assets of Shagrir Towing
Services, as well as the increased financial burden associated with such
acquisitions, including the increase in working capital deficiency (see Item 4
Recent Developments). 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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Our
future operations depend on our ability to obtain additional financing.

We
have historically financed our operations through public and private placements
of equity and debt securities, cash generated from the sales of our systems,
grants for research and development projects and bank credit lines. Pursuant to
a series of investments from March through October 2003, we issued a number of
our ordinary shares and warrants with an aggregate value equal to approximately
32.5% of our current issued and outstanding capital, on a fully diluted basis.
In June 2004, we purchased all of the securities of Shagrir not already held by
the Company, in consideration for the issuance of a number of ordinary shares
and warrants with an aggregate value equal to approximately 16.61% of our
current issued and outstanding share capital, on a fully diluted basis. In
February 2005, we raised $6 million additional capital among others in order to
partly finance our acquisition of the road-side assistance and towing services
of Shagrir Towing Services, and accordingly issued 71,428,570 of our ordinary
shares and warrants to purchase up to 15,714,284 of our ordinary shares to
various investors constituting 19.23% of our current issued and outstanding
share capital (assuming the exercise of all of the warrants). Also in February
2005, our subsidiary Shagrir was loaned approximately NIS 100 million in
convertible debt as part of Shagrirs acquisition of the road-side assistance
and towing services of Shagrir Towing Services. Pursuant to these transactions
we agreed to register for resale our ordinary shares issued to our investors,
our ordinary shares issuable to our investors pursuant to the exercise of
warrants and our ordinary shares issuable to lenders pursuant to the conversion
of the convertible debt. As a result, we currently have outstanding or intend
to have outstanding in the near future, effective registration statements
covering 308,264,786 our securities (excluding 15,000,000 of our ordinary
shares underlying registered options) (for further information regarding
agreements relating to the acquisition of the road-side assistance and towing
services of Shagrir Towing Services, see Item 4  Recent Developments and Item 10  Material Contracts).
We believe that our current assets, together with anticipated cash generated
from operations and outstanding bank credit lines, will sufficiently allow us
to continue our operations as a going concern for the foreseeable future. We
cannot assure you that if we are required to raise additional financing in the
future that we will be able to obtain such financing on satisfactory terms, if
at all. As a result of the registration statements that we currently have
outstanding and currently anticipate 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.  Additionally, should any of
Shagrirs lenders convert their debt into ordinary shares of Shagrir, this may
substantially dilute our interest in Shagrir thereby reducing or eliminating
our ability to control its operations. 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.

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

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

In
order to finance Shagrirs acquisition of the road-side assistance and towing
services of Shagrir Towing Services, it received a NIS 100 million credit
facility from Bank Hapoalim, a NIS 40 million loan from Shagrir Towing Services
and approximately NIS 50 million was loaned to it from a group of investors led
by Gandyr Investments Ltd. and Egged Holdings Ltd. Should Shagrir fail to repay
the loans in accordance with the repayment schedule pertaining to each loan and
should a lender refuse to amend the relevant repayments 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 10  Material Contracts.

We depend on a small number of
customers.

We depend on a
small number of customers and our future depends on our ability to maintain our
existing customers and attract new customers. For the twelve months ended
December 31, 2004, four of our customers accounted for approximately 31% of our
revenues.  (See further Notes 1(g) and
15(b)(3) of our consolidated financial statements). As a result of our
acquisition of the activities of Shagrir Towing
Services, we anticipate that the customers which will account for the majority
of our revenues in future years will be 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. Should Israeli
insurance companies which currently purchase these services, or any other of
our major customers reduce or cancel their purchases, our financial condition
may be materially adversely affected.

7

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We depend on others to manufacture our systems and
we
rely on a single-source supplier for the manufacture of our end units.

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

| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | reduced control over
  delivery schedules, quality assurance, manufacturing yields and cost;
| |   |                                                                                             
| |  | reduced manufacturing
  flexibility due to last moment quantity changes;                    
| |   |                                                                                             
| |  | transportation delays;                                                                      
| |   |                                                                                             
| |  | political and economic
  disruptions;                                                       
| |   |                                                                                             
| |  | the imposition of tariffs
  and export controls on such products;                           
| |   |                                                                                             
| |  | work stoppages;                                                                             
| |   |                                                                                             
| |  | changes in government
  policies; and                                                       
| |   |                                                                                             
| |  | the loss of molds and
  tooling in the event of a dispute with a manufacturer.              

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

We
rely on operators of existing paging networks to provide our Location Based
Solution systems.

One
of the benefits of our automatic vehicle location (AVL) and Industrial and
Monitoring Control (IMU) systems is that they utilize existing one-way paging
networks, as their down-link interface, and therefore do not require a
relatively large initial investment in infrastructure. In order for us to take
advantage of this benefit, domestic operators of our system will need to enter
into and maintain strategic relationships with wireless communications
companies that control existing paging infrastructure or already provide
one-way paging services to large numbers of customers. Should they fail to
maintain such relationships with wireless communication companies, our business
would be adversely affected.

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

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

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

Our
primary competitors in the other geographical markets in which we currently
operate are mainly Lo-Jack globally and Ituran in Argentina. Some offer a
similar solution to ours in these markets and others, like Lo-Jack, use a VHF
based messaging unit, without a wide area network, which is sold to customers
and is connected via radio to local law enforcement communication networks.

8

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

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.

Most
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 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 Tracsats US dollar
  results during 2002. This was mainly due to Tracsats inability to increase
  its Argentinian Peso-denominated prices to its customers, while its major costs
  of inventory and infrastructure are denominated in US dollars.
| |   |                                                                                                                                                                                                                                                                                                                               
| |  | Due to the current
  political instability in Venezuela, the Venezuelan government has imposed
  foreign exchange controls, which have effectively led to the cessation of
  purchase orders of our SVR products and services from our main customer in
  Venezuela during 2003.                                              

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

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

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

9

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Our 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 greatly 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 systems is subject to international
regulations.

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

Our potential growth in the geographical territories
where we do not control the domestic operator depends, to a great extent, on
the success of the domestic operators of our system in commercializing our
technology and marketing their services.

The
commercialization of our LBS systems and other services in each territory in
which we operate is performed and controlled by the operators in each of these territories
who license our technology, purchase our infrastructure and end units, and
market their services in their territories. With the exception of Tracsat, our
Argentinean subsidiary, Pointer SA our Mexican subsidiary, and Shagrir our
Israeli subsidiary we do not control any of the other operators. The
implementation of the operators business plans depends mainly on their
marketing strategies, their future 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 royalties, where applicable, from such territories will be 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. To date, such operations that we do
not control are essentially limited to Venezuela, Russia, China and Chile,
while we do control such operations in Israel, Mexico and Argentina. If we were
to experience any setbacks regarding such operators, this would have a material
adverse effect on our business.

10

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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.

High levels of inventory could adversely affect our
gross margins.

Should
we fail to meet sales forecasts or suffer cancellations of orders from
customers, we may find ourselves with a higher level of inventory than we
currently need. For the twelve months ended December 31, 2004, we incurred
inventory write-offs of $0.479 million. As a result of a high level of
inventory, we may be exposed to the risk of a decrease in the value of the
inventory should the price of this inventory drop, causing our gross margins to
be adversely affected. Furthermore, in the event that we maintain large amounts
of inventory, certain products might be rendered obsolete due to modification
and improvement of our products, which might cause us to continue to incur
inventory write-offs.

Our major shareholders have a controlling stake in
our
company.

Pursuant
to the share purchase agreement of March 2003 wherein DBSI Investments Ltd., or
DBSI and other investors invested approximately $2.6 million in our company,
the investments completed in second half of 2003, wherein DBSI and other
investors invested approximately  $1.2
million, and the share purchase agreement consummated in February 2005, in
which DBSI invested a further $1 million,
DBSI currently owns approximately 25.38% (on a fully diluted basis), of
our issued and outstanding shares. Pursuant
to the Shareholders Agreement between DBSI and Egged Holdings Ltd., or
Egged, DBSI also has the right to appoint
four out of our seven directors on our Board of Directors, and thus effectively
controls our Board of Directors.  In addition, under the Shareholders Agreement with Egged, DBSI
will vote its shares in favor of one director nominated by Egged. According to
the terms of the Shareholders Agreement, Egged and DBSI will also vote their
shares against certain resolutions brought to our shareholders for a
resolution, such as new share issuances, increases in our share capital and
certain transactions, unless they agree to vote otherwise. As a result, DBSI
and Egged have the ability to control material decisions requiring the approval
of our shareholders. For further information on the Shareholders Agreement
between DBSI and Egged, see Item 10  Material
Contracts.

Risk Factors Relating to our Ordinary
Shares

We do not expect to distribute cash
dividends.

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

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

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

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

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| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 shares have been delisted from the Nasdaq SmallCap Market.

In
August 2002, our shares were delisted from the Nasdaq SmallCap Market and are
now traded on the OTC Bulletin Board as a result of our failure to comply with
the net tangible assets or stock holders equity requirements for continued
listing set forth in NASDAQ Marketplace Rule 4310(c)(2)(B). Consequently,
selling and buying our securities has become more difficult because of delays
in the timing of transactions and in obtaining accurate quotations.
Furthermore, broker-dealers are subject to an SEC rule that imposes additional
sales practice requirements on broker-dealers who sell low-priced securities to
persons other than established customers and institutional accredited investors.
For transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchasers
written agreement to the transaction prior to sale. These factors may affect
the ability of broker-dealers to sell our ordinary shares and of shareholders
to sell our ordinary shares in the secondary market and in turn could result in
lower prices and larger spreads in the bid and ask prices for our ordinary
shares than might otherwise be obtained.

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

Our
ordinary shares are traded on the Over-the-Counter Bulletin Board. Trading in
our ordinary shares has been limited and there can be no assurance that an
active trading market for our ordinary shares will develop. As a result, this
could adversely affect our shareholders ability to sell our ordinary shares in
short time periods, or possibly at all. Thinly traded ordinary shares can be
more volatile than ordinary shares traded in an active public market. The
average daily trading volume of our ordinary shares in May 2005 was 147,233
shares. The high and low bid price of our ordinary shares for the last two
years has been $0.58 and $0.08, respectively. Our ordinary shares have
experienced, and are likely to experience in the future, significant price and
volume fluctuations, which could adversely affect the market price of our
ordinary shares without regard to our operating performance.

Our Ordinary Shares are deemed to be Penny
Stock which may make it more difficult for investors to sell their shares due to
suitability requirements.

Our
ordinary shares are deemed to be penny stock as that term is defined in Rule
3a51-1promulgated under the Securities Exchange Act of 1934. Penny stocks are
stock:

| |   |                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | With a price of less than
  $5.00 per share;                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                  
| |  | That are not traded on a
  recognized national exchange;                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                  
| |  | Whose prices are not
  quoted on the NASDAQ automated quotation system; or                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                  
| |  | In issuers with net
  tangible assets less than $2.0 million (if the issuer has been in continuous
  operation for at least three years) or $5.0 million (if in continuous
  operation for less than three years), or with average revenues of less than
  $6.0 million for the last three years.

Broker/dealers
dealing in penny stocks are required to provide potential investors with a
document disclosing the risks of penny stocks. Moreover, broker/dealers are
required to determine whether an investment in a penny stock is a suitable
investment for a prospective investor. These requirements may reduce the
potential market for our ordinary shares by reducing the number of potential
investors. This may make it more difficult for our shareholders to sell shares
to third parties or to otherwise dispose of them. This could cause our share
price to decline.

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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.

We do not publicize our quarterly financial
statements.

As
a foreign private issuer, we are only required to publicize our annual
financial statements. However, until 2002, we disclosed unaudited quarterly
financial statements as a customary practice. In order to minimize general
costs, we decided, in 2003, to discontinue this practice. As of January 1,
2003, we only publish our annual financial information as required by law and
unaudited semi-annual financial statements. As a result, investors are no
longer able to receive periodic financial information on a quarterly basis.
This will affect their ability to assess the condition of our results and
operations.

Risk Factors Relating to Our Operations in
Israel

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.  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.

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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. Recently, there has been a significant call up 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
part of our costs in Israel is not denominated in dollars and may be
influenced from the rate of devaluation of the New Israeli Shekel.  This exposes us to market risk from changes
in foreign exchange rates as against the U.S. dollar, as our dollar costs in Israel may increase if inflation in Israel
exceeds the devaluation of the NIS against the dollar or if the timing of such
devaluation lags behind inflation in Israel. In the twelve months ended
December 31, 2004, the Israeli economy recorded inflation of approximately 1.2%
and the U.S. dollar devalued against the NIS by approximately 1.65%, this is
not typical.  For further discussion of
such devaluation, see Item 5, Impact
of Exchange Rate Fluctuations on Results of Operations, Liabilities and Assets
and Item 11, Quantitative and Qualitative Disclosures About Market
Risk. There can be no assurance that we will not incur losses from such
fluctuations in the future.

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

We
have received certain grants and programs from the Israeli Government, the
European Union and the BIRD Foundation. 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, the benefits we
receive could be canceled and we may have to refund payments previously
received under these programs and pay higher royalties. We cannot guarantee
that these grants and programs will be continued in the future, at their
current or historical levels or at all. If these grants and programs are ended,
our business, financial condition and results of operations could be adversely
affected.

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.

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

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

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

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

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

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

Nexus
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 Nexus Telocation Systems Ltd, and through December 1997 we
operated under the name Nexus Telecommunication Systems, Ltd. We operate under
the Israel Companies Law  1999. Our shares are publicly traded on the
Over-The-Counter Bulletin Board under the symbol NXUSF.  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 and Petach-Tikva, Israel. The
headquarters of our subsidiary, Tracsat S.A., 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.nexus.telocation.com. Information on our web site is not incorporated by reference in this
annual report.

Recent Developments

Since
January 1, 2004, the following important events have occurred to us:

Employment Agreement with our Chief
Executive Officer

In May
2005, our Board of Directors approved an agreement with Mr. Danny Stern to
serve as our chief executive officer. Pursuant to the agreement, Mr. Stern
receives an annual gross salary of NIS 540,000 and was granted options to purchase 4,000,000 of our ordinary shares
at an exercise price of $0.106 per share, pursuant to our 2003 option plan.
Such options can be exercised in full after 48 months of continuous service,
with 25% of the options vesting after each 12 month-period of continuous
service. In addition, at the end of his first six months period of employment,
we have agreed to determine an annual bonus mechanism.

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

On February
28, 2005 pursuant to an Asset Purchase Agreement, Shagrir, our fully-owned
subsidiary completed the purchase of the road-side assistance and towing
services of Shagrir Towing Services, in consideration for approximately NIS 200
million. NIS 100 million was funded by a loan from Bank Hapoalim B.M, NIS 40
million was funded by a loan provided by Shagrir Towing Services and
approximately NIS 50 million was loaned by a group of our shareholders led by
Gandyr Investments Ltd. and Egged Holdings Ltd. In addition we invested an
amount of NIS 4,550,000 in the share capital of Shagrir and provided it
with a loan of NIS 5,000,000. As part of the transaction, we granted Bank
Hapoalim B.M a two year warrant to purchase up to 10,000,000 of our ordinary
shares, at a price per share of $0.18; and granted Shagrir Towing Services a
two year warrant to purchase up to 25,000,000 of our ordinary shares, at a
price per share of $0.18. Part of the loans provided by the investors led by
Gandyr Investments Ltd. and Egged Holdings Ltd. may be converted into our
shares and/or the shares of our subsidiary, Shagrir. For further
information relating to the purchase of the activities and assets of Shagrir
Towing Services, see Item 10  Material
Contracts.

$6 million Investment

On February
28, 2005, a group of investors, including our controlling shareholder DBSI
Investments Ltd, or DBSI, completed a $6 million investment in our share
capital. Pursuant to the investment agreements, we issued (i) 71,428,570 of our
ordinary shares at a price per share of $0.084 (of which 30,952,381were issued
to Egged Holdings Ltd., or Egged) and (ii) warrants to purchase up to
15,714,284 of our ordinary shares at the same exercise price (of which warrants
to purchase up to 6,809,523of our ordinary shares were issued to Egged),
constituting approximately 19.23% of our current issued and outstanding share
capital on a fully-diluted basis. Under the terms of the agreements, the
warrants are exercisable until the earlier of: (a) April 6, 2006; or (b) our
merger or the acquisition of substantially all of our assets. The transaction
was approved by our shareholders at their annual meeting held on February 1,
2005. In addition, on March 13, 2005, we entered into a joinder agreement with
the general manager of Shagrir, Mr. Ofer Lior pursuant to which in
consideration for $69,735 we issued Mr. Lior (i) 830,179 of our ordinary shares
at a price per share of $0.084 and (ii) a warrant to purchase up to 182,639 of
our ordinary shares at the same exercise price, constituting approximately
0.22% of our current issued and outstanding share capital on a fully-diluted
basis. This warrant is 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.

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

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, whereby we increased our holdings in Shagrir from
14% to 100%
of its issued share capital. Upon completion of the agreement on June 29, 2004,
we purchased all the outstanding shares and options to purchase shares of Shagrir. Upon completion of the transaction, we purchased
from certain of Shagrirs shareholders their rights to repayment by Shagrir of an aggregate of $5,215,043.50 pursuant to loans
which they provided
to Shagrir. In consideration for the right to receive
repayment of the loans, we issued such shareholders 10,430,086 of our ordinary
shares, constituting one of our ordinary shares for every $0.50 owed to such
shareholders pursuant to the loans. Furthermore, upon completion of the
transaction, we provided certain shareholders of Shagrir which provided
bank guarantees to Shagrir for an aggregate amount of $1,644,444.50,
with an indemnification letter pursuant to which we agreed to indemnify them in
the event of the banks exercising their guarantees.  In consideration for the indemnification letters provided by us
to such shareholders, the number of our ordinary shares that we issued to them
pursuant to the aforementioned acquisition transactions was reduced by an
aggregate of 2,288,888 ordinary shares, constituting one of our ordinary shares
for each $0.50 that we have agreed to indemnify them pursuant to the
guarantees. In addition, pursuant to the agreement, a number of options in Shagrir held by its employees were converted into
7,589,620 options of our
company, constituting, an aggregate of 1.67% of our current issued share
capital on a fully diluted basis. In consideration for all of the above, we
transferred a number of our ordinary shares, warrants and employees options
with an aggregate value equal to approximately 16.61% of our current issued
share capital on a fully diluted basis, including the employees options as
mentioned above and warrants to purchase up to 24,778,091 of our ordinary
shares at an exercise price of $0.044, exercisable until the earlier of: (a)
April 6, 2006; or (b) our merger or the acquisition of substantially all of our
assets. Prior to the completion of the acquisition, the directors of Shagrir resigned from its board of directors and we assumed
full control of Shagrir.

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Exercise of warrants by Bank
Hapoalim and other minority investors

From
January 1, 2004 through June 20, 2005, 17,501,364 warrants were exercised into
our ordinary shares, par value NIS 0.03 each. Of these, warrants to purchase
11,051,818 of our ordinary shares were exercised by a cashless exercise into
9,737,409 ordinary shares (of which Bank Hapoalim exercised warrants to
purchase 5,113,636 ordinary shares into 4,622,012 ordinary shares), and another
6,449,546 warrants were exercised into ordinary shares, for approximately
$284,000.

Incorporation of Local Mexican
Operator

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

Renewal of Purchase Orders in
Venezuela

In January
2004, the customer in Venezuela renewed its purchase orders after not having
ordered from us for approximately two years. In 2004, this customer ordered
over US $1 million worth of infrastructure equipment, spare parts and end
units. However, due to continuous political and economical uncertainties in
Venezuela, we cannot be sure of any further purchase orders from this customer
and the timing of such.

Potential Claim

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

17

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

In June,
2005 CEIEC and the third party filed a counter claim with the CIETAC for
repayment of  $300,000 relating to the
same transaction, plus weekly interest of 0.5% (compounded from February 2002).
The counter claim relates to the same amount that CEIEC has claimed from Bank
Hapoalim B.M pursuant to the guarantee discussed above. Based on our legal
advisors opinion, we have a good defense against  any claim of CEIEC and the third party.

Grant of Options to Employees

On June 1,
2004, our board of directors resolved to issue to our employees options to
purchase approximately 2.2 million of our ordinary shares, pursuant to our 2003
Employee Share Option Plan, at an exercise price of 13.3 cents ($0.133) per share. 44% of the options granted to
each employee shall vest 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.

Investment
in Property and Equipment

During
the years 2004, 2003 and 2002, we had capital expenditures of $0.9 million,
$1.1 million and $1.2 million, respectively, related mainly to the installment
of equipment used by Tracsat, our subsidiary in Argentina and Pointer SA, our
subsidiary in Mexico.

For
a description of additional recent developments which have taken place since
January 1, 2004, see Item 10 Information on
the Company  Material Contracts.

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

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

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

| |       |                                                                                                                                                                                                                                                                                                                            
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)   | Road-side assistance  these services may include towing
  services which are provided in Israel either directly by us or using
  sub-contractors, mobile automobile repair services, vehicle replacement services, the sale of spare-parts or
connecting the driver to
  other service providers.                         
| |       |                                                                                                                                                                                                                                                                                                                            
| | (ii)  | Stolen vehicle services  these include our vehicle
  replacement services and our vehicle retrieval services, which are based on
  the systems we use, develop and sell and through which, in co-operation with
  law enforcement and private security agencies, we prevent the cars from being
  stolen or retrieve them.
| |       |                                                                                                                                                                                                                                                                                                                            
| | (iii) | Value added services  may include location through the
  internet and other location based services provided to the drivers contacting
  our call center.                                                                                                                                                                 

18

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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:
Tracsat (we currently hold approximately
86.5% of the issued share capital of Tracsat) and Pointer SA (we
currently hold 68% of the issued share capital of Pointer SA), respectively.

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

The Nexusphere Network

Our
Nexusphere network is based on spread spectrum technology (SPSP) intended for
wide area networks (WAN). Among the advantages of Nexuspheres utilization of
the spread spectrum technology includes the following distinctive features:
resistance to interference, overcoming of fading caused by multipath and highly
sensitive receivers.

The
architecture of our Nexusphere system allows easy integration with existing
infrastructures, low-cost expansion, development of multiple applications, and
access to the internet and public switched telephone network gateways, all of
which provide the following advantages:

| |   |                                                                      
| | - | ---------------------------------------------------------------------
| |  | high receiver
  sensitivity;                                         
| |   |                                                                      
| |  | longer
  transmission ranges;                                        
| |   |                                                                      
| |  | resistance to
  interference;                                        
| |   |                                                                      
| |  | high system
  reliability and flexible configuration; and            
| |   |                                                                      
| |  | cost-effectiveness
  in system design, implementation and operations.

The system
is comprised of three major parts:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | End-units (RMU)  a transceiver (RF modem with
  inputs and outputs) that is installed within a vehicle or may be installed at
  any remote object to be monitored or located. The end-units inputs are
  connected to sensors within the object, while through its outputs it can send
  commands (which it receives from the CCC) to the object.                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Base stations  which are spread over the territory to
  be covered and are connected to existing communication infrastructure. Each
  base station is equipped with direction-finding array of antennae, which
  receive the end-units signal and measure the angle from which the signal
  arrived. These measurements, together with additional data received from the
  end-units, are then converted by the base station into digital information,
  and sent to the Command  & Control
  Center.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Command &
  Control Center (CCC)  the
  heart of the system, which includes the databases, and other software to
  administer the operation. Among other things, the CCC collects the
  information sent to it from the base stations, calculates the end-units
  location and displays the data on various monitors. Commands can be
  down-linked to the RMU from the CCC through a commercial paging system.                                                                                      

The
following are some of the available applications of Nexusphere:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Stolen Vehicles
  Recovery (SVR)   The Nexusphere system comprises unique
  features for SVR solutions, including (i) inclusion of communication &
  location (ii) concealed terminal (iii) resistance to jamming (iv) indoor
  positioning (v)  alarm system
  adaptability (vi) remote command (vii) accuracy (viii) back-up power supply,
  and (ix) 24x7 redundant command and control center (CCC).                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Fleet
  Management & Telematics  Nexusphere provides certain Fleet Management capabilities, which ensure
  that vehicles, and their merchandise, arrive when and where they are
  expected. The end-unit can connect to various sensors by RS-422 or RS-232
  standards, or by discrete (on or off) wirelines. The sensors monitor various
  vehicle operating systems, and the end unit will report the results to the
  fleet owners and managers.

19

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Wireless Remote
  Monitoring & Control Security and Industrial Applications  The Nexusphere system offers a total
  remote monitoring and control solution. Connecting the end-units to remote
  generators, fire systems and home alarm systems provides a link to safety and
  security command & control centers that is difficult to jam or interfere
  with.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Assets
  Surveillance & Protection As part of our Nexusphere System, we were previously involved in
  developing applications to provide solutions in the field of Assets
  Surveillance & Protection (ASAP). ASAP is based on an end-unit, which is
  attached to the asset and a terrestrial communication & location system.
  ASAP systems are most commonly employed by transportation companies,
  insurance companies, manufacturers and users of assets and crude materials.
  ASAP systems can provide instant warning and location in the event of
  hazardous chemical leakage or road accidents. Nexus led a two-year project
  with a consortium of eight European companies, consisting of technology
  developers and transportation companies, which was established in December
  2001 to develop and test an ASAP solution. The solution was tested in the
  third quarter of 2003 and demonstrated its advanced technologies over other
  alternatives.

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

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

Services and Operations

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

Shagrir
is the leader in Israel in providing road-side assistance and towing services. Shagrir provides services to approximately 700,000
subscribers
throughout Israel and its fleet of vehicles includes approximately 120 service
cars, mobile garages and towing vehicles, which are dispatched by the control
center to the vehicle through a sophisticated management and monitoring
software application, connected via
remote terminals used in the service cars, mobile garages and towing
vehicles.

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

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

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

20

---

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

Shagrir is a leading provider of SVR and
value added services in Israel for automobile owners, including the provision
of location based services for vehicles using our Nexusphere Network and other sophisticated systems for the
protection and location of vehicles. Using sensors located in a vehicle our
system may be alerted as to the progress of a theft by the transmission of
information to our twenty-four hour manned command and control center. Once received
by the center, the necessary steps to recover the vehicle are taken. Our
value-added 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.

The
system also allows for location of vehicles through the Internet, by inserting
a personal code, at any given time.

Equipment, Subcontractors and
Supplies

As of June
2005, Shagrir had 120 service cars, mobile garages and
towing vehicles and a number of replacement vehicles which currently number
approximately 100.

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

On average,
approximately 70% 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 to isolated locations (in peak and non-peak
periods).

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

Sales and Marketing

For the provision of its road-side assistance
and towing services  Shagrir sales and
marketing team directs its sales and marketing efforts to promoting its
subscriptions mainly to Israeli insurance companies, and to lesser extent fleet
vehicle customers and private customers. Our SVR services are marketed
primarily through vehicle importers and to a lesser extent fleet vehicle
operators and private individuals. We employ an in house sales and marketing
force and also direct the sale of our safety products and car units for
installment to private customers, business customers and vehicle fleets  either directly or through our network of
approximately 60 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, 2005;

21

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| |   |                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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, 2005; and           
| |   |                                                                                                                                                                                                         
| |  | a license to rent self-drive vehicles under the Control of
  Commodities and Services (Tour Transport, Special Transport and Vehicle
  Rental) Order, 5745-1995, which is valid until December 31, 2005.

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

Competition

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

Seasonality

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

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

The
location based services market is not seasonal.

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

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

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

Sales and Marketing

In
order to execute their sales and marketing initiatives, Tracsat 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 vehicle distributors and vehicle financing corporations in
their respective designated territories.

22

---

---



Patent and Licenses

Tracsat
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 elsewhere in Item 4. Government Regulations.

Government
Regulations

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

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

Competition

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

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

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

Seasonality

Our
business provided in Latin America is not materially seasonal.

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

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

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

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

23

---

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Geographical breakdown of our revenues:

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

| |                 |  |                |        |                          |  |                |  |                           |       |                |  |                           |  |  |       |  |  |      | 
| | --------------- |  | -------------- | ------ | ------------------------ |  | -------------- |  | ------------------------- | ----- | -------------- |  | ------------------------- |  |  | ----- |  |  | ---- | 
| |                 |  | 2004           |        | 2003                     |  | 2002           | 
| |                 |  |                |        |                          |  |                | 
| |                 |  | In
  thousands |        | % of our
  total
  sales |  | In
  thousands |  | % of our
  total 
  sales |       | In
  thousands |  | % of our
  total 
  sales | 
| |                 |  |                |        |                          |  |                |  |                           |       |                |  |                           | 
| | Israel          |  |                | 7,939  |                          |  | 72.4           |  |                           | 2,543 |                |  | 49.4                      |  |  | 1,592 |  |  | 25.0 | 
| |                 |  |                |        |                          |  |                |  |                           |       |                |  |                           |  |  |       |  |  |      | 
| | U.S.A           |  |                |       |                          |  |               |  |                           |      |                |  |                          |  |  | 820   |  |  | 12.9 | 
| |                 |  |                |        |                          |  |                |  |                           |       |                |  |                           |  |  |       |  |  |      | 
| | Latin
  America |  |                | 2,641  |                          |  | 24.1           |  |                           | 2,392 |                |  | 46.4                      |  |  | 3,833 |  |  | 60.3 | 
| |                 |  |                |        |                          |  |                |  |                           |       |                |  |                           |  |  |       |  |  |      | 
| | Other           |  |                | 389    |                          |  | 3.5            |  |                           | 215   |                |  | 4.2                       |  |  | 116   |  |  | 1.8  | 
| |                 |  |                |        |                          |  |                |  |                           |       |                |  |                           |  |  |       |  |  |      | 
| |                 |  |                |        |                          |  |                |  |                           |       |                |  |                           |  |  |       |  |  |      | 
| | Total           |  |                | 10,969 |                          |  | 100            |  |                           | 5,150 |                |  | 100                       |  |  | 6,361 |  |  | 100  | 
| |                 |  |                |        |                          |  |                |  |                           |       |                |  |                           |  |  |       |  |  |      | 

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

The
legal and commercial name of our company is Nexus Telocation Systems 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.

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

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

|    |                                                                  
|--- | -----------------------------------------------------------------
|(1) | We hold
  86.45% of the issued and outstanding shares of Tracsat.
|(2) | We hold 68%
  of the issued and outstanding shares of Pointer SA.

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

Our
executive offices, research and development and laboratory facilities are
located in Givatayim, Israel (a suburb of Tel Aviv). We currently lease
approximately 609 square meters and our annual lease payments are approximately
$80,000. Tracsats offices and operations facility are located in Buenos Aires.
Tracsat currently leases 1,053 square meters (including 333 square meters used
by its installation center) with an annual lease payment of $61,000. Shagrirs offices and operations facility are located in
Petach Tikva, Israel.
Shagrir currently leases 600 square meters in Petach Tikva with monthly rental
fees of $4250. The lease agreement for this Petach Tikva property was due to
expire on July 13, 2005, but the parties to the agreement, agreed that the term
be extended until terminated by six months advanced notice of such termination
by either party. In addition: (i)on January 3, 2005, Shagrir entered into: (a) a lease agreement with Shagrir (1985) Ltd. pursuant
to which Shagrir agreed to lease from Shagrir (1985) its Holon
property (5,320 square meters) over a period of 2 years beginning February 28,
2005 (with an option to extend this term for an additional 2 years), in
consideration for a monthly rental fee of $10,430; and (b) an agreement
pursuant to which Shagrir purchased from Shagrir (1985) its Haifa
property (2,100 square meters) for approximately $389,000; and (ii) in June
2005, a lease agreement for a certain Jerusalem, Israel property (approximately
606 square meters) with monthly rental fees of $2,800 was assigned to Shagrir. 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 $72,000. For further information, see Note 10c of our
consolidated financial statements.

24

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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 automobile owners and insurance companies.

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

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

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

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

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

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

Critical Accounting Policies

The
consolidated financial statements include Nexus 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

The
Company and its subsidiaries generate revenues from subscriber fees, sales of
systems and products and sales of Stolen Vehicle Recovery services. To a
lesser extent revenues are also derived from technical support services and
from royalties.

In
general, revenues from 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.

25

---

---



Subscriber
fees are recognized over the term of the agreement.

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

In
November 2002, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF
00-21). EITF 00-21 provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or
rights to use assets. The provisions of EITF 00-21 applied to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003.

In
applying EITF 00-21, separate contracts with the same entity or related parties
that are entered into at or near the same time are presumed to have been
negotiated as a package and should, therefore, be evaluated as a single
arrangement in considering whether there are one or more units of accounting.
That presumption may be overcome if there is sufficient evidence to the
contrary. EITF 00-21 also addresses how arrangement consideration should be
measured and allocated to the separate units of accounting in the arrangement.

Certain
agreements include a contractual obligation for installation of systems. When
such installation is requested by the customer, the entire revenues are
deferred until installation is performed.

We consider the sale of products
and subscriber fees to be separate units of accounting.

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

The
Company is entitled to royalties from one of its customers, which are based on
the number of the customers subscribers. The royalties are recognized when
such royalties are reported to the Company.

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 retuns was recorded.

Accounts Receivable

We
depend on a small number of customers located mainly in Israel and South
America. If the creditworthiness or the financial strength of the customers
were to decline, there could be an adverse effect on our operating results and
cash flows. Should geopolitical situations change in the countries where our
customers operate, there could be additional credit risks. In cases where our
customer is the operator (not owned by us), we assess collectibility separately
for such new customer and existing ones. For new customers, we required a down
payment for the initial project including the infrastructure, technical
services and the first batch of end-units. For existing customers, we assess
the credit history for each customer on a case-by-case basis. We also
investigate the financial capabilities of our customers by receiving on-going
information on their business status. In certain cases we demand down payments
and other financial instruments such as Letter of Credit as collaterals.
However, we cannot be certain that our estimations will prove correct as to any
one of our customers

In
the normal course of business, we monitor the financial condition of our
customers. Changes to these estimates are possible and could result in a
material effect on our balance sheet and reported results of operations.

26

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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 over the
fair value of net assets acquired. Pursuant to FAS 142, Goodwill and Other
Assets, goodwill is not amortized but rather tested for impairment at least
annually. As of December 31, 2004, the Company has determined that no
impairment with respect to goodwill exists.

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

Patents
are amortized over an eight-year period.

The
customer list is amortized over a five-year period. The brand name is amortized
over a two-year period, two thirds in the first year, and one third in the
second year.

The
Companys long lived assets are reviewed for impairment in accordance with SFAS
No.144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
No.144) whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of the assets to
the future undiscounted cash flows expected to be generated by the assets. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. No impairment losses have
been identified as of December 31, 2004.

Share based compensation

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

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The
  modified prospective method, in which compensation cost is recognized
  commencing with the effective date (i) based on the requirements of SFAS
  123(R) for all share-based payments granted after the effective date and (ii)
  based on the requirements of SFAS 123 for all awards granted to employees
  prior to the effective date of SFAS 123(R) that remain unvested at the
  effective date.
|
| |  | The
  modified retrospective method, which includes the requirements of the
  modified prospective method described above, but also permits entities to
  restate based on the amounts previously recognized under SFAS 123, for
  purposes of pro forma disclosures all prior periods presented.                                                                                                            

27

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As
permitted by SFAS 123, we currently account for share-based payments to
employees using APB 25, the intrinsic value method, and, as such, recognizes no
compensation cost for employee stock options. Accordingly, the adoption of the
SFAS 123(R) fair value method will have significant impact on our results of
operations, although it will have no impact on the our overall financial
position. The impact of the adoption of SFAS 123(R) cannot be predicted at this
time, as it depends on levels of share-based payments for future grant.
However, had we adopted SFAS 123(R) in prior periods, the impact of that
Standard would have approximated the impact of SFAS 123, as described in the
disclosure of the pro forma information above.

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

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

Significant Expenses

Cost of Revenues.

Cost
of revenues consists primarily of salaries and employee benefits,
subcontractors and consulting, raw materials and components, operational costs
of our subsidiaries (including mainly system maintenance, end-units
installation costs, system communications costs, security and recovery costs)
and depreciation of fixed assets.

Research and Development Expenses.

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

Selling & Marketing Expenses.

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

General and Administrative Expenses.

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

Amortization of deferred stock compensation.

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

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

28

---

---



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

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 in 2003 also from one time cashless expense resulting from
the induced conversion of a convertible debenture. Financial income consists of
interest on short-term bank deposits.

Other Expenses, Net.

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

Selected Financial Data

We
derived the following selected consolidated financial data presented below for
each of the years ended December 31, 2002, 2003 and 2004 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, 2000 and 2001 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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|                                                                            |  |      |         |      |  |        |   |      |         |      |  |        |   |  |         |  
|--------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | ------ | - | ---- | ------- | ---- |  | ------ | - |  | ------- | -
|US Dollars
  in Thousands (except share and per share data)                 | 
|                                                                            |  | 2004 |         | 2003 |  | 2002   |   | 2001 |         | 2000 | 
|Statement of Income Data:                                                   |  |      |         |      |  |        |   |      |         |      |  |        |   |  |         |  
|Revenues, sales                                                             |  |      | 5,594   |      |  | 2,774  |   |      | 5,196   |      |  | 12,375 |   |  | 6,035   |  
|Revenues, services                                                          |  |      | 5,375   |      |  | 2,376  |   |      | 1,165   |      |  | 184    |   |  |        |  
|Total Revenues                                                              |  |      | 10,969  |      |  | 5,150  |   |      | 6,361   |      |  | 12,559 |   |  | 6,035   |  
|Cost of revenues, sales                                                     |  |      | 5,666   |      |  | 2,099  |   |      | 3,528   |      |  | 9,355  |   |  | 4,498   |  
|Cost of revenues, services                                                  |  |      | 1,876   |      |  | 2,075  |   |      | 948     |      |  | 1,333  |   |  |        |  
|Total Cost of Revenues                                                      |  |      | 7,542   |      |  | 4,174  |   |      | 4,476   |      |  | 10,688 |   |  | 4,498   |  
|Gross profit (loss)                                                         |  |      | 3,427   |      |  | 976    |   |      | 1,885   |      |  | 1,871  |   |  | 1,537   |  
|Research and development costs, net                                         |  |      | 482     |      |  | 664    |   |      | 1,377   |      |  | 1,654  |   |  | 1,397   |  
|Selling, general and administrative
  expenses                              |  |      | 4,475   |      |  | 1,964  |   |      | 3,315   |      |  | 4,961  |   |  | 3,774   |  
|Amortization of deferred stock based
  compensation                         |  |      | 465     |      |  | 400    |   |      |        |      |  |       |   |  |        |  
|Amortization of intangible assets                                           |  |      | 932     |      |  | 67     |   |      | 76      |      |  | 67     |   |  | 64      |  
|Operating loss                                                              |  |      | 2,927   |      |  | 2,119  |   |      | 2,883   |      |  | 4,811  |   |  | 3,698   |  
|Financial expenses                                                          |  |      | 758     |      |  | 1,105  |   |      | 266     |      |  | 209    |   |  | 221     |  
|Other income (expenses)                                                     |  |      | (42     | )    |  | (32    | ) |      | (440    | )    |  | 563    |   |  | (13,526 | )
|                                                                            |  |      |         |      |  |        |   |      |         |      |  |        |   |  |         |  
|Loss from continuing operations before
  minority interest                  |  |      | 3,727   |      |  | 3,256  |   |      | 3,589   |      |  | 4,457  |   |  | 17,445  |  
|Minority interest in losses of a subsidiary                                 |  |      |        |      |  |       |   |      |        |      |  | 191    |   |  |        |  
|Loss from continuing operations                                             |  |      | 3,727   |      |  | 3,256  |   |      | 3,589   |      |  | 4,266  |   |  | 17,445  |  
|Gain (Loss) from discontinued operations                                    |  |      |        |      |  | 8,524  |   |      | (4,000  | )    |  | (5,204 | ) |  |        |  
|                                                                            |  |      |         |      |  |        |   |      |         |      |  |        |   |  |         |  
|Income (loss) before taxes on income                                        |  |      | (3,727  | )    |  | 5,268  |   |      | (7,589  | )    |  | (9,470 | ) |  | (20,508 | )
|Income taxes                                                                |  |      | 37      |      |  |       |   |      |        |      |  |       |   |  |        |  
|Net income (loss)                                                           |  |      | (3,764  | )    |  | 5,268  |   |      | (7,589  | )    |  | (9,470 | ) |  | (20,508 | )
|Basic and diluted net earning (loss) per
  share from continuing operations |  |      | (0.03   | )    |  | (0.04  | ) |      | (0.32   | )    |  | (0.42  | ) |  | (2.37   | )
|Basic and diluted net earning (loss) per
  share                            |  |      | (0.03   | )    |  | 0.06   |   |      | (0.67   | )    |  | (0.93  | ) |  | (2.78   | )
|Weighted average number of shares
  outstanding (in thousands)              |  |      | 145,747 |      |  | 85,567 |   |      | 11,289  |      |  | 10,162 |   |  | 7,369   |  
|                                                                            |  |      |         |      |  |        |   |      |         |      |  |        |   |  |         |  
|Balance Sheet Data:                                                         |  |      |         |      |  |        |   |      |         |      |  |        |   |  |         |  
|Total assets                                                                |  |      | 25,513  |      |  | 6,226  |   |      | 8,034   |      |  | 11,405 |   |  | 12,213  |  
|Net assets (liabilities) of continuing
  operations                         |  |      | 7,086   |      |  | (1,346 | ) |      | (4,121  | )    |  | 165    |   |  | 66      |  
|Working capital (deficit)                                                   |  |      | (6,698  | )    |  | (147   | ) |      | (1,454  | )    |  | (1,888 | ) |  | 537     |  
|Convertible debentures                                                      |  |      |        |      |  |       |   |      | 1,020   |      |  |       |   |  | 2,500   |  
|Shareholders equity (deficiency)                                           |  |      | 7,086   |      |  | (1,346 | ) |      | (12,645 | )    |  | (5,722 | ) |  | (2,177  | )
|Share capital                                                               |  |      | 1,145   |      |  | 773    |   |      | 94      |      |  | 91     |   |  | 67      |  
|Additional paid-in capital                                                  |  |      | 94,127  |      |  | 83,239 |   |      | 77,373  |      |  | 76,402 |   |  | 69,584  |  

Operating Results

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

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

30

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Cost of Revenues. Our cost of revenues increased to $7.5 million for the twelve months ended
December 31, 2004 as compared to $4.2 million for the same period in 2003. This
increase was associated mainly with the consolidation of Shagrirs results in the second half of
2004 into our consolidated financial statements as explained above. To a lesser
extent, our cost of revenues increased due to increased volume of end unit
sales mainly to our customer in Venezuela, which was partially offset by a
decrease in cost of revenues of our SVR services in Argentina.

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

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

Selling and
Marketing Expenses. Selling and marketing costs
increased by 156% to $1.6 million in 2004 from $621,000 in 2003. The major
increase in 2004 resulted from the consolidation of Shagrirs results in the second half of 2004 into our
consolidated financial statements since we increased our holdings from approximately
14% to 100% at the end of June 2004. We expect in 2005 to consolidate Shagrirs results for the whole year
and therefore to increase our selling and marketing costs.

General and
Administrative Expenses. General and
administrative expenses increased by approximately 115% from $1.3 million in
2003 to $2.9 million in 2004. The major increase in 2004 resulted from the
consolidation of Shagrirs
results in the second half of 2004 into our consolidated financial statements
since we increased our holdings from approximately 14% to 100% at the end of June
2004 and from an allowance for doubtful accounts of $ 326,000 of certain
debt owed by one of our customers. We expect in 2005 to consolidate Shagrirs results for the whole year
and therefore to increase our general and administrative expenses.

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

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

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

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

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

31

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Twelve Months Ended
December 31, 2003 Compared with Twelve Months Ended December 31, 2002

Revenues. Revenues sharply decreased by $1.2 million, or 19%, from $6.3 million in 2002
to $5.1 million in 2003. The major decrease in revenues in 2003 resulted from
the sharp decrease in end unit sale volume to our customer in Venezuela, which
was offset in part by the increase in revenues of our SVR services in
Argentina. The decrease in sales to our customer in Venezuela was mainly due
the economic situation in Venezuela and the imposition of foreign currency
restrictions.

Cost of Revenues. Our cost of revenues decreased to $4.2 million for the twelve months ended
December 31, 2003 as compared to $4.5 million for the same period in 2002. This
decrease is associated mainly with the decrease in our revenues from sales,
which was partly offset by an increase in the cost of services due to the
increased volume of revenues from services. As a percentage of revenues, cost
of sales increased by 11% from 2002 to 2003 primarily due to the reduction in
our revenues in 2003, which was not offset by a corresponding reduction in our
overhead in this period.

Gross Profit. As a result of the decrease in our revenues in 2003 and our level of cost of
revenues in 2003, our gross profit decreased by $909,000 from $1.9 million in
the year of 2002 to $976,000 in 2003.

Research and
Development Expenses. Net research and development
expenses decreased by 52% to $664,000 in the year of 2003 from $1.4 million in
2002, mainly due to the reduction of approximately 33% in manpower and
reduction in the average salary of R&D employees. In addition, in 2003,
research and development expenses were net of $476,000 in grants from the
European Community for the Assets Surveillance and Protection, or ASAP project
as compared to $520,000 in 2002. The ASAP project was completed in October
2003.

Selling and
Marketing Expenses. Selling and marketing expenses
decreased by 44% to $621,000 in the year 2003 from $1.1 million in 2002. The
decrease was mainly due to decreased commission expenses, which resulted from
the decrease in revenues and the execution of a cost reduction plan, including
the reduction of labor costs.

General and
Administrative Expenses. General and
administrative expenses decreased by approximately 39% from $2.2 million in
2002 to $1.3 million in 2003, mainly due to a $531,000 charge that we recorded
with respect to doubtful debts recorded in 2002 and a decrease in labor costs
and other expenses which resulted from the execution of a cost reduction plan
in 2003.

Operating Loss. 
As a result of the foregoing, our operating loss in 2003 decreased to $2.1
million compared to an operating loss of $2.9 million in 2002, which included
the $400,000 amortization of deferred stock compensation in 2003.

Financial Expenses
(Net). In 2003, financial expenses included a one
time cashless expense resulting from the induced conversion of a convertible
debenture in the amount of $1 million, which was the main cause of the increase
in net financial expenses from $266,000 in 2002 to $1.1 million, in 2003. The
increase was offset in part by the increase in foreign currency translation adjustments.

Net Income (Loss). In 2003, we had net income of $5.3 million compared to a net loss of $7.6
million in 2002. Our net income in the 2003 period was primarily the result of
a one-time, non-cash capital gain of $8.5 million resulting from the sale in
February 2003 of Nexus Data Inc., offset by $3.3 million loss from continuing
operations as a result of the foregoing, as compared to a $4 million loss from
NexusData Inc. and a $3.6 million loss from continuing operations in 2002.

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, the New Israeli Shekel
(NIS) and the Argentine Peso. For a discussion regarding the functional and
reporting currency of each of our subsidiaries see Note 2c to our financial
reports.

Due
to the two acquisitions we made in Israel, we expect that our business in
Israel will account in the foreseeable future for the majority of our business
and revenues. The business in Israel, especially the activities acquired from
Shagrir Towing Sevices are mainly denominated in NIS.

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

32

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We
believe that inflation in Israel and fluctuations in the U.S. dollar  NIS
exchange rate may have some effects on our business, and our net income.
Salaries of our employees in Israel are paid in New Israeli Shekels. These
salary payments constitute the main portion of the costs of our operations in
Israel. During 2004, the dollar value of these salaries decreased as a result
of a reduction in average salaries in NIS terms, which, however, was partly
offset by the effect of the depreciation of the US dollar against the Israeli
shekel.

The
exchange rate has fluctuated during 2004 from a high of NIS 4.634 to the dollar
to a low of NIS 4.308 to the dollar. The average high and low exchange rates
between the NIS and U.S. dollar during the most recent six months, as published
by the Bank of Israel, were as follows:

|                |  |                   |  |                   |  |  |  |  |       |  | 
|--------------- |  | ----------------- |  | ----------------- |  |  |  |  | ----- |  | 
|MONTH           |  | HIGH              |  | LOW               | 
|                |  |                   |  |                   | 
|                |  | 1 U.S.
  dollar = |  | 1 U.S.
  dollar = | 
|December
  2004 |  |                   |  | 4.374             |  |  |  |  | 4.308 |  | 
|January 2005    |  |                   |  | 4.414             |  |  |  |  | 4.308 |  | 
|February
  2005 |  |                   |  | 4.392             |  |  |  |  | 4.357 |  | 
|March 2005      |  |                   |  | 4.379             |  |  |  |  | 4.299 |  | 
|April 2005      |  |                   |  | 4.395             |  |  |  |  | 4.36  |  | 
|May 2005        |  |                   |  | 4.416             |  |  |  |  | 4.348 |  | 

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,
  2000  December 31, 2000 |  |                 |  | 4.0683 NIS/$1 |  | 
|January 1,
  2001  December 31, 2001 |  |                 |  | 4.2195 NIS/$1 |  | 
|January 1,
  2002  December 31, 2002 |  |                 |  | 4.7363 NIS/$1 |  | 
|January 1,
  2003  December 31, 2003 |  |                 |  | 4.5124 NIS/$1 |  | 
|January 1,
  2004  December 31, 2004 |  |                 |  | 4.4833 NIS/$1 |  | 

In
2000, the rate of inflation was approximately 0% and the devaluation rate was
2.7%. In 2001, the rate of inflation was about 1.4% and the NIS was devalued
against the dollar by 9.3%. In 2002, the rate of inflation was about 6.5% and
the NIS was devalued against the dollar by 7.3%. In 2003, the Israeli economy recorded negative inflation
of approximately 1.9% where the U.S. dollar devalued against the NIS by
approximately 7.6%. In 2004, the
Israeli economy recorded inflation of approximately 1.2% where the U.S. dollar
devalued against the NIS by approximately 1.6%. 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 2004, but they did not materially
affect our results of operations in such periods.

Regarding
our operation in Argentina, the fact that most of Tracsats revenues are not
denominated in US dollars, we believe that inflation in Argentina and
fluctuations in the U.S. dollar  Argentinian Peso exchange rate may have a
significant effect on the business and overall profitability of Tracsat and as
a consequence, on the results of our operations. In 2002, a
severe and rapid currency devaluation in Argentina adversely affected Tracsats
US dollar results. This was mainly due to Tracsat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.

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.

33

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Governmental and
Fiscal Policies which May Affect Our Business

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

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

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

At
December 31, 2004, we had a negative working capital of $6.7 million, our
current assets to current liabilities ratio was 0.47:1, we had cash and cash
equivalents of $75,000 and unused credit facility of $432,000.

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.

In
April 2003, DBSI Investments Ltd. acquired a controlling stake in our company
pursuant to a share purchase agreement with us from March 2003. The 2003 share
purchase agreement with DBSI and certain other investors provided for
additional investments in our company through October 2003. Pursuant to such
agreement, DBSI and the other investors who invested in our company following
the closing of the share purchase agreement in April 2003, invested
approximately $3.82 million. In consideration for their investment they
acquired 86,804,542 ordinary shares and warrants to purchase 60,763,184
ordinary shares at a purchase price of $0.044 per share. Each investor was
issued a warrant to purchase seven ordinary shares for every 10 shares
purchased under the agreement.

Pursuant
to our agreement with DBSI, AMS converted $723,000 of convertible debentures
issued to it, and we repaid AMS an amount of $300,000.

As
of December 31, 2004, we had a long-term credit facility for approximately
$6.16 million, of which $3 million was a five-year long-term loan for the
period beginning April 2003, $1.2 million were two four-year long-term loans
for the period beginning October 2003, $0.74 million was a four and half year
long-term loan for the period beginning December 2004 and a $0.9 million of two
year and three months loan for the period beginning May 2004,$0.15 million was
a two and a half year loan for the period beginning January 2003, and a $0.15
loan with no determined maturity date.

As
of December 31, 2004, we had a short term credit facility for approximately $5.89
million of which $4.56 million with Bank Hapoalim and $0.9 million with Bank
Mizrahi, $0.432 million of the short term credit facility remains as of
December 31, 2004 available for our use.

In
2004, net cash provided by our continuing operating activities amounted to
$0.094 million as compared to net cash used in continuing operating activities
of $2.13 million in 2003. In 2004, net cash used in our continuing investing
activities was $0.8 million as compared to $1.04 million net cash used in our
continuing investing activities in 2003. In 2004, net cash provided by
financing activities was $0.079 million as compared to $3.798 million provided
by continuing financing activities in 2003. Current liabilities increased from
$3.88 million in 2003 to $12.6 million at December 31, 2004, mainly due to a
increase of short-term bank credit and current maturities of long-term loans
and increase in trade payables balance influenced by Shagrirs financial statements
consolidated for the first time

34

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---



Long-term
liabilities increased from $3.691 million in December 31, 2003 to $5.829
million in December 31, 2004 mainly due to increase in long term loan included
in Shagrirs
financial statements consolidated for the first time.

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

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

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

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

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

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

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

Future
growth will depend upon our ability to enhance our existing products and to
introduce new products on a timely basis. Since we commenced operations we have
conducted extensive research and development activities and we continue to
improve our Nexusphere network. Our net expenditures for research and
development programs during the years ended December 31, 2004 and December 31,
2003, totaled approximately $ 0.482 million and $0.664 million,
respectively. We expect that we will continue to commit substantial resources
to research and development in the future. As of June, 2005, the Company
employed 9 persons in research and development. Our gross research and
development expenses constituted approximately 9.1% and 22.1% of our revenues,
and our net research and development expenses constituted approximately 4.4%
and 12.9% of such sales, in the respective years ended December 31, 2004 and
2003. For additional information concerning commitments for research
development programs See Note 10 to our financial statements included elsewhere
in this annual report.

35

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---



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

We
also received funding for certain research and development expenses relating to
our joint venture with API from the Israel-United States Bi-national Industrial
Research and Development Foundation, or BIRD Foundation. Royalties from sales
to the BIRD Foundation amount to 150% of the grant received. As of December 31,
2004, our contingent obligation to the BIRD Foundation was $2.024 million.

During
2004 through to May 2005 we upgraded the database utilized by our Nexusphere
system, introduced a significantly smaller remote mobile unit, which can be
compatible with a GPS system for anti-theft and fleet-management applications
concurrently and enhanced our base station receiver for the Nexusphere with
expanded applications. In addition, we are presently conducting other major
research and development projects such as:

| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| | q | Improved
  location algorithm, which will enable sparser deployment of base stations.   
|
| | q | Long-life
  RMU for applications that do not provide power such as parcel tracking.     
|
| | q | Enhanced IMU
  with significantly higher payload per message using turbo product coding.

There
can be no assurance that any of our developmental efforts will result in
commercially successful products, that such products will be released in a
timely manner or at all, or that we will be able to respond effectively to
technological changes or new product announcements by others.

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

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

36

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

We
also protect our trademarks and service marks in the United States through
federal registration of key trademark names and reliance on common law
trademark protection for other trade names. One United States federal trademark
is registered, but there can be no assurance that the United States federal
trademark will not at some future date be opposed by other trademark holders.

|   |                    
|-- | -------------------
|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. Our focus for the
establishment of new operations continues to be Latin America. In Israel, in
June 2004 we acquired our primary customer and operator in Israel, Shagrir, which expanded our operations and increased our revenues
in Israel.
The transaction reflected our policy not only to serve as a technology company
but also as an operator, providing operating services to the general public.
Our consolidated financial statements include the results of Shagrir from the second half of 2004. In addition, on February 28, 2005
pursuant to an Asset Purchase Agreement, we completed the purchase of certain
of the activities and assets of Shagrir Towing Services by our subsidiary, Shagrir, which will further expand our operations and
increase our revenues in
Israel.

Our
Argentinian subsidiary, Tracsat, 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 economical uncertainties in Venezuela, we cannot be
sure whether we will receive any further purchase orders from our customer in
Venezuela or when such orders may arrive.

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

Our
financial results for the period ended December 31, 2004, do not yet fully
reflect our financial condition. In 2005 and thereafter, we expect that, as a
result of our diversification into a service provider that provides a broad
range of services to automobile owners and the insurance industry, our revenue
channels will change significantly and our revenues will increase
substantially.

37

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|                                                                           |                               
|-------------------------------------------------------------------------- | ------------------------------
|E.                                                                         | OFF-BALANCE SHEET ARRANGEMENTS
|                                                                           |                               
|The
  company has no off balance arrangement as described in this section.
|                                                                           |                               
|F.                                                                         | CONTRACTUAL OBLIGATIONS       

| |                                                                   |  |  |   |  |       |  |                      |  |             |  |             |        |                       |  |  |  |       |  |  |  |  |    |  |  |  |  |     |  | 
| | ----------------------------------------------------------------- |  |  | - |  | ----- |  | -------------------- |  | ----------- |  | ----------- | ------ | --------------------- |  |  |  | ----- |  |  |  |  | -- |  |  |  |  | --- |  | 
| | Contractual Obligations 
  December 31,
  2004 (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 |  |       |  | 12,598               |  |             |  |             | 12,598 |                       |  |  |  |      |  |  |  |  |   |  |  |  |  |    |  | 
| |                                                                   |  |  |   |  |       |  |                      |  |             |  |             |        |                       |  |  |  |       |  |  |  |  |    |  |  |  |  |     |  | 
| | Long-term loans                                                   |  |  | 2 |  |       |  | 4,892                |  |             |  |             | 222    |                       |  |  |  | 4,574 |  |  |  |  | 96 |  |  |  |  |     |  | 
| |                                                                   |  |  |   |  |       |  |                      |  |             |  |             |        |                       |  |  |  |       |  |  |  |  |    |  |  |  |  |     |  | 
| | Accrued severance pay, net                                        |  |  | 3 |  |       |  | 506                  |  |             |  |             |       |                       |  |  |  |      |  |  |  |  |   |  |  |  |  | 506 |  | 
| |                                                                   |  |  |   |  |       |  |                      |  |             |  |             |        |                       |  |  |  |       |  |  |  |  |    |  |  |  |  |     |  | 
| | Management fees to DBSI                                           |  |  | 4 |  |       |  | 240                  |  |             |  |             | 180    |                       |  |  |  | 60    |  |  |  |  |   |  |  |  |  |    |  | 
| |                                                                   |  |  |   |  |       |  |                      |  |             |  |             |        |                       |  |  |  |       |  |  |  |  |    |  |  |  |  |     |  | 
| | Operating lease obligations                                       |  |  | 5 |  |       |  | 1,058                |  |             |  |             | 593    |                       |  |  |  | 465   |  |  |  |  |    |  |  |  |  |    |  | 
| |                                                                   |  |  |   |  |       |  |                      |  |             |  |             |        |                       |  |  |  |       |  |  |  |  |    |  |  |  |  |     |  | 
| | Purchase Obligations                                              |  |  |   |  |       |  | 248                  |  |             |  |             | 192    |                       |  |  |  | 55    |  |  |  |  |   |  |  |  |  |    |  | 
| |                                                                   |  |  |   |  |       |  |                      |  |             |  |             |        |                       |  |  |  |       |  |  |  |  |    |  |  |  |  |     |  | 
| | Royalties to BIRD                                                 |  |  | 6 |  |       |  | 2,024                |  |             |  |             |       |                       |  |  |  |      |  |  |  |  |   |  |  |  |  |     |  | 
| |                                                                   |  |  |   |  |       |  |                      |  |             |  |             |        |                       |  |  |  |       |  |  |  |  |    |  |  |  |  |     |  | 
| | Total contractual obligations                                     |  |  |   |  |       |  | 21,566               |  |             |  |             | 13,785 |                       |  |  |  | 5,154 |  |  |  |  | 96 |  |  |  |  | 506 |  | 

---

1 Short term debt and other current
liabilities include short term bank credits, trade accounts payable for
equipment and services that have already been supplied and other accrued
expenses.2 Long term loans include principal and interest payments in
accordance with the terms of the agreements with Banks. For further information
please see item 5B liquidity and capital resources.3 Accrued severance pay maturity depends on the date our employees
will actually cease being employed. The amount is net of outstanding severance
pay funds.4 The Company shall pay annual fees $180,000 in consideration for
DBSI management services for the period of three years commencing April 2003
such commitment do not include any automatic renewal of the agreement with
DBSI. 5 Operating lease obligations include rental payments of offices,
cars, and other premises and equipment.6 Royalties to BIRD include the amount received by BIRD foundation
indexed as per the agreement, which the Company has undertaken to pay based on
sales of a specific product. The Company does not anticipate selling this
product and therefore, does not anticipate paying these contingent royalties
(See Note 10b to our Financial Statements).

38

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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 |  | 49 |     | Chairman of
  Board of Directors                    
| | Danny Stern        |  | 53 |     | President
  and CEO                                 
| | Alicia
  Rotbard   |  | 59 |     | External
  Director                                 
| | Gov Ben Ami        |  | 78 |     | External
  Director                                 
| | Barak Dotan        |  | 37 |     | Director                                            
| | Ken Lalo           |  | 47 |     | Director                                            
| | Yoel
  Rosenthal   |  | 50 |     | Director                                            
| | Opher
  Linchevski |  | 36 |     | Director                                            
| | Hanoch Yokev       |  | 57 |     | Vice
  President, R&D and Chief Technology Officer  
| | Ronen Stein        |  | 38 |     | Vice
  President and Chief Financial Officer        
| | Zvika Weber        |  | 44 |     | Vice
  President, Business Development and Marketing

Yossi Ben Shalom
was appointed as our new Chairman of the Board of Directors in 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 PICS (Israel)
Ltd. and LIMS Technologies Ltd. from 1990 through 1999. Mr. Stern holds a
Bachelor of Arts degree in Economics from Tel Aviv University

Alicia 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 was appointed as a director on the Board
of Nexus in 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.

39

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---



Ken Lalo
was appointed a director on our Board in April 2003. Mr. Lalo is the Executive
Vice Chairman of Nipson SAS and Chairman of its US, UK and German subsidiaries.
From 2001, he served as Vice President, Koonras Technologies Ltd., an
investment company controlled by Polar Investments Ltd. and also as a member of
the Boards of Directors of various affiliates of Koonras, including publicly
traded and private companies. 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.

Opher Linchevski was appointed a director on our Board in
February 2005. Mr Linchevski is the CFO of Egged Cooperative Society for
Transportation in Israel Ltd. (Egged). Since 2004 he has served as CEO of
Egged Holdings Ltd., a wholly owned subsidiary of Egged, a company involved in
the light rail project in Jerusalem, the light rail tender for Tel Aviv, and
additional public transportation activities outside of Israel; Mr. Linchevski
is a member of the Board of Directors of various subsidiaries of Egged. During
2001 Mr. Linchevski served as a director of the Board of Directors, a member of
the financial committee and a member of the hedging committee of Zim Israel
Navigation Company Ltd.. From 1998 until 2001 Mr. Linchevski served as manager
of the transport unit in the Israeli Ministry of Finance (budgets). Mr.
Linchevski holds an LL.B., a B.A. in economics and an M.B.A. all from the
Hebrew University.

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

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

Zvika Weber
was appointed our Vice-President of Business Development in April 2003. From
February 1991 until April 2003, he served as Logistics Business Director at
Nexus. From 1996 to December 2001, Mr. Weber served as Director of Product
Management at Nice Systems Ltd. From 1980 to 1996, he served as a Major in the
Israeli Air Force. Mr. Weber holds a Practical Engineering degree and B.A. in
History of the Middle East and Geography from Bar Ilan University in Israel.

|   |             
|-- | ------------
|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,
2004, was approximately $0.371 million, 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 $0.056 million.

40

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In addition,
during 2004 a total of 1 million options were granted to all persons as a group
who served in the capacity of director or executive officer, at an exercise
price of $0.133, pursuant to our 2003 Option Plan.

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

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

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

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

| |   |                                                                         
| | - | ------------------------------------------------------------------------
| |  | an
  employment relationship;                                           
|
| |  | a business
  or professional relationship maintained on a regular basis;
|
| |  | control; and                                                            
|
| |  | service as
  an office holder.                                          

A
person shall be qualified to serve as an outside director only if he or she
possesses accounting and financial expertise or professional qualifications. At
least one outside director must posses accounting and financial expertise. The
conditions and criteria for possessing accounting and financial expertise or
professional qualifications are to be determined in regulations promulgated by
the Israeli Minister of Justice in consultation with the Israeli Securities
Authority. These regulations have not yet been published. 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

41

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---



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

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 (excluding NexusData
employees) at the end of each of the last three years:

42

---

---



|                         |  |  |        |  |       |      |       |  |  |    |  |  |  |  |     |  | 
|------------------------ |  |  | ------ |  | ----- | ---- | ----- |  |  | -- |  |  |  |  | --- |  | 
|                         |  |  | Israel |  | Other |      | Total | 
|                         |  |  |        |  |       |      |       | 
|2004                     |  |  |        |  |       |      |       |  |  |    |  |  |  |  |     |  | 
|Sales and Marketing      |  |  |        |  | 58    | (*)  |       |  |  | 11 |  |  |  |  | 69  |  | 
|Administration           |  |  |        |  | 19    |      |       |  |  | 8  |  |  |  |  | 27  |  | 
|Research and Development |  |  |        |  | 11    |      |       |  |  |   |  |  |  |  | 11  |  | 
|Other                    |  |  |        |  | 49    | (**) |       |  |  | 24 |  |  |  |  | 73  |  | 
|Total                    |  |  |        |  | 137   |      |       |  |  | 43 |  |  |  |  | 180 |  | 

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

|                         |  |        |  |       |  |       |  |  |    |  |  |  |  |    |  | 
|------------------------ |  | ------ |  | ----- |  | ----- |  |  | -- |  |  |  |  | -- |  | 
|                         |  | Israel |  | Other |  | Total | 
|                         |  |        |  |       |  |       | 
|2003                     |  |        |  |       |  |       |  |  |    |  |  |  |  |    |  | 
|Sales and Marketing      |  |        |  | 2     |  |       |  |  | 7  |  |  |  |  | 9  |  | 
|Administration           |  |        |  | 7     |  |       |  |  | 5  |  |  |  |  | 12 |  | 
|Research and Development |  |        |  | 11    |  |       |  |  | 0  |  |  |  |  | 11 |  | 
|Other                    |  |        |  | 9     |  |       |  |  | 19 |  |  |  |  | 28 |  | 
|Total                    |  |        |  | 29    |  |       |  |  | 31 |  |  |  |  | 60 |  | 

|                         |  |        |  |        |  |       |  |       |   |  |  |  |  |    |  |  |  |  |    |  | 
|------------------------ |  | ------ |  | ------ |  | ----- |  | ----- | - |  |  |  |  | -- |  |  |  |  | -- |  | 
|                         |  | Israel |  | U.S.A. |  | Other |  | Total |  
|                         |  |        |  |        |  |       |  |       |  
|2002                     |  |        |  |        |  |       |  |       |   |  |  |  |  |    |  |  |  |  |    |  | 
|Sales and Marketing      |  |        |  | 2      |  |       |  |       | 1 |  |  |  |  | 2  |  |  |  |  | 5  |  | 
|Administration           |  |        |  | 7      |  |       |  |       | 0 |  |  |  |  | 3  |  |  |  |  | 10 |  | 
|Research and Development |  |        |  | 17     |  |       |  |       | 0 |  |  |  |  | 0  |  |  |  |  | 17 |  | 
|Other                    |  |        |  | 12     |  |       |  |       | 0 |  |  |  |  | 10 |  |  |  |  | 22 |  | 
|Total                    |  |        |  | 38     |  |       |  |       | 1 |  |  |  |  | 15 |  |  |  |  | 54 |  | 

We
have entered into employment contracts with substantially all of our employees,
all of which include non-competition, nondisclosure and confidentiality
provisions relating to our proprietary information. We believe that our
relations with our employees are satisfactory. We are not party to any
collective bargaining agreements. However, in Israel, certain provisions of the
collective bargaining agreements between the Histadrut (General Federation of
Labor in Israel) and the Coordination Bureau of Economic Organizations
(including the Industrialists Association) are applicable to our employees by
order of the Israeli Ministry of Labor. These provisions concern principally
the length of the workday, minimum daily wages for professional workers,
insurance for work-related accidents, procedures for dismissing employees,
determination of severance pay, and other conditions of employment. We
generally provide our employees in Israel, with benefits and working conditions
beyond the required minimums.

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

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

Some
of our directors and officers own ordinary shares in our company and/or options
to purchase ordinary shares. As of June, 2005, 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 39.68% of our issued share capital held by DBSI, and an
additional 22.43% of our issued share capital held by Egged, as a result of
certain joint voting rights between Egged and DBSI, pursuant to a shareholders
agreement between them. For further information regarding the shareholders
agreement between Egged and DBSI, see Item 10 Additional Information 
Material Contracts.

43

---

---



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

Employee Share Option Plans

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

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

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

The
following table and notes thereto set forth certain information as of June 27,
2005 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 (1) |  |             | Percent of
  Shares Beneficially Owned | 
|                                     |  |                                             |  |             |                                        | 
|DBSI
  Investment Ltd.(2)(3)         |  |                                             |  | 114,978,356 | (4)                                    |  |  |  | 39.66 | % | 
|Polar
  Communications Ltd.          |  |                                             |  | 21,019,724  | (5)                                    |  |  |  | 8.32  | % | 
|Clal Information
  Technologies Ltd. |  |                                             |  | 17,744,277  | (6)(7)                                 |  |  |  | 7.05  | % | 
|Egged Holdings
  Ltd.                |  |                                             |  | 62,154,669  | (8)(9)                                 |  |  |  | 22.43 | % | 
|Pelephone
  Communications Ltd       |  |                                             |  | 16,527,549  | (10)                                   |  |  |  | 6.55  | % | 
|M. Vertheim
  (Holdings) Ltd.        |  |                                             |  | 18,553,794  | (11)                                   |  |  |  | 6.79  | % | 
|Bank Hapoalim BM                     |  |                                             |  | 14,622,012  | (12)                                   |  |  |  | 5.71  | % | 
|Menora                               |  |                                             |  | 14,523,810  | (13)                                   |  |  |  | 5.84  | % | 
|Shagrir
  Motor Vehicle Systems Ltd. |  |                                             |  | 25,000,000  | (14)                                   |  |  |  | 9.23  | % | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The number of ordinary
  shares issued and outstanding on June 9, 2005 was 245,891,084. The number of
  shares beneficially owned by a person includes ordinary shares subject to
  options or warrants held by that person that are currently exercisable or
  exercisable within 60 days. Such shares issuable pursuant to such options or
  warrants are deemed outstanding for computing the percentage ownership of the
  person holding such options but not deemed outstanding for the purposes of
  computing the percentage ownership of any other person. To our knowledge, the
  persons named in this table have sole voting and investment power with respect
  to all ordinary shares shown as owned by them, except as described below.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(2) | Until June 2004, DBSI Investment Ltd. held a proxy
  with respect to all of the voting power in the Company held by AMS
  Electronics Ltd. This proxy
  was terminated. Does not include the shares held by Egged and covered by the
  November 16, 2004, Shareholders Agreement between DBSI and Egged. For
  further information regarding such Agreement see Item 10 Additional
  Information  Material Contracts.                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(3) | As office holders of DBSI,
  Messrs. Barak Dotan and Yossi Ben Shalom may be considered to be the
  beneficial holders of the 39.68% of our issued share capital held by DBSI.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

44

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|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4)  | Includes
  43,982,685 ordinary shares issuable upon the exercise of a currently
  exercisable warrant.                                                                                                                                                                                                                                                                                                                                                                                                                  
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(5)  | Includes
  6,611,964 ordinary shares issuable upon the exercise of a currently
  exercisable warrant.                                                                                                                                                                                                                                                                                                                                                                                                                   
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(6)  | Includes
  5,909,419 ordinary shares issuable upon the exercise of a currently
  exercisable warrant.                                                                                                                                                                                                                                                                                                                                                                                                                   
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(7)  | Clal is an
  Israeli corporation controlled by IDB Development Corporation Ltd. (IDBD),
  which, in turn, is controlled by IDB Holding Corporation (IDBH). These
  companies
  hold an additional 1,449,043 shares of our issued share capital as
  follows: IDBD (225,867 shares) and Clal Industries and Investments Ltd.
  (CII)  a majority-owned subsidiary of IDBD (1,223,176 shares). CII, IDBD
  and IDBH are all Israeli corporations whose shares are publicly traded on The
  Tel Aviv Stock Exchange.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(8)  | Includes 24,392,765 ordinary shares issuable upon the conversion of
  loans.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(9)  | Does not
  include the shares held by DBSI and covered by the November 16, 2004,
  Shareholders Agreement between Egged and DBSI. For further information
  regarding such Agreement see Item 10 Additional Information  Material
  Contracts.                                                                                                                                                                                                                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(10) | Includes
  6,609,219 ordinary shares issuable upon the exercise of a currently
  exercisable warrant.                                                                                                                                                                                                                                                                                                                                                                                                                   
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(11) | Includes
  6,095,878 ordinary shares issuable upon the exercise of a currently
  exercisable warrant.                                                                                                                                                                                                                                                                                                                                                                                                                   
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(12) | Includes
  10,000,000 ordinary shares issuable upon the exercise of a currently
  exercisable warrant.                                                                                                                                                                                                                                                                                                                                                                                                                  
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(13) | Includes
  2,619,048 ordinary shares issuable upon the exercise of a currently
  exercisable warrant.                                                                                                                                                                                                                                                                                                                                                                                                                   
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(14) | Includes
  25,000,000 ordinary shares issuable upon the exercise of a currently
  exercisable warrant.                                                                                                                                                                                                                                                                                                                                                                                                                  

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

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

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

Agreements with Mr.
Offer Lior and his affiliates

In
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)
830,179 of our ordinary shares at a price per share of $0.084 and (ii) a
warrant to purchase up to 182,639 or our ordinary shares at the same exercise
price, constituting approximately 0.22% of our current issued and outstanding
share capital on a fully-diluted basis. This warrant is 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.

In
February 2005 we 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 115,000 (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.

45

---

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In
February 2005 we entered into an Employment Agreement pursuant to which, Mr.
Ofer Lior shall provide services to Nexus. In consideration for the provision
of such services, Mr. Lior is to be granted an option to purchase 1,753 ordinary
shares of Shagrir (representing, at the date of issuance, 3.5% of the issued
and outstanding share capital of Shagrir), at an exercise price of $280,000 (as
adjusted in accordance with the terms of the agreement). This option shall be
exercisable in full after 48 months of continuous service, with 50% of the
option vesting after the first 24-month period of continuous services and 25%
of the option vesting after each 12-month period of continuous service
thereafter.

Agreements with
Shagrir

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

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

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

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

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

Sale of NexusData

In
February 2003, we completed the sale of all of our holdings in NexusData to
Storm International, which subsequently assigned all of its rights and
obligations to Nexus LLC. Mr. Yaron Sheinman, the former Chairman of our Board
of Directors, is one of the members of Nexus LLC, and took part in the sale
transaction. This transaction was ratified by our audit committee, Board of
Directors and shareholders in accordance with the laws of the State of Israel.

Agreements with AMS.

In
January 2002, we entered into a major manufacturing agreement with our main
manufacturer, AMS, for the manufacture of a significant portion of our end
units and those of NexusData, minimally valued at $36 million. This agreement
was amended such that we were released from our undertaking to issue purchase
orders to AMS minimally valued at $36 million and have committed to make
purchases of our end units from AMS amounting to at least $10 million over the
course of a four-year period, provided that there is actual demand for these
products from our customers. In addition, we will not be liable for any
liabilities of NexusData under this agreement and in no event shall a claim be
made by AMS against us relating to NexusDatas liabilities. AMS was also
granted exclusivity and/or right of first refusal rights in connection with its
manufacture of our products.

46

---

---



In
March 2003, pursuant to the DBSI investment agreement, we reached an agreement
with AMS, such that AMS converted approximately $723,000 (a sum including
interest accrued thereon), out of a convertible debenture purchased by us at a
price equal to the price paid in the DBSI investment round of financing, namely
$0.044, into 16,435,500 ordinary shares. 600,000 of these shares were held in
trust and have been released to AMS. We also repaid AMS $300,000 out of the
convertible debenture that was purchased by AMS following the closing of the
DBSI investment financing round.

Management Agreement
with DBSI Investments Ltd.

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

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

Pursuant
to the share purchase agreement of March 13, 2003, DBSI and other investors
invested approximately $2.6 million in the share capital of the Company.
Furthermore, in September and October 2003, DBSI, Mr. Arik Avni  the Companys
former Chief Executive Officer (the Former CEO) and certain other minority
shareholders (the Investors) invested an aggregate of $1.2 million in the
share capital of the Company, under the same terms and conditions set forth in
the share purchase agreement of March 13, 2003. The amounts invested were as
follows: DBSI invested an aggregate amount of $2,600,000, in consideration for
which it was issued 59,090,909 shares and 41,363,636 warrants exercisable at a
price of $0.044 per share, the Former CEO invested an aggregate amount of
$44,000, in consideration for which it was issued 1,000,000 shares and 700,000
warrants exercisable at a price of $0.044 per share, and the Investors invested
an aggregate amount of $201,400 in consideration for which they were issued
26,713,633 of our ordinary shares and 18,699,548warrants exercisable at a price
of $0.044 per share. In February 2005, DBSI invested a further $1 million in
the share capital of the Company, in consideration for which it was issued
11,904,762 shares and 2,619,048 warrants exercisable at a price of $0.084 per
share. DBSI currently owns approximately 25.38% (on a fully diluted basis), of
our issued and outstanding shares.

Cooperation and
Share Exchange Agreements with Shagrir

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

Subsequently,
on April 25, 2004, we entered into an agreement with the shareholders of Shagrir, to purchase 100% of the issued
share capital of Shagrir. Upon
completion of the agreement on June 27, 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.

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

Not applicable

47

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---



|        |                                                        
|------- | -------------------------------------------------------
|ITEM 8. | FINANCIAL INFORMATION                                  
|        |                                                        
|A.      | CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

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

Legal Proceedings

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

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

In
June, 2005 CEIEC and the third party filed a counter claim with the CIETAC for
repayment of $300,000 relating to the same transaction, plus weekly interest of
0.5% (compounded from February 2002). The counter claim relates to the same
amount that CEIEC has claimed from Bank Hapoalim B.M pursuant to the guarantee
discussed above. Based on our legal advisors opinion, have a good defense
against any claim of CEIEC and the third party.

In
September 2000, Tracsat entered into a 30-month contract with a third party.
Pursuant to the contract Tracsat agreed to order from the third party a minimum
number of unit installations. In October 2001 and thereafter, Tracsat ceased to
make minimum payments to the third party. A legal demand was presented against
Tracsat. A provision amounting to $148,000 was recorded in our financials,
representing managements estimate of expenses that might occur as a result of
this demand based on its attorneys advice. In October 2003 and August 2004,
the Argentinean court ordered a levy in the aggregate amount of $114,000 on a
bank account. During 2002, 2003 and 2004, several claims were filed against Shagrir by customers. The claims are in
an amount aggregating to approximately $371,000. The substance of the claims is
the malfunction of Shagrirs
products, which occurred during the ordinary course of business. Management, based
on the opinion of its attorneys, is of the opinion that no material costs will
arise in respect to these claims and, therefore, no provision was recorded in
the financial statements in respect of the claims.

48

---

---



During
May 2002, Shagrir
filed a claim against one of its customers in the amount of approximately
$70,000 in respect of the breach of an agreement reached between the parties.
The defendant filed a counterclaim in the amount of approximately $93,000,
claiming that Shagrir breached the
aforesaid agreement. Management, based on the opinion of its attorneys, is of
the opinion that no material costs will arise in respect of this counterclaim
and, therefore, no provision was recorded in the financial statements in
respect of the counterclaim.

On
January 20, 2004, a lawsuit in the amount of $162,000 was filed against Shagrir and two additional defendants,
alleging that a truck, in which a tracking system was installed, was stolen and
was not tracked. The Court dismissed Shagrir
from this lawsuit. On September 9, 2004, we received a third party notice from
one of the additional defendants, seeking indemnification or compensation from Shagrir if the Court determines that it
must pay compensation to the plaintiff in respect of the trucks theft.

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

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

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

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

Markets and Share
Price History

Between
June 1994 and April 1997, and commencing again on October 31, 1997 until August
2002, our Ordinary Shares were quoted on Nasdaq under the symbol NXUS. Between
April 17, 1997, and October 30, 1997, and commencing again as of August 2002
the OTC Bulletin Board reported trading in the Ordinary Shares under the symbol
NXUS and later changed to NXUSF. The table below sets forth the high and low
bid prices of our Ordinary Shares, as reported by Nasdaq or the OTC Bulletin
Board during the indicated periods.

|                    |  |      |       |     |  |       | 
|------------------- |  | ---- | ----- | --- |  | ----- | 
|Period              |  | High |       | Low | 
|                    |  |      |       |     | 
|                    |  |      |       |     |  |       | 
|May 2005            |  |      | 0.13  |     |  | 0.10  | 
|April 2005          |  |      | 0.14  |     |  | 0.11  | 
|March 2005          |  |      | 0.142 |     |  | 0.125 | 
|February 2005       |  |      | 0.167 |     |  | 0.135 | 
|January 2005        |  |      | 0.21  |     |  | 0.122 | 
|December 2004       |  |      | 0.14  |     |  | 0.09  | 
|Forth Quarter 2004  |  |      | 0.14  |     |  | 0.085 | 
|Third Quarter 2004  |  |      | 0.17  |     |  | 0.115 | 
|Second Quarter 2004 |  |      | 0.4   |     |  | 0.14  | 
|First Quarter 2004  |  |      | 0.58  |     |  | 0.2   | 
|Fourth Quarter 2003 |  |      | 0.335 |     |  | 0.14  | 
|Third Quarter 2003  |  |      | 0.26  |     |  | 0.135 | 
|Second Quarter 2003 |  |      | 0.28  |     |  | 0.13  | 
|First Quarter 2003  |  |      | 0.24  |     |  | 0.065 | 
|                    |  |      |       |     |  |       | 
|2004                |  |      | 0.58  |     |  | 0.085 | 
|2003                |  |      | 0.335 |     |  | 0.065 | 
|2002                |  |      | 2.35  |     |  | 0.008 | 
|2001                |  |      | 4.689 |     |  | 1.375 | 
|2000                |  |      | 13.44 |     |  | 0.50  | 

49

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As
of June 9, 2005, there were 92 record holders of Ordinary Shares, including 43
record holders in the United States (who held 55,132,321of our outstanding
Ordinary Shares).

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

Not applicable

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

Our
shares are listed for trade on the Over-The-Counter Bulletin Board under the
symbol NXUSF.

|   |                     
|-- | --------------------
|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-three reverse stock split of our ordinary shares, effective as of April
2001, each three shares of our old Ordinary Shares with a par value of NIS 0.01
each were converted into one Ordinary Share with a par value of NIS 0.03 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.

50

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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:

| |   |                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | amendments to our Articles
  (other than modifications of shareholders rights as mentioned above);                                                                                                                                                                          
|
| |  | appointment or termination
  of our auditors;                                                                                                                                                                                                                               
|
| |  | appointment and dismissal
  of directors;                                                                                                                                                                                                                                   
|
| |  | approval of acts and
  transactions requiring general meeting approval under the Israeli Companies
  Law;                                                                                                                                                                   
|
| |  | increase or reduction of
  our authorized share capital [or the rights of shareholders or a class of
  shareholders]  Sections 286 and 287 of the Israeli Companies Law                                                                                                    
|
| |  | any merger as provided in
  section 320 of the Israeli Companies Law; and                                                                                                                                                                                                   
|
| |  | the exercise of the board
  of directors powers by a general meeting, if the board of directors is
  unable to exercise its powers and the exercise of any of its powers is vital
  for our proper management, as provided in section 52(a) of the Israeli
  Companies Law.

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

The Israeli Companies Law

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

The
Israeli Companies Law requires that an office holder of a company promptly
disclose any personal interest that he or she may have and all related material
information known to him or her, in connection with any existing or proposed
transaction by the company. In addition, if the transaction is an extraordinary
transaction, as defined under Israeli law, the office holder must also disclose
any personal interest held by the office holders spouse, siblings, parents,
grandparents, descendants, spouses descendants and the spouses of any of the
foregoing, or by any corporation in which the office holder is a 5% or greater
shareholder, holder of 5% or more of the voting power, director or general
manager or in which he or she has the right to appoint at least one director or
the general manager. An extraordinary transaction is defined as a transaction
not in the ordinary course of business, not on market terms, or that is likely
to have a material impact on the companys profitability, assets or
liabilities.

51

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

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

|                                                                                                                                   |     |                                                                         
|---------------------------------------------------------------------------------------------------------------------------------- | --- | ------------------------------------------------------------------------
|(a)     all
  of the directors are permitted to vote on the matter and attend the meeting
  in which the matter is considered; and
|                                                                                                                                   |     |                                                                         
|                                                                                                                                   | (b) | the
  matter requires approval of the shareholders at a general meeting.

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

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

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

| |     |                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                        
| | --- | -------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | A
  private placement that meets all of the following conditions:                                       
| |     |                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                          | (i)
  the private placement will increase the relative holdings of a shareholder
  that holds five percent or more of the companys outstanding share capital,
  assuming the exercise of all of the securities convertible into shares held
  by that person, or that will cause any person to become, as a result of the
  issuance, a holder of more than five percent of the companys outstanding
  share capital.
| |     |                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                          | (ii)
  20 percent or more of the voting rights in the company prior to such issuance
  are being offered.                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                          | (iii)
  all or part of the consideration for the offering is not cash or registered
  securities, or the private placement is not being offered at market terms.                                                                                                                                                                                                                                                       
| |     |                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                        
| | (b) | A
  private placement that results in anyone becoming a controlling shareholder
  of the public company.

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

52

---

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

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

| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | any
  amendment to the Articles of Association;                               
|
| |  | an
  increase of the companys authorized share capital;                      
|
| |  | a
  merger; or                                                                
|
| |  | approval
  of interested party transactions that require shareholder approval.

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.

53

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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. See also
Item 6A. Directors, Senior Management And Employees  Directors And Senior
Management  Approval of Related Party Transactions Under Israeli Law.

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 Rule 4350 of
the Market Place Rules 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.                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Shareholder
  Approval  We seek shareholder approval for all corporate action requiring
  such approval, in accordance with the requirements of the Israeli Companies
  Law  1999.                                                                                                                                                                                                                                                                                                                                                                                                             

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

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

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

On
February 28, 2005 we completed the purchase of the road-side assistance and
towing services of Shagrir Towing Services by our subsidiary, Shagrir, in consideration for approximately NIS 200 million. NIS 100
million
was funded by a credit line made available by Bank Hapoalim B.M, NIS 40 million
was funded by a loan provided by Shagrir Towing Services and approximately NIS
50 million was funded by a group of investors led by Gandyr Investments Ltd.
and Egged Holdings Ltd. In addition we invested an amount of NIS 4,550,000 in
the share capital of Shagrir, and provided it with a loan of NIS
5,000,000. As part of the transaction, we granted Bank Hapoalim B.M a two year
warrant to purchase up to 10,000,000 of our ordinary shares, at a price per
share of $0.18; and granted Shagrir Towing Services a two year warrant to
purchase up to 25,000,000 of our ordinary shares, at a price per share of
$0.18. Part of the loans provided by the investors led by Gandyr Investments
Ltd. and Egged Holdings Ltd. may be converted into our shares and/or the shares
of our subsidiary, Shagrir.

54

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | NIS 100
  Million Credit Line from Bank Hapoalim                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |   | Pursuant
  to the agreement with Bank Hapoalim, we have been provided with an NIS 70
  million credit line until March 1, 2013 and an NIS 30 million credit line
  until March 31, 2007. The sums drawn down will be repaid quarterly from June
  30, 2006 at a rate of NIS 1,250,000 per quarter. The interest on the
  principal sum will be prime +0.5% with respect to the NIS 30 million credit
  line, and with respect to the NIS 70 million credit line, interest of 7.39%
  on NIS 35 million and 5.5% and linkage to the Israeli CPI on the remaining
  NIS 35 million. The interest shall be payable quarterly from June 30, 2005. As security on the loan, Bank Hapoalim
  has, in addition to the first degree floating charge it has over all the
  assets of Nexus (i) a first ranking fixed charge over all Shagrirs rights under the Asset Purchase Agreement, consummated in
February
  2005, pursuant to which Shagrir purchased certain of the activities and
  assets of Shagrir Towing Services, (ii) a first ranking mortgage over a
  certain property in Haifa, Israel; (iii) a first ranking fixed charge over a
  certain NIS 10 million deposit in a certain bank account; and (iv) a first
  ranking fixed charge over Nexus shareholdings in Shagrir. We have drawn down NIS 100 million under the credit line.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | NIS 40
  million loan by Shagrir Towing Services                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |   | Pursuant
  to our agreement with Shagrir Towing Services, Shagrir was loaned NIS 40 million, repayable in twenty quarterly
  installments commencing February 28, 2006 and with interest payable at a rate
  of 6.5% per annum. As security on the loan, Shagrir Towing Services has a
  second ranking fixed charge over Shagrirs rights to proceeds from transactions
  with Clal Insurance Company Ltd. and The Israel Phoenix Insurance Company
  Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | NIS 50
  million loan by Egged and other Investors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |   | Pursuant
  to the agreement with Egged, Egged loaned Shagrir NIS 7,275,000, according to which the loan would be repaid over 10
  years with 4% interest payable during first 2-years and 7.5% interest payable
  thereafter. In consideration for the loan Egged was provided with a 24-month
  option to convert the loan into our ordinary shares or into shares of Shagrir, at its discretion. The loan may be converted by
Egged into up to
  9,433 ordinary shares of Shagrir. Should Egged wish to convert the loan
  into shares of Shagrir, 60% of the loan will be converted at
  price per share of NIS 729, and the remaining 40% will be converted at a
  price per share ranging from NIS 729 to NIS 937 (according to a sliding
  scale, where the later the conversion, the higher the share price). The loan
  may also be converted by Egged into up to 8,888,889 of our ordinary shares
  (calculated at a price per our ordinary shares of $0.18). Should Egged fail
  to exercise at least 60% of the option by the end of the 2-year option
  period, Shagrir has a Put option to force Egged to
  purchase such number of shares in Shagrir that represents
  60% of the loan amount.                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |   | Furthermore,
  pursuant to the agreement with Egged, Egged loaned Shagrir $2 million at an interest rate of LIBOR (3-month) plus 3.5%
  compounded annually and accrued daily. Interest payments and principal
  payments shall become payable from February 28, 2008. This loan is
  convertible into the ordinary shares of Shagrir and/or up to
  15,503,875 of our ordinary shares (calculated at a price per our ordinary
  shares of $0.129), subject to certain conditions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

55

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In
  addition, pursuant to an agreement between us, Shagrir and a group of investors, a
  group of investors agreed to loan Shagrir
  NIS 29,100,000 repayable in accordance with an agreed quarterly repayment
  schedule over a period of ten years ranging from approximately NIS 650,000 to
  NIS 1.5 million (including interest accruing at a rate of 4% per annum for
  the first two years and 7.5% thereafter). Pursuant to the terms of the
  agreement, in consideration for the loan, the shareholders received a two
  year option to (i) purchase up to an aggregate of 35,555,555 of our ordinary
  shares at a price of $0.18 per share; or purchase shares of Shagrir according to which 60% of the
  loan will be converted at price per share of NIS 729, and the remaining 40%
  will be converted at a price per share ranging from NIS 729 to NIS 937
  (according to a sliding scale, where the later the conversion, the higher the
  share price). Should the investors fail to exercise at least 60% of the
  option by the end of the two-year option period, Shagrir has a Put option to force the investors to purchase
  such number of shares in Shagrir
  that represents 60% of the loan amount. Moreover, pursuant to an agreement
  between us, Gandyr Investments Ltd., Govli Ltd., Sulam Financial Holdings and
  Egged, NIS 10 million was loaned to Shagrir,
  of which we loaned Shagrir NIS
  5 million. Interest repayments and repayments of the principal will commence
  on August 28, 2005. Interest under the loan is payable at a rate of 6.5% per
  year. Pursuant to this agreement, we agreed that for the duration of our
  cooperation agreement with Shagrir, we will place in escrow our design and
  production file relating to the design and production of our security
  products. The file will only be released from escrow in the event that (i) we
  become insolvent; (ii) fail to provide security products to Shagrir, or (iii)
  Shagrirs revenues from its security business are 70% or more of our revenues
  from our security business, for three consecutive financial quarters. For
  further information on our cooperation agreement, see Exhibit 4.7 to this
  Annual Report.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | As
  security on the loans, Egged and other Investors have (i) a second ranking
  floating charge over all the property and assets of Shagrir, and (ii) a third ranking
  fixed charge over Shagrirs
  rights to proceeds from transactions with Clal Insurance Company Ltd. and The
  Israel Phoenix Insurance Company Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

$6 million
Investment

On February
28, 2005, a group of investors, including DBSI, completed a $6 million
investment in our share capital. Pursuant to the investment agreements, we
issued (i) 71,428,570 of our ordinary shares at a price per share of $0.084 (of
which 30,952,381 were issued to Egged and (ii) warrants to purchase up to
15,714,284 of our ordinary shares at the same exercise price (of which warrants
to purchase up to 6,809,523 of our ordinary shares were issued to Egged),
constituting, as of the date thereof, approximately 19.23% of our issued share
capital on a fully-diluted basis. Under the terms of the agreements, the
warrants are exercisable until the earlier of: (a) April 6, 2006; or (b) our
merger or the acquisition of substantially all of our assets. The transaction
was approved by our shareholders at their annual meeting held on February 1,
2005.

Our Investment in
Shagrir

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

Management Services
Agreement

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

56

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Shareholders
Agreement

On November
16, 2004, our two major shareholders DBSI and Egged entered into a shareholders
agreement which included their agreement to vote their shares so that our Board
of Directors shall consist of seven directors of whom: (i) four members will be
nominated by DBSI; (ii) one member will be nominated by Egged; and (iii) two
members shall be external directors as required by the Israeli Companies Law.
DBSI and Egged also agreed that Egged shall have the right to appoint the
greater of (i) one director; and (ii) such number of directors which constitute
20% of our representation on the Board of Directors of any of our direct or
indirect subsidiaries other than Shagrir. Additionally, DBSI and Egged agreed to vote their shares
against any of the following resolutions, unless either party agrees otherwise
in a prior written agreement: (i) any distribution of a dividend of either more
or less than 75% of the profits attributable for distribution under law; (ii)
any increase in our share capital or in the share capital of Shagrir; (iii) entry into or amendment
of any shareholders agreement to which we is a party; (iv) issuance by us
until November 16, 2006 of new shares or other securities convertible into our
shares at a pre-money valuation that is lower than our valuation in the
February 2005 investment excluding issuance of new options to our employees or
the employees of our subsidiaries; (v) approval of certain material
transactions such as a merger, sale of at least a substantial amount of our
assets, a reorganization, or a liquidation; and (vi) amendment of our Articles
of Association or those of any of our subsidiaries in such a way which shall
have an adverse effect on the rights of either of the parties.
For a
summary of our other material contracts, see Item 4  Information on the
Company  Recent Developments and Item 6  Related Party Transactions.

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

Under
current Israeli regulations, any dividends or other distributions paid in
respect of our ordinary shares purchased by nonresidents of Israel with certain
non-Israeli currencies (including dollars) and any amounts payable upon the
dissolution, liquidation or winding up of our affairs, as well as the proceeds
of any sale in Israel of our securities to an Israeli resident, will be freely
repatriable in such non-Israeli currencies at the rate of exchange prevailing
at the time of conversion pursuant to the general permit issued under the
Israeli Currency Law, 1978, provided that Israeli income tax has been paid on
(or withheld from) such payments. Because exchange rates between the NIS and
the U.S. dollar fluctuate continuously, U.S. shareholders will be subject to
any such currency fluctuation during the period from when such dividend is
declared through the date payment is made in U.S. dollars.

Investments outside Israel by the Company no longer require specific
approval from the Controller of Foreign Currency at the Bank of Israel.

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

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

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 35% in 2004, 34% in 2005, 32% in 2006 and 30% in 2007 and thereafter
(According to a proposed legislation the tax rates may be reduced in a
progressive way to 25%, until 2010).

However,
the effective tax rate payable by a company that derives income from an
Approved Enterprise (as further discussed below) may be considerably less.
Under the Income Tax Law (Adjustment for Inflation) 1985, income for tax
purposes is measured in terms of earnings in NIS adjusted for the increase in
the Israeli CPI.

57

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Tax Benefits and Grants for Research and
Development

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

Law for the Encouragement of Industry
(Taxes), 1969

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

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

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

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

(d)          Accelerated
depreciation rates on equipment and buildings.

Israeli Capital Gains Tax

Until
the end of the year 2002, 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.

As a result
of the recent tax reform legislation in Israel, gains from the sale of our
ordinary shares derived from January 1, 2003 and on will in general be liable
to capital gains tax of up to 15% (under a proposed legislation the tax rate
may be changed to 20%, as of 2006). This will be the case so long as our
securities remain listed for trading on NASDAQ or are traded on the Tel Aviv
Stock Exchange or on a designated foreign stock market. However, according to
the tax reform legislation, non-residents of Israel will generally be exempt
from any capital gains tax from the sale of our securities so long as the gains
are not derived through a permanent establishment that the non-resident
maintains in Israel, and so long as our securities remain listed for trading as
described above. These provisions dealing with capital gains are not applicable
to a person whose gains from selling or otherwise disposing of our securities
are deemed to be business income or whose taxable income is determined pursuant
to the Israeli Income Tax Law (Inflation Adjustments), 1985; the latter law
would not normally be applicable to non-resident shareholders who have no
business activity in Israel.

In any event, under the US-Israel Tax Treaty, a US treaty resident may
generally only be liable to Israeli capital gains tax on the sale of our
ordinary shares (subject to the provisions of Israeli domestic law as described
above) if that US treaty resident holds 10% or more of the voting power in our
company.

58

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Israeli Tax on Dividend Income

Israeli tax
at a rate of 25% is generally withheld at source from dividends paid to Israeli
individuals and 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.nexus.telocation.com) all our interim and year-end
financial statements as well as other information.

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

59

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|               |                                                           
|-------------- | ----------------------------------------------------------
|I.             | SUBSIDIARY INFORMATION                                    
|               |                                                           
|Not Applicable
|               |                                                           
|ITEM 11.       | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risks

Our
exposure to market rate risk for changes in interest rates relates primarily to
funds borrowed by us from banks. We have not used interest derivative financial
instruments. As of December 31, 2004, we had financial assets totaling
approximately $320,000 bearing variable interest rates and total funds borrowed
of $11,636,000. The net decrease in our earnings for the next year resulting
from an increase of 10% in variable interest rates will be approximately
$50,000 holding other variables constant.

Currency Exchange
Rate Risks

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

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

Regarding
our operations in Israel, as of December 31, 2004 we had net liabilities of
$3.7 million and net expenses of $300,000, denominated in New Israeli Shekels
(NIS). A hypothetical 10% devaluation of the New Israeli Shekel against the
U.S. dollar would thus result in approximately a $400,000 decrease in our
earnings.

Our
revenues and expenses generated by Tracsat are mostly denominated in
Argentinian Pesos and are therefore exposed to exchange rate fluctuations
between the Argentinian Peso and the United States dollar. Assuming an adverse
foreign exchange rate fluctuation, we would experience a reduction in U.S.
dollar revenues and net income. As of December 31, 2004 we had net liabilities
of $200,000 and expenses of $1 million, denominated in the Argetinian Peso. A
hypothetical 10% devaluation of the Argentinian Peso against the US dollar
would thus result in approximately $120,000 net decrease in our earnings.

As our
operation in Mexico is still in its development stage and currently less
material, we cannot be certain of the exposures there and we cannot quantify
the exchange rates risks associated with this operation.

Expenses in New
Israel Shekels

The cost of
our Israel operations, as expressed in U.S. dollars, is influenced by the
extent to which any increase in the rate of inflation in Israel is not offset
(or is offset on a lagging basis) by a devaluation of the NIS in relation to
the U.S. dollar. The inflation rate in Israel was 1.4%, negative 1.9%
(deflation), 6.5% in 2004, 2003, and 2002, respectively. At the same time the
U.S. dollar devalued against the NIS by approximately 1.6% and 7.6% in 2004 and
2003 respectively, while in 2002 the NIS devalued against the U.S. Dollar
7.3%,. For further discussion with respect to the devaluation of the NIS, see
the discussion under the caption Impact of Inflation and Devaluation on
Results of Operations, Liabilities, and Assets in Item 5.

|                |                                                        
|--------------- | -------------------------------------------------------
|ITEM 12.        | DESCRIPTIONS OF SECURITIES OTHER THAN EQUITY SECURITIES
|                |                                                        
|Not Applicable.
|PART II        
|                |                                                        
|ITEM 13.        | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES        
|                |                                                        
|Not applicable.

60

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|                |                                                                               
|--------------- | ------------------------------------------------------------------------------
|ITEM 14.        | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
  PROCEEDS
|                |                                                                               
|Not applicable.
|                |                                                                               
|ITEM 15.        | CONTROLS AND PROCEDURES                                                       

(a)          We
performed an evaluation of the effectiveness of our disclosure controls and
procedures that are designed to ensure that the material financial and
non-financial information required to be disclosed on Form 20-F and filed with
the SEC is recorded, processed, summarized and reported timely. Based on our
evaluation, our management, including the Chief Executive Officer and Chief
Financial Officer, has concluded that our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the
end of the period covered by this report are effective. Notwithstanding the
foregoing, there can be no assurance that our disclosure controls and
procedures will detect or uncover all failures of persons within our company to
disclose material information otherwise required to be set forth in our
reports.

(b)          There
have been no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of
evaluation thereof. Therefore, no corrective actions were taken with regard to
significant deficiencies and material weakness.

|          |                                  
|--------- | ---------------------------------
|ITEM 16.  | [RESERVED]                       
|          |                                  
|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT.

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

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

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

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

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

The following table presents fees for professional audit services
rendered by our principal auditors for the audit of the Companys consolidated
annual financial statements for the years ended December 31, 2004 and 2003 To
be checked by E&Y

|                        |  |                     |    |      |  |    | 
|----------------------- |  | ------------------- | -- | ---- |  | -- | 
|                        |  | 2004                |    | 2003 | 
|                        |  | In USD in thousands |   
|Audit
  Fees(1)         |  |                     | 76 |      |  | 25 | 
|Audit-Related
  Fees(2) |  |                     | 70 |      |  | 18 | 
|Tax Fees(3)             |  |                     | 2  |      |  | 4  | 
|All Other
  Fees        |  |                     | 11 |      |  |   | 

|    |                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Audit fees
  consist of fees for professional services rendered for the audit of the
  Companys consolidated financial statements and review of financial
  statements and services normally provided by the independent auditor in
  connection with statutory and regulatory filings or engagements.              
|    |                                                                                                                                                                                                                                                                                                                      
|(2) | Audit-related
  fees are fees principally for services not provided in Audit Fees, such as
  services provided in connection with the preparation of our registration
  statement on Forms F-3, filed with the SEC in September and October 2004 and
  December 2003 and Form 6K filed with the SEC in November 2004.

61

---

---



|    |                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Tax services
  fees consist of compliance fees for the preparation of original and amended
  tax returns, claims for refunds and tax payment-planning services for tax
  compliance, tax planning and tax advice. Tax service fees also include fees
  relating to other tax advices, tax consulting and planning other than for tax
  compliance and preparation.

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 2004 were approved by our Audit Committee.

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

As a foreign private issuer we
remain exempt, until July 31, 2005, from NASDAQ audit committee related listing
standards that have come into effect following December 13, 1999.

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

As required
by Regulation S-X, the consolidated financial results for the years ended
December 31 2002, December 31, 2003 and December 31, 2004 of Shagrir Systems
are found at the end of this Annual Report beginning on page F40

As required
by Regulation S-X the unaudited pro forma condensed consolidated statements of
operations to give effect to the acquisition of Shagrir Systems as if such
acquisition had occurred as of January 1, 2004 by combining our historical
Statements of Operations and the historical Statements of Operations of Shagrir
Systems for the year ended December 31, 2004, are found at the end of this
Annual Report beginning on page F65.

62

---

---



|         |         
|-------- | --------
|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
and February 1, 2005.

4.1          English
Summary of the Lease Agreement by and between Shagrir (1985) Ltd. and Delek
Real Estate Ltd. dated February 23, 1998, as amended on March 5, 2003 (original
language  Hebrew).

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

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

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

4.5          English
Summary of the Lease Agreement by and between Shagrir and Menasheh Mashiach,
Tzion Mashiach and Eliahu Mashiach, dated July 24, 2002 (original language 
Hebrew).

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

4.7          English
Summary of Cooperation Agreement by and between Shagrir and us, dated February
25, 2004 (original language  Hebrew).

4.8          Share
Exchange Agreement by and between the Shareholders of Shagrir and us, dated
April 25, 2004.

4.9          English
Summary of the Convertible Loan Agreement by and among Shagrir, Gandyr
Investments Ltd., Govli Ltd., Sulam Financial Holdings Ltd. and us, dated
November 15, 2004 (original language  Hebrew).

4.10        Registration Rights
Agreement by and among Gandyr Investments Ltd., Govli Ltd., Sulam Financial
Holdings Ltd. and us, dated November 15, 2004.

4.11        Share Purchase
Agreement between Egged and us, dated November 16, 2004 (including Joinder
Agreements thereto).

4.12        English Summary of
the Convertible Loan Agreement by and among Shagrir, Egged and us, dated
November 16, 2004 (original language  Hebrew).

4.13        English Summary of
the Management Agreement by and among Shagrir, Gandyr Investments Ltd., Govli
Ltd. Sulam Financial Holdings Ltd. and Egged, dated November 16, 2004 (original
language  Hebrew).

4.14        English Summary of
the Management Agreement by and between Shagrir and us, dated November 16, 2004
(original language  Hebrew).

4.15        English
Summary of the Loan Consolidation Agreement by and between Shagrir and us,
dated November 16, 2004 (original language  Hebrew).

63

---

---



4.16          English
Summary of the Loan Agreement by and between Shagrir and us, dated November 16,
2004 (original language  Hebrew).

4.17          English
Summary of the Loan Agreement by and among Shagrir, Gandyr Investments Ltd.,
Govli Ltd., Sulam Financial Holdings Ltd., Egged and us, dated November 16,
2004 (original language  Hebrew).

4.18          English
Summary of the Letter Agreement by and between Shagrir and Bank Hapoalim Ltd.,
dated November 16, 2004 (original language  Hebrew).

4.19          Shareholders
Agreement by and between DBSI and Egged, dated November 16, 2004 (as amended on
January 30, 2005).

4.20          English
Summary of the Asset Purchase Agreement by and among Shagrir Towing Services
and Shagrir, dated January 3, 2005 (original language  Hebrew).

4.21          English
Summary of the Lease Agreement by and between Shagrir (1985) Ltd. and Shagrir,
dated January 3, 2005 (original language  Hebrew).

4.22          English
Summary of the Asset Purchase Agreement by and between Shagrir (1985) Ltd. and
Shagrir, dated January 3, 2005 (original language  Hebrew).

4.23          English Summary of the Assignment Agreements
by and among Shagrir Towing Services, Shagrir and Certain Israeli Insurance
Companies, dated January through February 2005 (original language  Hebrew).

4.24          English
Summary of the Management Agreement by and between Shagrir and Dekalog Focused
Management Ltd., dated February 28, 2005 (original language  Hebrew).

4.25          Engilsh
Summary of the Employment Agreement by and between Mr. Offer Lior and us, dated
February 28, 2005 (original language  Hebrew).

4.26          English
Summary of the Employment Agreement by and between Mr. Danny Stern and us,
dated May 23, 2005 (original language  Hebrew).

8.1            A
list of our subsidiaries is found in the Appendix to our consolidated financial
statements and incorporated herein by reference.

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

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

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

10.4          Consent
of Fahn Kanne & Co. Certified Public Accountants (Israel).

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

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

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

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

64

---

---



SIGNATURE

Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Tel Aviv,
State of Israel, on the 30 day of June, 2005.

NEXUS TELOCATION SYSTEMS LIMITED

| |                                      |                        | 
| | ------------------------------------ | ---------------------- | 
| | By:                                  | /s/
  Yossi Ben Shalom | 
| |                                      |                       
| | Yossi Ben
  Shalom                  
| | Chairman of
  the Board of Directors

65

---

---

# NEXUS TELOCATION
SYSTEMS LTD. AND ITS SUBSIDIARIES

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2004

# 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-39



---

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders of

# NEXUS TELOCATION
SYSTEMS LTD.

We
have audited the accompanying consolidated balance sheets of Nexus Telocation Systems Ltd.
(the Company) and its subsidiaries as of December 31, 2004 and 2003 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,
2004. 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, which statements
reflect total assets constituting 9.6% and 31.8% as of December 31, 2004 and 2003,
respectively, and total revenues constituting 16.6% and 46.11%, of the related
consolidated totals for the years then ended, respectively. Those statements 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,
2004 and 2003 and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2004, in conformity with U.S.
generally accepted accounting principles.

|                 |  |                                 
|---------------- |  | --------------------------------
|
|
|
|
|Tel-Aviv, Israel |  | KOST FORER GABBAY & KASIERER    
|June 5, 2005,    |  | A Member of Ernst & Young Global

F - 2

---

---

# Independent
auditors opinion

To the Shareholders ofPointer
Recuperación de México, S. A de C. V.

We have audited the balance sheet of
Pointer Recuperación de México, S.A de C.V. as of December 31, 2004, and the
related statements of operations, and cash flows for the period from June 17, to December
31, 2004. 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 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 audit provides a reasonable basis for our
opinion.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position of Pointer Recuperación de México, S. A. de C. V. as of December
31, 2004, and the related statements of operations, and cash flows 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./S/ Rogelio Avalos
By:  Rogelio Avalos, CPA
| |  | ---------------------------------------------------------------------------------------------

Mexico City January 25,
2004



---

---

# Auditores y Consultores

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of Tracsat S.A.

We have audited the accompanying
balance sheet of Tracsat S.A. as of December 31, 2004 and 2003, 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, 2004. These financial statements are the
resposibility of the Companys management. Our responsibility is to express an
opinion of 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 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 Tracsat S.A. as of December 31, 2004 and 2003 and the results of its
operations and cash flows for each of the three years in the period ended December 31,
2004, in accordance with generally accepted accounting principles in the United States.

GRANT THORNTON ARGENTINA
S.C.

Buenos Aires, ArgentinaFebruary
3, 2005

Grant Thornton ArgentinaSociedad
Civil

Av.Corrientes 327 Piso 3°
C1043AAD Buenos Aires  Argentina T(54 11) 4105 0000F(54 11) 4105
0100 Epost@gtar.com.arWwww.gtar.com.ar

# Member of Grant Thornton
International



---

---

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

|                                                                              | December 31,
|----------------------------------------------------------------------------- | ------------
|
|
|
|
|ASSETS                                                                        |             
|                                                                              |             
|CURRENT ASSETS:                                                               |             
|Cash and cash equivalents                                                     |             
|Short-term investments                                                        |             
|Trade receivables (net of allowance for doubtful accounts of $ 568 and $ 0 at |             
|December 31, 2004 and 2003, respectively)                                     |             
|Other accounts receivable and prepaid expenses (Note 3)                       |             
|Inventories (Note 4)                                                          |             
|                                                                              |             
|                                                                              |             
|Total current assets                                                          |             
|                                                                              |             
|                                                                              |             
|LONG-TERM ASSETS:                                                             |             
|Long-term accounts receivable                                                 |             
|Severance pay fund                                                            |             
|Property and equipment, net (Note 5)                                          |             
|Goodwill                                                                      |             
|Other intangible assets, net (Note 6)                                         |             
|                                                                              |             
|                                                                              |             
|Total long-term assets                                                        |             
|                                                                              |             
|                                                                              |             
|Total assets                                                                  |             
|                                                                              |             

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

F - 3

---

---

|NEXUS TELOCATION SYSTEMS LTD. AND ITS SUBSIDIARIES         
|-----------------------------------------------------------
|                                                           
|CONSOLIDATED BALANCE SHEETS                                
|                                                           
|U.S. dollars in thousands (except share and per share data)

|                                                                               | December 31,
|------------------------------------------------------------------------------ | ------------
|
|
|
|
|LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)                              |             
|                                                                               |             
|CURRENT LIABILITIES:                                                           |             
|Short-term bank credit and current maturities of long-term bank loans          |             
|(Note 7)                                                                       |             
|Trade payables                                                                 |             
|Other accounts payable and accrued expenses (Note 8)                           |             
|                                                                               |             
|                                                                               |             
|Total current liabilities                                                      |             
|                                                                               |             
|                                                                               |             
|LONG-TERM LIABILITIES:                                                         |             
|Long-term loans (Note 9)                                                       |             
|Accrued severance pay                                                          |             
|                                                                               |             
|                                                                               |             
|                                                                               |             
|                                                                               |             
|SHAREHOLDERS' EQUITY (DEFICIENCY):                                             |             
|Share capital (Note 11) -                                                      |             
|Ordinary shares of NIS 0.03 par value:                                         |             
|Authorized - 400,000,000 and 200,000,000 shares at December 31, 2004 and 2003; |             
|Issued and outstanding - 170,450,516 and 114,529,974 shares at December 31,    |             
|2004 and 2003, respectively                                                    |             
|Additional paid-in capital                                                     |             
|Deferred stock-based compensation                                              |             
|Accumulated other comprehensive loss                                           |             
|Accumulated deficit                                                            |             
|                                                                               |             
|                                                                               |             
|Total shareholders' equity (deficiency)                                        |             
|                                                                               |             
|                                                                               |             
|Total liabilities and shareholders' equity (deficiency)                        |             
|                                                                               |             
|                                                                               |             

|*) | Restated,
see Note 2a.
|-- | ----------------------

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

F - 4

---

---

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

|                                                              | Year ended December 31,
|------------------------------------------------------------- | -----------------------
|
|
|
|
|Revenues:                                                     |                        
|Products                                                      |                        
|Services                                                      |                        
|                                                              |                        
|                                                              |                        
|Total revenues (Note 15b)                                     |                        
|                                                              |                        
|                                                              |                        
|Cost of revenues:                                             |                        
|Products                                                      |                        
|Services                                                      |                        
|                                                              |                        
|                                                              |                        
|Total cost of revenues                                        |                        
|                                                              |                        
|                                                              |                        
|Gross profit                                                  |                        
|                                                              |                        
|                                                              |                        
|Operating expenses:                                           |                        
|Research and development, net (Note 16a)                      |                        
|Selling and marketing                                         |                        
|General and administrative                                    |                        
|Amortization of deferred stock-based compensation *)          |                        
|Amortization of intangible assets                             |                        
|                                                              |                        
|                                                              |                        
|Total operating expenses                                      |                        
|                                                              |                        
|                                                              |                        
|Operating loss                                                |                        
|Financial expenses, net (Note 16b)                            |                        
|Other expenses, net (Note 16c)                                |                        
|                                                              |                        
|                                                              |                        
|Loss before taxes on income                                   |                        
|Taxes on income                                               |                        
|                                                              |                        
|                                                              |                        
|Loss from continuing operations                               |                        
|Gain (loss) from discontinued operations (Note 1c)            |                        
|                                                              |                        
|                                                              |                        
|Net income (loss)                                             |                        
|                                                              |                        
|                                                              |                        
|Basic and diluted loss per share from continuing operations   |                        
|Basic and diluted earnings (loss) per share from discontinued |                        
|operations                                                    |                        
|                                                              |                        
|                                                              |                        
|Basic and diluted net earnings (loss) per share               |                        
|                                                              |                        
|                                                              |                        
|*)Stock-based compensation relates to the following:          |                        
|Research and development                               $      |                        
|General and administrative                                    |                        
|                                                              |                        
|                                                              |                        
|Total                                                         |                        
|                                                              |                        

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

F - 5

---

---

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

|                                                  | Number ofshares | Sharecapital | Additionalpaid-incapital | Deferredstock-basedcompensation | Accumulatedothercomprehensiveloss | Accumulateddeficit | Totalcomprehensiveincome(loss) | Totalshareholders'equity(deficiency)
|------------------------------------------------- | --------------- | ------------ | ------------------------ | ------------------------------- | --------------------------------- | ------------------ | ------------------------------ | ------------------------------------
|
|
|
|
|                                                  |                 |              |                          |                                 |                                   |                    |                                |                                     
|Balance as of January 1, 2002                     |                 |              |                          | 10,889,932                      |                                   | $                  | 91                             |                                     
|                                                  |                 |             
|Issuance of shares, net                           |                 |              |                          | 400,000                         |                                   |                    | 3                              |                                     
|Comprehensive loss:                               |                 |             
|Other comprehensive                               |                 |             
|loss - foreign                                    |                 |             
|currency translation                              |                 |             
|adjustments                                       |                 |              |                          | -                               |                                   |                    | -                              |                                     
|Net loss                                          |                 |              |                          | -                               |                                   |                    | -                              |                                     
|                                                  |                 |              |                          |                                 |                                   |                    |                                |                                     
|Total comprehensive loss                          |                 |              |                          |                                 |                                   |                    |                                |                                     
|                                                  |                 |              |                          |                                 |                                   |                    |                                |                                     
|                                                  |                 |             
|Balance as of  December 31, 2002                  |                 |              |                          | 11,289,932                      |                                   |                    | 94                             |                                     
|Issuance of shares, net                           |                 |              |                          | 86,804,542                      |                                   |                    | 570                            |                                     
|Conversion of                                     |                 |             
|convertible debenture                             |                 |              |                          | 16,435,500                      |                                   |                    | 109                            |                                     
|Deferred stock-based                              |                 |             
|compensation                                      |                 |              |                          | -                               |                                   |                    | -                              |                                     
|Amortization of deferred stock-based compensation |                 |              |                          | -                               |                                   |                    | -                              |                                     
|                                                  |                 |             
|Induced conversion of convertible debenture       |                 |              |                          | -                               |                                   |                    | -                              |                                     
|                                                  |                 |             
|Issuance of warrants to a bank                    |                 |              |                          | -                               |                                   |                    | -                              |                                     
|Comprehensive income:                             |                 |             
|Other comprehensive                               |                 |             
|income - foreign                                  |                 |             
|currency translation                              |                 |             
|adjustments                                       |                 |              |                          | -                               |                                   |                    | -                              |                                     
|Net income                                        |                 |              |                          | -                               |                                   |                    | -                              |                                     
|                                                  |                 |              |                          |                                 |                                   |                    |                                |                                     
|Total comprehensive                               |                 |             
|income                                            |                 |              |                          |                                 |                                   |                    |                                |                                     
|                                                  |                 |              |                          |                                 |                                   |                    |                                |                                     
|                                                  |                 |             
|Balance as of  December                           |                 |             
|31, 2003                                          |                 |              |                          | 114,529,974                     |                                   |                    | 773                            |                                     
|Issuance of shares,                               |                 |             
|warrants and options                              |                 |             
|for the acquisition                               |                 |             
|of additional                                     |                 |             
|interest in a                                     |                 |             
|subsidiary, net                                   |                 |              |                          | 42,915,405                      |                                   |                    | 286                            |                                     
|Deferred stock-based                              |                 |             
|compensation                                      |                 |              |                          | -                               |                                   |                    | -                              |                                     
|Amortization of                                   |                 |             
|deferred stock-based                              |                 |             
|compensation                                      |                 |              |                          | -                               |                                   |                    | -                              |                                     
|Exercise of warrants                              |                 |              |                          | 13,005,137                      |                                   |                    | 86                             |                                     
|Comprehensive loss:                               |                 |             
|Other comprehensive                               |                 |             
|income - foreign                                  |                 |             
|currency translation                              |                 |             
|adjustments                                       |                 |              |                          | -                               |                                   |                    | -                              |                                     
|Net loss                                          |                 |              |                          | -                               |                                   |                    | -                              |                                     
|                                                  |                 |              |                          |                                 |                                   |                    |                                |                                     
|Total comprehensive loss                          |                 |              |                          |                                 |                                   |                    |                                |                                     
|                                                  |                 |              |                          |                                 |                                   |                    |                                |                                     
|                                                  |                 |             
|Balance as of  December                           |                 |             
|31, 2004                                          |                 |              |                          | 170,450,516                     |                                   | $                  | 1,145                          |                                     
|                                                  |                 |              |                          |                                 |                                   |                    |                                |                                     

|*) | Restated,
see Note 2a.
|-- | ----------------------

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

F - 6

---

---

|NEXUS TELOCATION SYSTEMS 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 (used in) operating activities:                     |                        
|Loss (gain) from discontinued operations                        |                        
|Depreciation and amortization                                   |                        
|Interest on convertible debenture and long-term loan            |                        
|Accrued severance pay, net                                      |                        
|Impairment of investments                                       |                        
|Write-off of inventories                                        |                        
|Loss (gain) from sale of property and equipment, net            |                        
|Amortization of deferred stock-based compensation               |                        
|Induced conversion of convertible debenture                     |                        
|Decrease (increase) in trade receivables                        |                        
|Decrease in other accounts receivable and prepaid expenses      |                        
|Increase in other long-term accounts receivable                 |                        
|Decrease (increase) in inventories                              |                        
|Increase (decrease) in trade payables                           |                        
|Decrease in other accounts payable and accrued expenses         |                        
|                                                                |                        
|                                                                |                        
|Net cash provided by (used in) continuing operating             |                        
|activities                                                      |                        
|                                                                |                        
|Net cash used in discontinued operating activities              |                        
|                                                                |                        
|                                                                |                        
|Net cash provided by (used in) operating activities             |                        
|                                                                |                        
|                                                                |                        
|Cash flows from investing activities:                           |                        
|Purchase of property and equipment                              |                        
|Proceeds from (investment in) short-term bank deposits          |                        
|Proceeds from sale of property and equipment                    |                        
|Investment in investees                                         |                        
|Acquisition of additional interest in Shagrir Motor Vehicle     |                        
|Systems, net of cash acquired (a)                               |                        
|                                                                |                        
|                                                                |                        
|Net cash used in continuing investing activities                |                        
|                                                                |                        
|Net cash provided by discontinued investing activities          |                        
|                                                                |                        
|                                                                |                        
|Net cash used in investing activities                           |                        
|                                                                |                        

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

F - 7

---

---

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

|                                                               | Year ended December 31,
|-------------------------------------------------------------- | -----------------------
|
|
|
|
|Cash flows from financing activities:                          |                        
|Proceeds from issuance of convertible debenture                |                        
|Proceeds from issuance of shares and exercise of warrants, net |                        
|Repayment of convertible debenture                             |                        
|Short-term bank credit, net                                    |                        
|Issuance of warrants to a bank                                 |                        
|Proceeds from long term loan                                   |                        
|                                                               |                        
|                                                               |                        
|Net cash provided by continuing financing activities           |                        
|                                                               |                        
|Net cash provided by discontinued financing activities         |                        
|                                                               |                        
|                                                               |                        
|Net cash provided by financing activities                      |                        
|                                                               |                        
|                                                               |                        
|Effect of exchange rate on cash and cash equivalents           |                        
|                                                               |                        
|                                                               |                        
|Increase (decrease) in cash and cash equivalents               |                        
|Cash and cash equivalents at the beginning of the year         |                        
|                                                               |                        
|                                                               |                        
|Cash and cash equivalents at the end of the year               |                        
|                                                               |                        
|                                                               |                        
|Supplemental disclosure of cash flow transaction:              |                        
|Cash paid during the year for interest                         |                        
|                                                               |                        
|                                                               |                        
|(a) Acquisition of additional interest in Shagrir Motor        |                        
|Vehicle Systems:                                               |                        
|                                                               |                        
|Fair value of assets acquired and liabilities assumed at       |                        
|date of acquisition:                                           |                        
|Working capital                                                |                        
|Long-term accounts receivable                                  |                        
|Property and equipment                                         |                        
|Customer list                                                  |                        
|Brand name                                                     |                        
|Goodwill                                                       |                        
|Short-term bank credit                                         |                        
|Long-term loan                                                 |                        
|Accrued severance pay, net                                     |                        
|                                                               |                        
|                                                               |                        
|                                                               |                        
|Fair value of shares, options and warrants issued              |                        
|                                                               |                        
|                                                               |                        
|                                                               |                        
|                                                               |                        
|                                                               |                        
|(b) Non-cash investing and financing activities:               |                        
|                                                               |                        
|Conversion of convertible debenture                            |                        
|                                                               |                        

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

F - 8

---

---

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

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

| | a. | Nexus
Telocation Systems Ltd. (the Company) was incorporated in           Israel
and commenced operations in July 1991. The Company is engaged in the
          development, production and marketing of low energy and cost effective wireless
          communications and location based information systems through the application
of           digital spread spectrum technologies, deployed in Stolen Vehicle Retrieval
          Applications. The Company through its subsidiaries that serve as local
          operators, predominantly in Israel and Latin America, perform security and
          safety operations and services, based on its system and technology. The
          Companys shares are traded on the OTC Bulletin Board.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Sellers, who provided loans to Shagrir Motor Vehicle System in the past, assigned these
loans to the Company. The Company also undertook to indemnify the Sellers who provided
Shagrir Motor Vehicle System with guarantees in respect of Shagrir Motor Vehicle Systems
loans from banks in the event the banks will exercise such guarantees. In order to secure
such indemnification undertaking, the Company issued to the Sellers options to purchase,
at no consideration, 3,288,889 of the Companys Ordinary shares, in the event the
Company does not meet its indemnification obligations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
consideration comprises the following:
| | ------------------------------------------

|                                             | 
|-------------------------------------------- | 
|
|
|
|
|Issuance of 42,915,405 Ordinary shares       | 
|Issuance of 24,778,091 warrants              | 
|Issuance of 7,589,620 employee stock options | 
|Direct transaction costs                     | 
|                                             | 
|                                             | 
|                                             | 
|                                             | 

| | The
warrants are exercisable at an exercise price of $ 0.044 per share and are exercisable
during the period which ends by the earlier of (i) April 6, 2006; or (ii) a merger or
consolidation of the Company into any other corporation or corporations where the Company
is not the surviving entity, or the sale of substantially all of the assets of the
Company, in which the shareholders of the Company hold less than 33% of the outstanding
voting power of the successor or surviving corporation immediately following such
consolidation, merger, sale of assets or reorganization.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 9

---

---

|NEXUS TELOCATION SYSTEMS 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
Statement of Financial Accounting Standards (SAFS) No. 141, Business
Combinations (SFAS No. 141) and, accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based on their estimated fair
values at the date of acquisition.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | For
estimated amortization expense 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
unaudited pro forma information below assumes that the acquisition had been consummated
on January 1, 2003 and 2004 and includes the effect of amortization of intangible assets
from those dates. This data is presented for information purposes only and is not
necessarily indicative of the results that would have been achieved had the acquisition
taken place on those dates. The pro forma information is as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                    | Year ended December 31,
|----------------------------------- | -----------------------
|
|
|
|
|Net revenues                        |                        
|                                    |                        
|Net income (loss)                   |                        
|                                    |                        
|Basic net earnings (loss) per share |                        
|                                    |                        

| | *) | Including
net income from discontinued operation of $ 8,524 (net loss and net           loss per
share from continuing operation amounted to $ 6,051 and 0.05,           respectively).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---

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

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

| | 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 Shagrir (1985) Ltd. (a wholly owned subsidiary) by the Companys subsidiary Shagrir
          Motor Vehicle Systems, in consideration for approximately NIS 200,000 thousand.
          Shagrir Towing Services Ltd. is one of the leading companies in Israel in the
          field of automobile repair services and towing services. Shagrir Motor Vehicle
          Systems funded the acquisition as follows:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | NIS
100,000 thousand ($ 22,952 as of February 28, 2005) were funded by a loan
          provided to Shagrir Motor Vehicle Systems by Bank Hapoalim B.M.. NIS 30,000
          thousand represent a credit line for a period of two years with an interest
rate           of Prime + 0.5%. NIS 70,000 thousand were provided for a period of 8 years
(an           interest rate of 7.39% with respect to NIS 35,000 thousand and an interest
rate           of 5.5% and a linkage to the Israeli CPI with respect to the additional
NIS           35,000 thousand). The Company granted to Bank Hapoalim B.M. a warrant to
          purchase up to 10,000,000 Ordinary shares of the Company, at a price per share
          of $ 0.18.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 2. | NIS
36,400 thousand ($ 8,354 as of February 28, 2005) were funded by a group of
          investors lead by Gandyr Investments Ltd. and Egged Holdings Ltd. (Gandyr
          Investments Ltd. and Egged Holdings Ltd. will be referred to as the
          investors). Shagrir Motor Vehicle Systems raised from the investors cash
          in consideration for the issuance of a convertible debt. The debt is for a
          period of 10 years, denominated in NIS linked to the Israeli CPI and bears
          annual interest of 4% for the first two years and 7.5% for the remaining
period.           The debt is convertible during the first 2 years into shares of the
Company (at           $ 0.18 per share) or into shares of Shagrir Motor Vehicle Systems
(60% of the           conversion rights at NIS 729 per share and 40% of the conversion
rights at NIS           729-937 per share according to the exercise date), at the
discretion of the debt           holders (the Embedded Call Option). If the
investors do not convert           the debt into shares of Shagrir Motor Vehicle Systems
or shares of the Company,           Shagrir Motor Vehicle Systems, can, at the end of the
first two-year period,           force the conversion of the debt (up to 60% of the
conversion rights) into           Shagrir Motor Vehicle Systems shares at NIS 729
per share (the           Embedded Put Option).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---

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

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

| | 3. | NIS
8,714 thousand ($ 2,000 as of February 28, 2005) were funded by a           convertible
loan provided by Egged Holdings Ltd. The loan shall bear an annual           interest
rate of three months LIBOR +3.5%. The principle loan amount shall           be
repaid in 17 equal quarterly installments, commencing 36 months from the
          closing date.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
lender shall be entitled to convert the loan into Ordinary shares of the Company (at a
conversion price of $ 0.219 per share) or into shares of Shagrir Motor Vehicle Systems
(at a conversion price of NIS 924). The conversion into shares of Shagrir Motor Vehicle
Systems is limited to such number of shares that will enable the Company to retain
holdings of at least 50.1% of the share capital of Shagrir Motor Vehicle Systems, on a
fully diluted basis.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | NIS
40,000 thousand ($ 9,181 as of February 28, 2005) were funded by a loan to be repaid
by Shagrir Motor Vehicle Systems to Shagrir Towing Services Ltd. The           loan will
be repaid in 20 quarterly payments linked to the Israeli CPI and bears           an
annual interest rate of 6.5%.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Company granted to Shagrir Towing Services Ltd. and Shagrir (1985) Ltd.
together a warrant to purchase up to 25,000,000 Ordinary shares of the Company at a price
per share of $ 0.18 for a period of 24 months.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | The
Company invested an amount of NIS 4,550 thousand ($ 1,000) in the share           capital
of Shagrir Motor Vehicle Systems. In addition, the company and investors
          provided additional loans in the amount of NIS 10,000 thousand ($ 2,296) (NIS
          5,000 thousand each).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
NIS 10,000 thousand loans are linked to the Israeli CPI and bearing an annual interest
rate of 6.5%. They shall be repaid in nine quarterly installments, commencing six months
from February 28, 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
investments in the Companys shares and for warrants granted by the Company, see
Note 17d.
| | ----------------------------------------------------------------------------------------------

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

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

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

F - 12

---

---

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

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

| | 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 relationship                   | 
|Brand name                              | 
|Goodwill                                | 
|                                        | 
|                                        | 
|Total purchase price                    | 
|                                        | 
|                                        | 

| | The
amortization of the customer relationship and the brand name on a straight line basis is $ 1,310
per annum.
| | ---------------------------------------------------------------------------------------------------------------

| | In
accordance with 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 determine,
through the impairment review process, that goodwill has been impaired, it will record
the impairment charge in its statements of operations. The Company will also assess the
impairment of goodwill wherever events of changes in circumstances indicate that the
carrying value may not be recoverable.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

F - 13

---

---

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

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

| | The
following are the results of discontinued operations for the years ended December 31,
2004, 2003 and 2002:
| | --------------------------------------------------------------------------------------------------------------

|                              | Year ended December 31,
|----------------------------- | -----------------------
|
|
|
|
|Revenues                      |                        
|Cost of revenues              |                        
|                              |                        
|Excess of cost over revenues  |                        
|                              |                        
|Operating expenses:           |                        
|Research and development, net |                        
|Sales and marketing           |                        
|General and administrative    |                        
|                              |                        
|                              |                        
|                              |                        
|Operating loss                |                        
|Financial expenses, net       |                        
|Other income                  |                        
|                              |                        
|                              |                        
|Net income (loss)             |                        
|                              |                        

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

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

| | f. | 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
January 25, 2005, the Company sold to its local partners 28.5% of its holdings in Pointer
Mexico in consideration of its par value. Pointer Mexico is intended to install tracking
units and to provide location, tracking and recovery of stolen vehicles services to its
customers in Mexico.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2004 Pointer Mexico is still undergoing an establishment process and has
not commenced significant operations.
| | ---------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

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

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

| | g. | Four
customers accounted for 31% of the Companys and its           subsidiaries revenues
for the year ended December 31, 2004, three           customers accounted for 91% of the
Companys and its subsidiaries          revenues for the year ended December 31,
2003 and three customers accounted           for 80% of the Companys and its
subsidiaries revenues for the year           ended December 31, 2002 (see Note
15b(3)).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | The
consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States (US GAAP).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | The
significant accounting policies applied in the annual consolidated           financial
statements of the Company as of December 31, 2003, are applied           consistently in
these consolidated financial statements. However, 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 reduction in           shareholders equity in the
balance sheet as of January 1, 2002.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | The
dollar is also considered to be the functional currency of Pointer Mexico.
| | ------------------------------------------------------------------------------

F - 15

---

---

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

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

| | Accordingly,
monetary accounts maintained in currencies other than the dollar are remeasured into
dollars in accordance with SFAS No. 52, Foreign Currency Translation. All
transaction gains and losses of the remeasured monetary balance sheet items are reflected
in the statement of operations as financial income or expense, as appropriate.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | d. | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | g. | 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, parts and supplies 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 2004, 2003 and 2002, the Company and its subsidiaries wrote off
approximately $ 479, $ 111 and $ 324, respectively. The write-offs are included
in cost of revenues.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

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

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

| | h. | 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                  | 33                        
|Computers and development equipment | 10 - 33 (mainly 20)       
|Office furniture and equipment      | 6 - 15                    
|Motor vehicles                      | 20                        
|Network installation                | 10-33                     
|Leasehold improvements              | Over the term of the lease
|                                    |                           

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

| | Goodwill
reflects the excess of the purchase price of the acquired subsidiary over the fair value
of net assets acquired. Pursuant to FAS 142, Goodwill and Other Assets,
goodwill is not amortized but rather tested for impairment at least annually. As of
December 31, 2004, the Company has determined that no impairment with respect to goodwill
exists.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | The
customer list is amortized over a five-year period. The brand name is amortized over a
two-year period, two thirds in the first year, and one third in the second year.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Companys long lived assets are reviewed for impairment in accordance with SFAS
No.144, Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS
No.144) whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of the assets to the future
undiscounted cash flows expected to be generated by the assets. If such assets are
considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or fair value less costs
to sell. No impairment losses have been identified as of December 31, 2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

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

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

| | k. | 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 2004 are as
follows:
| | ----------------------------------------------------------------------------------------------

|                                             | 
|-------------------------------------------- | 
|
|
|
|
|Balance, beginning of the year               | 
|Acquisition of Shagrir Motor Vehicle Systems | 
|Warranties issued during the year            | 
|Settlements made during the year             | 
|Expirations                                  | 
|Foreign currency translation adjustment      | 
|                                             | 
|                                             | 
|Balance, end of year                         | 
|                                             | 
|                                             | 

| | l. | Revenue
recognition:
| | -- | --------------------

| | The
Company and its subsidiaries generate revenues from sales of systems and products, sales
of Stolen Vehicle Recovery services and subscriber fees for location services. To a
lesser extent, revenues are also derived from technical support services and from
royalties.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
general, revenues from 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Subscriber
fees are recognized over the term of the agreement.
| | --------------------------------------------------------------

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

| | In
November 2002, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF
00-21). EITF 00-21 provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF 00-21 are applied to revenue arrangements entered into in
fiscal periods beginning after June 15, 2003.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

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

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

| | In
applying EITF 00-21, separate contracts with the same entity or related parties that are
entered into at or near the same time are presumed to have been negotiated as a package
and should, therefore, be evaluated as a single arrangement in considering whether there
are one or more units of accounting. That presumption may be overcome if there is
sufficient evidence to the contrary. EITF 00-21 also addresses how arrangement
consideration should be measured and allocated to the separate units of accounting in the
arrangement.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Certain
agreements include a contractual obligation for installation of systems. When such
installation is requested by the customer, the entire revenues are deferred until
installation is performed.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company considers the sale of products and subscriber fees to be separate units of
accounting.
| | --------------------------------------------------------------------------------------------------

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

| | The
Company is entitled to royalties from one of its customers, which are based on the number
of the customers subscribers. The royalties are recognized when such royalties are
reported to the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | n. | Grants:
| | -- | -------

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

| | o. | Advertising
expenses:
| | -- | ---------------------

| | Advertising
expenses are charged to the statement of operations as incurred. Advertising expenses for
the years ended December 31, 2004, 2003 and 2002 were $ 177, $ 6 and $ 16, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

|NEXUS TELOCATION SYSTEMS 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. | Deferred
income taxes:
| | -- | ----------------------

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

| | q. | Basic
and diluted net earning (loss) per share:
| | -- | -----------------------------------------------

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

| | Options
and warrants outstanding to purchase approximately 95,794,986, 75,813,588 and 1,368,731
Ordinary shares of the Company for the years ended December 31, 2004, 2003 and 2002,
respectively, were not included in the computation of diluted net earnings (loss) per
share, since they would have an anti-dilutive effect.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | The
Company adopted the disclosure provisions of SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure (SFAS No. 148),
which amended certain provisions of SFAS 123, Accounting for Stock-Based
Compensation (SFAS No. 123). The Company continues to apply the
provisions of APB No. 25, in accounting for stock-based compensation.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 20

---

---

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

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

| | The
fair value for options granted in 2004, 2003 and 2002 is amortized over their vesting
period and estimated at the date of grant using a Black-Scholes options pricing model
with the following weighted average assumptions:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                            | 2004                            | 2003                            | 2002                  
|------------------------------------------------------------------------------------------- | ------------------------------- | ------------------------------- | ----------------------
|                                                                                            |                                 |                                 |                       
|Dividend yield        
Expected volatility   
Risk-free interest    
Expected life of up to | 0%     
102%   
3.5%   
5 years | 0%     
55.6%  
1%     
3 years | 0%
141%
1.5%
2.5 years

| | As
for fair value of options issued, see Note 11c.
| | --------------------------------------------------

| | Pro
forma information under SFAS 123 and SFAS 148 is as follows:
| | ----------------------------------------------------------------

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

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

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

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

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

F - 21

---

---

|NEXUS TELOCATION SYSTEMS LTD. AND ITS SUBSIDIARIES
|--------------------------------------------------
|                                                  
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|                                                  
|U.S. dollars in thousands                         

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

| | t. | 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, 2004, 2003 and 2002 were $ 172, $ 143
and $ 166, respectively.
| | ----------------------------------------------------------------------------------------------------------------------

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

| | Amounts
recorded for long-term loans approximate fair values. The fair value was estimated using
discounted cash flow analysis, based on the Companys incremental borrowing rates
for similar type of borrowing arrangements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

F - 22

---

---

|NEXUS TELOCATION SYSTEMS LTD. AND ITS SUBSIDIARIES
|--------------------------------------------------
|                                                  
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|                                                  
|U.S. dollars in thousands                         

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

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

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

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

| | As
permitted by SFAS 123, the Company currently accounts for share-based payments to
employees using APB 25, the intrinsic value method, and, as such, recognizes no
compensation cost for employee stock options. Accordingly, the adoption of the SFAS
123(R) fair value method will have significant impact on the Companys results of
operations, although it will have no impact on the Companys overall financial
position. The impact of the adoption of SFAS 123(R) cannot be predicted at this time, as
it depends on levels of share-based payments for future grant. However, had the Company
adopted SFAS 123(R) in prior periods, the impact of that Standard would have approximated
the impact of SFAS 123, as described in the disclosure of the pro forma information above.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | w. | Reclassifications:
| | -- | ------------------

| | Certain
financial statement data for prior years have been reclassified to conform to current
year financial statement presentation.
| | ------------------------------------------------------------------------------------------------------------------------------------

| | The
reclassification did not impact net income, working capital or cash flows from operations
as previously reported.
| | ---------------------------------------------------------------------------------------------------------------------

F - 23

---

---

|NEXUS TELOCATION SYSTEMS LTD. AND ITS SUBSIDIARIES
|--------------------------------------------------
|                                                  
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|                                                  
|U.S. dollars in thousands                         

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

|                               | December 31,
|------------------------------ | ------------
|
|
|
|
|Government authorities         |             
|Employees                      |             
|Grants from European Community |             
|Prepaid expenses               |             
|Others                         |             
|                               |             
|                               |             
|                               |             
|                               |             

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

|               | December 31,
|-------------- | ------------
|
|
|Raw material   |             
|Finished goods |             
|               |             
|               |             
|               |             
|               |             
|               |             

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

| | a. | Property
and equipment:
| | -- | -----------------------

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

| | b. | Depreciation
expenses for the years ended December 31, 2004, 2003 and 2002           were $ 1,134,
$ 1,104 and $ 770, respectively.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---

|NEXUS TELOCATION SYSTEMS LTD. AND ITS SUBSIDIARIES
|--------------------------------------------------
|                                                  
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|                                                  
|U.S. dollars in thousands                         

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

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

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

| | b. | Amortization
expenses for the years ended December 31, 2004, 2003 and 2002 were           $ 932, $ 67
and $ 76, respectively.
| | -- | -----------------------------------------------------------------------------------------------------------------------------

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

|December 31, | 
|------------ | 
|
|
|
|
|2005         | 
|2006         | 
|2007         | 
|2008         | 
|             | 
|             | 
|             | 
|             | 

F - 25

---

---

|NEXUS TELOCATION SYSTEMS LTD. AND ITS SUBSIDIARIES
|--------------------------------------------------
|                                                  
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|                                                  
|U.S. dollars in thousands                         

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

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

|                                       | December 31,
|-------------------------------------- | ------------
|
|
|
|
|Short-term bank loans:                 |             
|In Argentine pesos                     |             
|In NIS                                 |             
|                                       |             
|                                       |             
|                                       |             
|                                       |             
|Short-term bank credit:                |             
|In, or linked to, dollars              |             
|In Argentine pesos                     |             
|In NIS                                 |             
|                                       |             
|                                       |             
|                                       |             
|                                       |             
|Current maturities of long-term loans: |             
|In, or linked to, dollars              |             
|                                       |             
|In NIS linked to CPI                   |             
|In NIS                                 |             
|                                       |             
|                                       |             
|                                       |             
|                                       |             
|                                       |             
|                                       |             
|                                       |             
|                                       |             
|Unutilized credit lines                |             
|                                       |             

F - 26

---

---

|NEXUS TELOCATION SYSTEMS LTD. AND ITS SUBSIDIARIES
|--------------------------------------------------
|                                                  
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|                                                  
|U.S. dollars in thousands                         

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

|                               | December 31,
|------------------------------ | ------------
|
|
|
|
|Employees and payroll accruals |             
|Provision for warranty         |             
|Accrued expenses               |             
|Customer advances              |             
|Deferred revenues              |             
|Related party                  |             
|Others                         |             
|                               |             
|                               |             
|                               |             
|                               |             

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

|                           | December 31,
|-------------------------- | ------------
|
|
|
|
|In or linked to the dollar |             
|                           |             
|In NIS linked to CPI       |             
|In NIS                     |             
|In Mexican peso            |             
|                           |             
|                           |             
|Less - current maturities  |             
|                           |             
|                           |             
|                           |             
|                           |             

F - 27

---

---

|NEXUS TELOCATION SYSTEMS LTD. AND ITS SUBSIDIARIES
|--------------------------------------------------
|                                                  
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|                                                  
|U.S. dollars in thousands                         

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

| | As
of December 31, 2004, the aggregate annual maturities of the long-term loans are as
follows:
| | -----------------------------------------------------------------------------------------------

|Year ending December 31,  | 
|------------------------- | 
|
|
|
|
|2005 (current maturities) | 
|2006                      | 
|2007                      | 
|2008                      | 
|2009                      | 
|Undetermined              | 
|                          | 
|                          | 
|                          | 
|                          | 
|                          | 

|NOTE 10: |  | COMMITMENTS AND CONTINGENT LIABILITIES
|-------- | - | --------------------------------------

| | a. | Collateral:
| | -- | -----------

| | 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. | 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 $ 46, in force between January 2005           May
2007.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | The
Company obtained bank guarantees in the amount of $ 34 in favor of its           lessor.
| | -- | --------------------------------------------------------------------------------------------

| | 4. | The
Company obtained bank guarantees in the amount of $ 100 in favor of a           supplier.
| | -- | ---------------------------------------------------------------------------------------------

| | b. | 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, 2004 is $ 2,024. No royalties were accrued or paid during 2004, 2003 and 2002.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 28

---

---

|NEXUS TELOCATION SYSTEMS LTD. AND ITS SUBSIDIARIES
|--------------------------------------------------
|                                                  
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|                                                  
|U.S. dollars in thousands                         

|NOTE 10: |  | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|-------- | - | ----------------------------------------------

| | c. | Lease
commitment:
| | -- | -----------------

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

|     | U.S. dollars
|---- | ------------
|
|
|
|
|2005 |             
|2006 |             
|2007 |             
|     |             
|     |             
|     |             
|     |             
|     |             

| | Rent
expenses for the years ended December 31, 2004, 2003 and 2002, were $ 690, $ 180 and
$ 524, respectively.
| | --------------------------------------------------------------------------------------------------------------

| | d. | Litigation:
| | -- | -----------

| | 1. | On November 26,
2002, the Company filed a claim with the Tel-Aviv           Magistrates Court for a
permanent injunction against Bank Hapoalim B.M.           and the China National
Electronics Import Export Beijing Company           (CEIEC). In the claim,
the Company requested that the court prohibit           Bank Hapoalim from paying CEIEC
any amount, pursuant to a guarantee in the           amount of $ 300 in favor of CEIEC
provided to it in the framework of a           transaction, and to prohibit CEIEC from
requesting Bank Hapoalim to pay it any           sums pursuant to the guarantee. The
Company requested the injunction as a result           of unlawful requests made by CEIEC
that Bank Hapoalim will pay it the guarantee.           Following a hearing, which CEIEC
did not attend, on December 31, 2002, the           Tel-Aviv Magistrates Court ruled in
the Companys favor and thereby           permanently prohibited Bank Hapoalim from
paying any funds to CEIEC pursuant to           the guarantee and prohibited CEIEC from
requesting Bank Hapoalim to pay it any           funds pursuant to the guarantee. CEIEC
commenced proceedings in China, against           Bank Hapoalim, to which the Company is
not a party, for the payment of the           guarantee. In August 2004, Bank Hapoalim
informed the Company that it may pay to           CEIEC the guaranteed amount plus
interest at a rate of 0.5% per week, commencing           March 2002 and, in such an
event, will request that the Company indemnify it for           the amount paid. In light
of the permanent injunction ordered in the           Companys favor in 2002 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, based on the legal advisors          opinion, the Company has
defense claims rejecting any possible demands by Bank           Hapoalim for
indemnification.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---

|NEXUS TELOCATION SYSTEMS LTD. AND ITS SUBSIDIARIES
|--------------------------------------------------
|                                                  
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|                                                  
|U.S. dollars in thousands                         

|NOTE 10: |  | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|-------- | - | ----------------------------------------------

| | On
March, 2005 the company filed a claim against CEIEC and another third party with China
International Economic and Trade Arbitration Commission Beijing, China (CIETAC)
for approximately $558 representing the damages caused to the company by the breach by
CEIEC and the third party of the contract between the parties in respect of the
transaction mentioned above.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June, 2005 CEIEC and the third party filed a counter claim with CIETAC for repayment of
$300 plus weekly interest of 0.5% (compounded from February 2002). The counter claim
relates to the same amount that CEIEC claims from Bank Hapoalim B.M pursuant to the
guarantee discussed above . Based on its legal advisors opinion, the Company has
good defense claims rejecting any claim of CEIEC and the third party. Therefore, no
provision was recorded in the financial statements in respect of the claims.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
September 2000, Tracsat entered into a 30-month contract with a third party.
          Pursuant to the contract Tracsat committed to order from the third party a
          minimum level of unit installations. In October 2001 and thereafter, Tracsat
          ceased to make minimum payments to the third party. A legal demand was
presented           against Tracsat. A provision amounting to $ 148 was recorded by the
Company,           representing managements estimate, based on the opinion of its
legal           advisors, of expenses that might occur as a result of this demand. In
October           2003 and August 2004, the Argentinean court ordered a levy in the
amount of $           114 on a bank account.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | During
2002, 2003 and 2004, several claims were filed against Shagrir Motor           Vehicle
Systems by customers. The claims are in an amount aggregating to           approximately $ 371.
The substance of the claims is the malfunction of           Shagrir Motor Vehicle Systems products,
which occurred during the ordinary           course of business. Management, based on the
opinion of its attorneys, is of the           opinion that no material costs will arise
to Shagrir Motor Vehicle Systems in           respect to these claims and, therefore, no
provision was recorded in the           financial statements in respect of the claims.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | During
May 2002, Shagrir Motor Vehicle Systems filed a claim against one of its
          customers in the amount of approximately $ 70 in respect of the breach of an
          agreement reached between the parties. The defendant filed a counterclaim in
the           amount of approximately $ 93, claiming that Shagrir Motor Vehicle Systems
          breached the aforesaid agreement. Management, based on the opinion of its
          attorneys, is of the opinion that no material costs will arise to Shagrir Motor
          Vehicle Systems in respect of this counterclaim and, therefore, no provision
was           recorded in the financial statements in respect of the counterclaim.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | On
January 20, 2004, a lawsuit in the amount of $ 162 was filed against Shagrir
          Motor Vehicle Systems and two additional defendants, alleging that a truck, in
          which a tracking system was installed, was stolen and was not tracked. The
Court           dismissed Shagrir Motor Vehicle Systems from this lawsuit. On September
9, 2004,           the Company received a third party notice from one of the additional
defendants,           seeking indemnification or compensation from Shagrir Motor Vehicle
Systems if           the Court determines that it must pay compensation to the plaintiff
in respect           of the trucks theft.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | e. | The
Company and DBSI Investment Ltd. (DBSI) (see Note 14) have           entered
into a management services agreement pursuant to which DBSI shall           provide
management services in consideration for annual management fees of $ 180           for a
period of three years commencing on April 6, 2003.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 30

---

---

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

|NOTE 10: |  | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|-------- | - | ----------------------------------------------

| | This
agreement shall be automatically renewed for additional periods of twelve months each
unless either party gives the other party a notice of termination three months prior to
the beginning of a renewal term.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | According
to the employment agreement of the Companys CEO, in 2003 and           2004, the
CEO is entitled to an annual bonus of 8% of the Companys pre-tax           income,
excluding the annual management fees.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, in the event that the CEO is entitled to the abovementioned bonus, the VP
Finance and the VP R&D are entitled to a bonus equal to two monthly salaries each.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 15, 2005, the services of the Companys CEO were terminated (see Note 17b).
| | ----------------------------------------------------------------------------------

|NOTE 11: |  | SHAREHOLDERS EQUITY (DEFICIENCY)
|-------- | - | ---------------------------------

| | a. | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Issued
and outstanding share capital:
| | -- | -------------------------------------

| | 1. | In
January 2002, the Company issued 400,000 shares to AMS, a major supplier of           the
Company, at $ 2.5 per share.
| | -- | -------------------------------------------------------------------------------------------------------------------------

| | 2. | During
2003, the Company signed a share purchase agreement effective as of           March 13,
2003. According to the agreement, the Company issued to investors           58,545,454
shares (45,454,545 of which were issued to DBSI) for a total           consideration of $
2,576 ($ 0.044 per share). In addition, the Company           issued to the
investors 40,981,818 warrants (31,818,181 of which were issued to           DBSI) with an
exercise price of $ 0.044 per share. The warrants shall be           exercisable in
cash or through a cashless exercise at the election of its holder           for a period
which is the earlier of: (1) a merger and acquisition           (M&A)
transaction (as defined in the investment agreement) or           (2) three years from
April 6, 2005.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | In
August 2003, the Company entered into an additional agreement with certain
          investors pursuant to which the Company issued 28,259,088 shares (13,636,364 of
          which were issued to DBSI) for a total consideration of $ 1,243
          ($ 0.044 per share). In addition, the Company issued to the investors
          19,781,366 warrants (9,545,455 of which were issued to DBSI) with an exercise
          price of $ 0.044 per share. The warrants shall be exercisable in cash or
          through cashless exercise at the election of its holder for a period which is
          the earlier of: (1) an M&A transaction or (2) three years from the closing
          date.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---

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

|NOTE 11: |  | SHAREHOLDERS EQUITY (DEFICIENCY) (Cont.)
|-------- | - | -----------------------------------------

| | 4. | During
2004, 14,319,546 warrants were exercised into 13,005,137 of the           Companys
Ordinary shares. Out of the 14,319,546 warrants, 11,051,818           warrants were
exercised by way of cashless exercise into 9,737,409 Ordinary           shares, and
3,267,728 warrants were exercised into Ordinary shares, for a           consideration of
$ 143.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | 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 42,915,405 of the Companys Ordinary shares.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Options:
| | -- | --------

| | 1. | The
Company grants, under various option plans, options to its employees,           directors
and service providers. The options are granted for a period of five           years and
usually have a vesting period of up to three years. As of December 31,           2004,
285,380 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 approximately 2.2 million of the Companys
          Ordinary shares at an exercise price of $ 0.133 per share. 44% of the options
          granted to each employee shall vest 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. | Following
the closing for 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 24,778,091 warrants at an exercise price of $ 0.044 per           share.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition the Company issued 7,589,620 fully vested employees stock options at an exercise
price of $ 0.133 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. | A
summary of the status of the Companys employee stock options as of
          December 31, 2004, 2003 and 2002, and changes during the years then ended, are
          as follows:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                       | 2004 | 2003 | 2002
|---------------------- | ---- | ---- | ----
|
|
|
|
|Options outstanding at |      |      |     
|the beginning of the   |      |     
|year                   |      |      |     
|Granted                |      |      |     
|Forfeited              |      |      |     
|                       |      |      |     
|Outstanding at the end |      |     
|of the year            |      |      |     
|                       |      |      |     
|Options exercisable at |      |     
|the end of the year    |      |      |     
|                       |      |      |     

F - 32

---

---

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

|NOTE 11: |  | SHAREHOLDERS EQUITY (DEFICIENCY) (Cont.)
|-------- | - | -----------------------------------------

| | The
following table summarizes information relating to stock options outstanding as of
December 31, 2004, according to exercise price range:
| | --------------------------------------------------------------------------------------------------------------------------------------------

|            | Options outstanding | Options exercisable
|----------- | ------------------- | -------------------
|
|
|
|
|$     0.044 |                     |                    
|$     0.133 |                     |                    
|$ 1.03-2.55 |                     |                    
|$ 7.5-16.5  |                     |                    
|            |                     |                    
|            |                     |                    
|            |                     |                    
|            |                     |                    

| | The
weighted average fair values of options granted during the years ended December 31,
2004, 2003 and 2002 were:
| | -----------------------------------------------------------------------------------------------------------------

|                 | Exercise price less than market price | Exercise price equal to market price
|---------------- | ------------------------------------- | ------------------------------------
|
|
|
|
|Weighted average |                                       |                                     
|exercise prices  |                                       |                                     
|                 |                                       |                                     
|Weighted-average |                                       |                                     
|fair value on    |                                       |                                     
|grant date       |                                       |                                     
|                 |                                       |                                     
|                 |                                       |                                     

| | See
also Note 17b.
| | ------------------

| | 5. | The
Companys outstanding warrants to investors as of December 31, 2004,           are
as follows:
| | -- | --------------------------------------------------------------------------------------------------

|Number     | Year ofissuance | Expiration date | Exercise priceU.S.$
|---------- | --------------- | --------------- | -------------------
|
|
|
|
|165,000    |                 |                 |                    
|52,417,272 |                 |                 |                    
|24,778,091 |                 |                 |                    
|           |                 |                 |                    
|           |                 |                 |                    
|77,360,363 |                 |                 |                    
|           |                 |                 |                    

| | (*) | The
earlier of an M&A transaction or three years from the issuance dates           (March
and August 2006).
| | --- | -----------------------------------------------------------------------------------------------------------

| | (**) | The
earlier of April 6, 2006 or an M&A transaction.
| | ---- | ---------------------------------------------------

| | See
also Note 17a.
| | ------------------

| | 6. | 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 - 33

---

---

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

|NOTE 12: |  | NET EARNINGS (LOSS) PER SHARE
|-------- | - | -----------------------------

| | The
following table sets forth the computation of basic and diluted net earnings (loss) per
share:
| | --------------------------------------------------------------------------------------------------

|                                                          | Year ended December 31,
|--------------------------------------------------------- | -----------------------
|
|
|
|
|Numerator for basic and diluted earnings (loss) per share |                        
|- Net income (loss) available to shareholders             |                        
|                                                          |                        
|Weighted average shares outstanding (in thousands)        |                        
|                                                          |                        
|Basic and diluted net earnings (loss) per share           |                        
|                                                          |                        

|NOTE 13: |  | INCOME TAXES
|-------- | - | ------------

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

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

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

| | The
Company is an industrial company, as defined by this law and, as such, is
entitled to certain tax benefits, mainly accelerated depreciation of machinery and
equipment, as prescribed by regulations published under the Income Tax Law (Inflationary
Adjustments), 1985, the right to claim public issuance expenses in three annual
installments and an annual deduction of 12.5% of patents and other intangible property
rights as deductions for tax purposes.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Loss
before taxes on income:
| | -- | ----------------------------

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

F - 34

---

---

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

|NOTE 13: |  | INCOME TAXES (Cont.)
|-------- | - | --------------------

| | d. | Deferred
taxes:
| | -- | ---------------

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

|                                                   | December 31,
|-------------------------------------------------- | ------------
|
|
|
|
|Reserves and accruals                              |             
|Carryforward tax losses                            |             
|Impairment of an investment                        |             
|Other temporary differences, net                   |             
|                                                   |             
|                                                   |             
|Net deferred tax assets before valuation allowance |             
|Valuation allowance *)                             |             
|                                                   |             
|                                                   |             
|Net deferred tax assets                            |             
|                                                   |             

| | *) | The
Company and its subsidiaries have provided valuation allowances in respect           of
deferred tax assets resulting from tax loss carryforwards and other temporary
          differences. Since the Company and its subsidiaries have a history of losses,
it           is more likely than not that the deferred taxes regarding the losses
          carryforwards and other temporary differences will not be realized in the
          foreseeable future.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Carryforward
tax losses of the Company totaled approximately $ 70,000 as of December 31,
2004. The carryforward tax losses have no expiration date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | Carryforward
tax losses of Tracsat are approximately $ 2,315 as of December 31, 2004. The carryforward
tax losses will expire from 2005 to 2008.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| | Carryforward
tax losses of Shagrir Motor Vehicle Systems totaled approximately $ 22,000 as of December 31,
2004. The carryforward tax losses have no expiration date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Carryforward
tax losses of Pointer Mexico totaled approximately $ 195 as of December 31, 2004. The tax
loss carryforwards can be offset in the following 10 fiscal years against taxable income.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | The
main reconciling items between the statutory tax rate of the Company and           the
effective tax rate are the non-recognition of tax benefits from accumulated           net
operating losses carryforward and other temporary differences, due to the
          uncertainty of the realization of such tax benefits.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 35

---

---

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

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

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

|                                             | December 31,
|-------------------------------------------- | ------------
|
|
|
|
|Other accounts payable and accrued expenses: |             
|DBSI                                         |             
|AMS                                          |             
|                                             |             

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

|                        | Year ended December 31,
|----------------------- | -----------------------
|
|
|
|
|Purchases from AMS      |                        
|Management fees to DBSI |                        

|NOTE 15: |  | SEGMENT, CUSTOMER AND GEOGRAPHIC INFORMATION
|-------- | - | --------------------------------------------

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

| | The
Company operates in one segment, Location Based Service (LBS).
| | ------------------------------------------------------------------

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

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

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

F - 36

---

---

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

|NOTE 15: |  | SEGMENT, CUSTOMER AND GEOGRAPHIC INFORMATION (Cont.)
|-------- | - | ----------------------------------------------------

| | 3. | Revenues
classified by major customer:
| | -- | --------------------------------------

| | Percentage
of sales to customers exceeding 10% of total revenues:
| | -----------------------------------------------------------------

|           | 2004 | 2003 | 2002
|---------- | ---- | ---- | ----
|
|
|
|
|Customer A |      |      |     
|Customer B |      |      |     
|Customer C |      |      |     
|Customer D |      |      |     
|Customer E |      |      |     
|           |      |      |     
|           |      |      |     
|           |      |      |     
|           |      |      |     

|NOTE 16: |  | SELECTED STATEMENTS OF OPERATIONS DATA
|-------- | - | --------------------------------------

|                                            | Year ended December 31,
|------------------------------------------- | -----------------------
|
|
|
|
|a.  Research and development, net:          |                        
|Total expenses                              |                        
|Less - grants and participation             |                        
|                                            |                        
|                                            |                        
|                                            |                        
|                                            |                        
|                                            |                        
|b.  Financial expenses, net:                |                        
|                                            |                        
|Income:                                     |                        
|Interest on short-term bank deposits        |                        
|                                            |                        
|                                            |                        
|Expenses:                                   |                        
|Induced conversion of convertible debenture |                        
|Bank charges and interest expenses          |                        
|Foreign currency translation adjustments    |                        
|Interest on convertible debentures          |                        
|Amortization of compensation related to     |                        
|warrants issued to a bank                   |                        
|Other                                       |                        
|                                            |                        
|                                            |                        
|                                            |                        
|                                            |                        
|                                            |                        
|                                            |                        
|                                            |                        

F - 37

---

---

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

|NOTE 16: |  | SELECTED STATEMENTS OF OPERATIONS DATA (Cont.)
|-------- | - | ----------------------------------------------

|                                      | Year ended December 31,
|------------------------------------- | -----------------------
|
|
|
|
|c.   Other expenses:                  |                        
|Impairment of investments (1)         |                        
|Gain in respect to waiver of advances |                        
|Capital loss                          |                        
|Other                                 |                        
|                                      |                        
|                                      |                        
|                                      |                        

| | (1) | In
respect of the investments in MAGA Communication Limited (MAGA)           and
in Tri Angle LLC. (Tri Angle), the Companys investment in
          MAGA was an investment in an option to acquire 5% of MAGAs outstanding
          Ordinary shares. During 2002, the Companys management determined, in
light           of MAGAs financial position, not to exercise its option. Tri Angle
LLC.,           had ceased its operations during 2002. Accordingly, the Companys
          management determined that these fact patterns indicated that the carrying
          amounts of these two investments would not be recoverable, and wrote off the
          entire amount of the investment in MAGA of $ 500 and the entire amount of the
          investment in Tri Angle LLC of $ 180.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 17: |  | SUBSEQUENT EVENTS
|-------- | - | -----------------

| | a. | In
February 2005, 3,181,818 warrants were exercised into Ordinary shares of the
          Company for a total consideration of $ 140.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------

| | b. | In March 13, 2005, the company issued to Shagrirs CEO 830,179 shares for a
               total consideration of $ 69,735 (NIS 0.03 per share), and 182,639 warrants with
               an exercise price of $ 0.084 per share.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | During
2005, 165,000 warrants and 52,167 employees stock options expired.
| | -- | -------------------------------------------------------------------------

| | d. | On May 15, 2005, the Companys CEO announced his departure.  In the context of the  termination of his
services,  the vesting of his  unvested  options was  accelerated  such that the options  became fully
vested and a new mechanism of annual bonus was agreed upon for 2005.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 options to purchase 4,000,000 Ordinary shares
of the Company, with an exercise price of $ 0.106 per share.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | On
February 28, 2005, the Company announced the closing of the transaction for           the
purchase of the activities and assets of Shagrir Towing Services Ltd. and
          Shagrir (1985) Ltd. by the Companys subsidiary, Shagrir Motor Vehicle
          Systems (see Note 1c).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Following
the purchase of the activities and assets of Shagrir Towing Services           Ltd. by
the Companys subsidiary, Shagrir Motor Vehicle Systems (see Note           1c), the
subsidiary entered into a management services agreement with the           Company,
pursuant to which the Company will provide the subsidiary 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.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 38

---

---

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

|NOTE 17: |  | SUBSEQUENT EVENTS (Cont.)
|-------- | - | -------------------------

| | g. | Following
the Shagrir Towing Services Ltd. transaction (see Note 1f), Shagrir           Motor
Vehicle Systems entered into a retirement agreement with three senior           employees
according to which salary continuation benefits shall be paid for           periods of
six to nine months during 2005.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | During
February 2005, the Company completed a round of financing of $ 6,000           ($ 1,000
of which was invested by DBSI Investments Ltd., a major           shareholder of the
Company), in consideration of 71,428,570 of the           Companys Ordinary shares
at a price per share of $ 0.084. Under the terms           of the investment agreements,
the investors were issued warrants to purchase up           to 15,714,284 shares of the
Company, with an exercise price of $ 0.084 per           share. The warrants may be
exercised at any time during the period, beginning on           February 28, 2005 and
until the earlier of (i) April 6, 2006; or (ii) an M&A           transaction.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Out of the total number of shares and  warrants  issued,  Egged  Holdings  Ltd. was issued  30,952,381
shares and 6,809,523 warrants.
| | -------------------------------------------------------------------------------------------------------------------------------------

| | i. | On
February 28, 2005, three senior employees of Shagrir Motor Vehicle Systems           were
granted options to purchase up to 2,355 shares of Shagrir Motor Vehicle
          Systems. The options vest over a period of 48 months. The exercise price is
          derived from the market value of Shagrir Motor Vehicle Systems of $ 8,000, and
          is subject to adjustments in case of dividend distributions or any other
amounts           that may be paid to shareholders of Shagrir Motor Vehicle Systems.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
options grant the employees 4.7% of the issued share capital of Shagrir Motor Vehicle
Systems at the date of grant.
| | -----------------------------------------------------------------------------------------------------------------------

F - 39

---

---

# SHAGRIR TOWING
SERVICES LTD.

# CONSOLIDATED FINANCIAL
STATEMENTSAS OF DECEMBER 31, 2004



---

---

# SHAGRIR TOWING
SERVICES LTD.

# CONSOLIDATED FINANCIAL
STATEMENTS

# TABLE OF CONTENTS

|                                              | PAGE           
|--------------------------------------------- | ---------------
|
|
|
|
|Auditors' Report                              | F - 40         
|Consolidated Financial Statements:           
|Balance Sheets                                | F - 41         
|Statements of Operations                      | F - 42         
|Statements on Changes in Shareholders' Equity | F - 43         
|Statements of Cash Flows                      | F - 44 - F - 45
|Notes to the Financial Statements             | F - 46 - F - 64



---

---

|Certified Public Accountants (Isr)
Member firm of Grant Thornton | 
|---------------------------------------------------------------- | 

# AUDITORS REPORT

# TO THE SHAREHOLDERS OF SHAGRIR
TOWING SERVICES LTD.

We have audited the accompanying
consolidated balance sheets of Shagrir Towing Services Ltd.(hereinafter  the
Company) and its subsidiary as of December 31, 2004 and 2003, and the
related consolidated statements of operations, changes in shareholders equity, and
cash flows for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the board of directors and management of
the Company. Our responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. 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 the board of directors and management of the Company, 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 aforementioned
consolidated financial statements present fairly, in all material respects, the
consolidated financial position of the Company as of December 31, 2004 and 2003, and
the consolidated results of operations, changes in shareholders equity, and cash
flows for each of the three years in the period ended December 31, 2004, in
conformity with accounting principles generally accepted in Israel.

As explained in Note 2A, the
financial statements as of December 31, 2004 and for the year then ended are presented in
reported amounts, in accordance with the accounting standards of the Israeli Accounting
Standards Board. The financial statements as of December 31, 2003 and for the years ended
until that date are presented in values adjusted as of that date to reflect the changes in
the general purchasing power of the Israeli currency, in accordance with pronouncements of
the Institute of Certified Public Accountants in Israel.

Accounting principles generally
accepted in Israel vary in certain significant respects from accounting principles
generally accepted in the United States of America. Information relating to the nature and
effect of such differences is presented in Note 20 to the consolidated financial
statements.

Without qualifying our opinion, we
draw attention to the contents of Note 1B to the financial statements regarding an
agreement that was signed for the sale of the business operations of the Company and its
subsidiary.

| |  | Fahn Kanne & Co.
Certified Public Accountants(Isr.)
| |  | ---------------------------------------------------

Tel-Aviv, January 31, 2005

|                                                                                                                                           |                
|------------------------------------------------------------------------------------------------------------------------------------------ | ---------------
|Head Office:         
Levinstein Tower     
23 Menachem Begin Rd.
Tel-Aviv 66184       
PO Box 36172         
Tel-Aviv 61361       
Israel
|T:                                                                                                                                         | 972-3-7106666  
|F:                                                                                                                                         | 972-3-7106660  
|E:                                                                                                                                         | info@gtfk.co.il

F - 40

---

---

# SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# CONSOLIDATED BALANCE
SHEETS(In thousands, except
share data)

|                                                              |  | Conveniencetranslationinto US$(Note 2A6) | New Israel Shekels
|------------------------------------------------------------- |  | ---------------------------------------- | ------------------
|
|
|
|
|A S S E T S                                                   |  |                                          |                   
|Current assets                                                |  |                                         
|                                                              |  |                                          |                   
|Cash and cash equivalents                                     |  |                                          |                   
|Short-term investments                                        |  |                                          | 3                 
|Trade accounts receivable                                     |  |                                          | 4                 
|Accounts receivable and other debit balances                  |  |                                          | 5                 
|Deferred taxes                                                |  |                                          | 18B               
|Inventory of tools and spare parts                            |  |                                          |                   
|                                                              |  |                                          |                   
|                                                              |  |                                          |                   
|                                                              |  |                                          |                   
|Long-term investments and debit balances                      |  |                                         
|                                                              |  |                                          |                   
|Investment in private investment fund                         |  |                                          | 6                 
|Deferred taxes                                                |  |                                          | 18B               
|                                                              |  |                                          |                   
|                                                              |  |                                          |                   
|                                                              |  |                                          |                   
|Fixed assets, net                                             |  |                                          | 7                 
|                                                              |  |                                          |                   
|                                                              |  |                                          |                   
|                                                              |  |                                          |                   
|LIABILITIES AND SHAREHOLDERS' EQUITY                          |  |                                         
|                                                              |  |                                          |                   
|Current liabilities                                           |  |                                         
|                                                              |  |                                          |                   
|Trade accounts payable                                        |  |                                          | 8                 
|Unearned income                                               |  |                                          |                   
|Accounts payable and other credit balances                    |  |                                          | 9                 
|                                                              |  |                                          |                   
|                                                              |  |                                          |                   
|                                                              |  |                                          |                   
|Long-term liabilities                                         |  |                                         
|                                                              |  |                                          |                   
|Liability in respect of employee rights upon retirement, net  |  |                                          | 10                
|Deferred taxes                                                |  |                                          | 18B               
|                                                              |  |                                          |                   
|                                                              |  |                                          |                   
|                                                              |  |                                          |                   
|Commitments                                                   |  |                                          | 11                
|                                                              |  |                                          |                   
|Shareholders' equity                                          |  |                                         
|                                                              |  |                                          |                   
|Share capital:                                                |  |                                         
|Ordinary shares of NIS 1 par value - Authorized: 1,500 shares |  |                                         
|at December 31, 2004 and 2003; Issued and outstanding:        |  |                                         
|1,500 shares at December 31, 2004 and 2003                    |  |                                          |                   
|Additional paid-in capital                                    |  |                                          |                   
|Dividend declared subsequent to the balance sheet date        |  |                                          |                   
|Retained earnings                                             |  |                                          |                   
|                                                              |  |                                          |                   
|                                                              |  |                                          |                   
|                                                              |  |                                          |                   
|                                                              |  |                                          |                   
|                                                              |  |                                          |                   

|(1) | See
Note 2A.
|--- | ------------

|(2) | Adjusted
to the NIS of December 2003.
|--- | -------------------------------------

|
Gabriel LastChairman of the Board | 
Ofer LiorMember of the Board, C.E.O. | 
Joseph RegevC.F.O.
|------------------------------------------------ | --------------------------------------------------- | ---------------------------------

Date: January 31, 2005.

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

F - 41

---

---

# SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# CONSOLIDATED
STATEMENTS OF OPERATIONS(In thousands)

|                                    |  | Conveniencetranslationinto US$(Note 2A6) | New Israel Shekels
|----------------------------------- |  | ---------------------------------------- | ------------------
|
|
|
|
|Revenues                            |  |                                          |                   
|                                    |  |                                          |                   
|Cost of revenues                    |  |                                          |                   
|                                    |  |                                          |                   
|Gross profit                        |  |                                          |                   
|                                    |  |                                          |                   
|Selling and marketing expenses      |  |                                          |                   
|                                    |  |                                          |                   
|General and administrative expenses |  |                                          |                   
|                                    |  |                                          |                   
|Operating income                    |  |                                          |                   
|                                    |  |                                          |                   
|Financing income (expenses), net    |  |                                          |                   
|                                    |  |                                          |                   
|Other income, net                   |  |                                          |                   
|                                    |  |                                          |                   
|Income before taxes on income       |  |                                          |                   
|                                    |  |                                          |                   
|Taxes on income                     |  |                                          |                   
|                                    |  |                                          |                   
|Net income for the year             |  |                                          |                   
|                                    |  |                                          |                   

|(1) | See
Note 2A.
|--- | ------------

|(2) | Adjusted
to the NIS of December 2003.
|--- | -------------------------------------

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

F - 42

---

---

# SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY(In thousands)

Year ended December 31, 2004

|                                     | New Israel Shekels
|------------------------------------ | ------------------
|
|
|
|
|Balance at January 1, 2004           |                   
|Net income for the year              |                   
|Dividends declared subsequent to the |                   
|balance sheet date                   |                   
|                                     |                   
|Balance at December 31, 2004         |                   
|                                     |                   

|                                     | Convenience translation into US$ (Note 2A6)
|------------------------------------ | -------------------------------------------
|
|
|                                     |                                            
|Balance at January 1, 2004           |                                            
|Net income for the year              |                                            
|Dividends declared subsequent to the |                                            
|balance sheet date                   |                                            
|                                     |                                            
|Balance at December 31, 2004         |                                            
|                                     |                                            

Year ended December 31, 2002 and 2003

|                             | New Israel Shekels
|---------------------------- | ------------------
|
|
|
|Balance at January 1, 2002   |                   
|                             |                   
|Net income for the year      |                   
|Dividend                     |                   
|                             |                   
|Balance at December 31, 2002 |                   
|                             |                   
|Net income for the year      |                   
|Dividend                     |                   
|                             |                   
|Balance at December 31, 2003 |                   
|                             |                   

|(1) | See
Note 2A.
|--- | ------------

|(2) | Adjusted
to the NIS of December 2003.
|--- | -------------------------------------

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

F - 43

---

---

# SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# CONSOLIDATED
STATEMENTS OF CASH FLOWS(In thousands)

|                                                          | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|--------------------------------------------------------- | ------------------------------------------- | ------------------
|
|
|
|
|Cash flows from operating activities:                     |                                             |                   
|                                                          |                                             |                   
|Net income for the year                                   |                                             |                   
|Adjustments required to reconcile net income to net cash  |                                             |                   
|from operating activities (Appendix A)                    |                                             |                   
|                                                          |                                             |                   
|Net cash provided by operating activities                 |                                             |                   
|                                                          |                                             |                   
|Cash flows from investing activities:                     |                                             |                   
|                                                          |                                             |                   
|Proceeds from sales (purchases) of marketable securities, |                                             |                   
|net                                                       |                                             |                   
|                                                          |                                             |                   
|Proceeds from (investment in) short-term deposits, net    |                                             |                   
|                                                          |                                             |                   
|Investment in long-term deposit                           |                                             |                   
|                                                          |                                             |                   
|Reimbursement of investment (investment) in private       |                                             |                   
|investment fund, net                                      |                                             |                   
|                                                          |                                             |                   
|Purchase of fixed assets                                  |                                             |                   
|                                                          |                                             |                   
|Proceeds from sale of fixed assets                        |                                             |                   
|                                                          |                                             |                   
|Net cash provided by (used in) investing activities:      |                                             |                   
|                                                          |                                             |                   
|Cash flows from financing activities:                     |                                             |                   
|                                                          |                                             |                   
|Dividend paid                                             |                                             |                   
|                                                          |                                             |                   
|Net cash used in financing activities                     |                                             |                   
|                                                          |                                             |                   
|                                                          |                                             |                   
|Increase (decrease) in cash and cash equivalents          |                                             |                   
|                                                          |                                             |                   
|Cash and cash equivalents at beginning of year            |                                             |                   
|                                                          |                                             |                   
|Cash and cash equivalents at end of year                  |                                             |                   
|                                                          |                                             |                   

|(1) | See
Note 2A.
|--- | ------------

|(2) | Adjusted
to the NIS of December 2003.
|--- | -------------------------------------

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

F - 44

---

---

# SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# APPENDIX TO THE
CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)

Appendix A: Adjustments required to reconcile net income to net cash from operating activities

|                                                                       | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|---------------------------------------------------------------------- | ------------------------------------------- | ------------------
|
|
|
|
|Income and expenses not involving cash flows from operatingactivities: |                                             |                   
|                                                                       |                                             |                   
|Depreciation                                                           |                                             |                   
|                                                                       |                                             |                   
|Deferred taxes, net                                                    |                                             |                   
|                                                                       |                                             |                   
|Liability for employee rights upon retirement, net                     |                                             |                   
|                                                                       |                                             |                   
|Erosion of long-term deposit                                           |                                             |                   
|                                                                       |                                             |                   
|Net loss (gain) on marketable securities                               |                                             |                   
|                                                                       |                                             |                   
|Capital gain on sale of fixed assets                                   |                                             |                   
|                                                                       |                                             |                   
|Share in losses of private investment fund                             |                                             |                   
|                                                                       |                                             |                   
|Changes in assets and liabilities:                                     |                                             |                   
|                                                                       |                                             |                   
|Decrease (increase) in trade accounts receivable                       |                                             |                   
|                                                                       |                                             |                   
|Decrease (increase) in accounts receivable and other                   |                                             |                   
|debit balances                                                         |                                             |                   
|                                                                       |                                             |                   
|Decrease (increase) in inventory of tools and spare parts              |                                             |                   
|                                                                       |                                             |                   
|Decrease (increase) in trade accounts payable                          |                                             |                   
|                                                                       |                                             |                   
|Increase (decrease) in unearned income                                 |                                             |                   
|                                                                       |                                             |                   
|Increase (decrease) in accounts payable and other credit               |                                             |                   
|balances                                                               |                                             |                   
|                                                                       |                                             |                   
|                                                                       |                                             |                   
|                                                                       |                                             |                   

# Appendix B: Material
non-cash activities

|                                 | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|-------------------------------- | ------------------------------------------- | ------------------
|
|
|
|Dividends declared, not yet paid |                                             |                   
|                                 |                                             |                   

|(1) | See
Note 2A.
|--- | ------------

|(2) | Adjusted
to the NIS of December 2003.
|--- | -------------------------------------

|(*) | Reclassified.
|--- | -------------

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

F - 45

---

---

# SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENT

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

| | A. | Shagrir
Towing Services Ltd. (hereafter: the Company) is owned and
controlled jointly, in equal shares, by Delek Automotive Systems Ltd.,
Atara Investment Company Ltd., and Clal Insurance Company Ltd. The Companys
major operations are carried out through Shagrir (1985) Ltd., a
wholly-owned subsidiary (hereinafter  the Subsidiary), a
company engaged in the provision of towing and road-repair services to
motor vehicles and in the provision of replacement vehicle services.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Subsequent
to the balance sheet date, on January 3, 2005, the Company and its
subsidiary (hereinafter  Shagrir) entered into an
agreement with Pointer (of Eden Telecom) Ltd. (hereinafter  the
Purchaser), whereby the Purchaser would purchase from Shagrir
all of the Shagrirs goodwill in the area of towing and road-repair
services and replacement vehicle services, including proprietary rights,
the name Shagrir, its trademark, its database of existing
customers, intangible rights and their related assets, as well as Shagrirs
commitments (all hereinafter  the Operations), as well
as all of the assets and liabilities in connection with the Operations, as
defined in the agreement (hereinafter- the Net Assets) (all
hereinafter  the Transaction).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
consideration for the Transaction amounts to NIS 190 million, to be paid upon the
consummation of the Transaction, as well as an additional amount equal to the carrying
value of the Net Assets of Shagrir (hereinafter  the Consideration).
Upon consummation of the Transaction, an advance of NIS 10 million shall be paid on
account of the Net Assets, and following the consummation of the Transaction, the parties
will make an accounting in respect of the Consideration for the Net Assets, following an
arbitration process stipulated in the agreement.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | An
amount of NIS 40 million out of the Consideration will be financed through a loan (the
Loan) to be granted by Shagrir to the Purchaser, against a second degree lien
on all of the Purchasers rights to receive funds from the Clal and Phoenix insurance
companies under the service agreements between the Purchaser and each of these two
insurance companies. The Shagrir loan is linked to the ICPI and bears linked interest at a
rate of 6.5% per annum (hereinafter  the Shagrir Interest). The Loan is
repayable in 20 equal and consecutive quarterly payments (principal and interest), with
the first payment on account of the Shagrir loan being due at the end of the twelve-month
period following the date of consummation of the Transaction, and the last payment being
due 72 months following the date of consummation of the Transaction.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
date of consummation was set as 5 days following the fulfillment of the last of the
pre-conditions as detailed below, but no later than 180 days after the signing of the
agreement or some later date to be agreed upon between the parties.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Consummation
of the Transaction is subject to the fulfillment of several pre-conditions which are
stipulated in the agreement, including the approval of the Commissioner of Restrictive
Trade Practices, an undertaking pertaining to the transition of employees, obtaining bank
financing by the Purchaser, and assignment of all material agreements by Shagrir to the
Purchaser.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
agreement stipulates that, at the date of the accounting, Shagrir will pay the Purchaser
all of the profits that accrued to Shagrir in respect of the sold Operations, commencing
on the Effective Date (as defined below), until the date of consummation, and the
Purchaser will pay Shagrir the Interest on the Consideration in an amount equal to the
Shagrir Interest for that period.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 46

---

---

# SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (cont.)

|NOTE 1 |  | GENERAL (cont.)
|------ | - | ---------------

| | B. | (cont.)
| | -- | -------

| | The
Effective Date, in the event that the Consummation Date is prior to March 15,
2005, will be December 31, 2004. In the event that the Consummation Date is between March
15, 2005 and May 31, 2005, the Effective Date will be March 31, 2005. And, in the event
that the Consummation Date is after May 31, 2005, the Effective Date will be June 30,
2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Without
taking into consideration the amount of the profits that Shagrir will pay the Purchaser
and the amount of the Shagrir Interest that the Purchaser will pay Shagrir, if at all, as
above, Shagrir estimates that the Transaction, should it be consummated, will earn Shagrir
an after-tax profit of NIS 133.5 million.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | In
these financial statements, the following terms are defined as follows:
| | -- | --------------------------------------------------------------------------

| | Related
parties  as defined in Opinion No. 29 of the Institute of Certified Public
Accountants in Israel.
| | ------------------------------------------------------------------------------------------------------------

| | Subsidiary
 a company over which the Company has direct or indirect control (by holding most of
the voting rights and the rights to appoint directors therein), and whose financial
statements, therefore, are consolidated with those of the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
consolidated financial statements are prepared in accordance with generally accepted
accounting principles (GAAP) in Israel, which differ in certain respects from
those generally accepted in the United States, as described in Note 20.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
significant accounting policies that were applied in the preparation of the consolidated
financial statements, are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------

| | A. | The
measurement basis for the financial statements
| | -- | --------------------------------------------------

| | 1. | Definitions
| | -- | -----------

| | A. | Adjusted
amount  a nominal historical amount adjusted to the Index of
               December 2003, in accordance with the provisions of Opinions 23 and 36 of
the                Institute of Certified Public Accountants in Israel.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Reported
amount  an adjusted amount as of December 31, 2003, plus amounts                in
nominal values added subsequent to December 31, 2003, less amounts deducted
               subsequent to December 31, 2003.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Adjusted
financial statements
| | -- | -----------------------------

| | Until
December 31, 2003, the financial statements of the Company and its subsidiary were
presented on the basis of the historical cost convention, adjusted for changes in the
general purchasing power of the Israeli currency (NIS), in accordance with the provisions
of opinions of the Institute of Certified Public Accountants in Israel. The amounts in the
financial statements until that date were stated in adjusted shekels having identical
purchasing power (NIS of December 2003), on the basis of changes in the Index.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
adjustment of the financial statements was based on the accounts of the Company and its
subsidiary. Such accounts are maintained on a regular basis in nominal shekels.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 47

---

---

# SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (cont.)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | A. | The
measurement basis for the financial statements (cont.)
| | -- | ----------------------------------------------------------

| | 2. | Adjusted
financial statements (cont.)
| | -- | -------------------------------------

| | The
principles used in adjusting the financial statements are presented below, as follows:
| | ------------------------------------------------------------------------------------------

| | a. | Balance
sheet
| | -- | -------------

| | Non-monetary
items (e.g., fixed assets, unearned income, and share capital) were adjusted for changes
in the Index, from the Index of the month in which they were purchased or generated,
until the Index of the month of the balance sheet date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Monetary
items are presented in the adjusted balance sheet at their nominal values.
| | -----------------------------------------------------------------------------------

| | b. | Income
statement
| | -- | ----------------

| |  | Revenues
from sales were adjusted for changes in the Index, from the date of the transaction to
the month of the balance sheet date.
| | - | ------------------------------------------------------------------------------------------------------------------------------------

| |  | Expenses
relating to allowances included in the balance sheet (e.g., allowance for vacation pay,
deferred taxes, and liability for employee rights upon retirement) are based on an
analysis of the adjusted changes in the concurrent balance sheet item.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Revenues
and expenses deriving from non-monetary items (mainly depreciation) were adjusted on the
basis of specific indices, concurrent with the adjustment of the balance sheet item.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Expenses,
except for those deriving from non-monetary items, expenses relating to allowances
included in the balance sheet, and the financing component, were adjusted for changes in
the Index from the month of the transaction to the month of the balance sheet date.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
net financing component reflects financing income and expenses in real terms, the erosion
of financial items during the year, and gains and losses on the sale or revaluation of
marketable securities.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Statement
of changes in shareholders equity
| | -- | --------------------------------------------

| | A
dividend that was declared and paid in the year in which it was declared was adjusted on
the basis of the changes in the Index from the time of the actual payment to the Index of
December 2003. A dividend that was declared and not paid as of the balance sheet date was
included at its unadjusted nominal value.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Discontinuance
of Adjustment of Financial Statements
| | -- | ----------------------------------------------------

| | On
January 1, 2004, Standard No. 12, Discontinuance of Adjustment of
Financial Statements became effective. According to the Standard, financial
statements are no longer adjusted for inflation commencing on that date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 48

---

---

# SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (cont.)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | A. | The
measurement basis for the financial statements (cont.)
| | -- | ----------------------------------------------------------

| | 4. | Point
of departure for financial statement presentation subsequent toDecember 31, 2003
| | -- | --------------------------------------------------------------------------------------

| | a. | In
the past, the Company presented its financial statements on the basis of
               historical cost, adjusted for changes in the Israeli Consumer Price Index.
The                adjusted values, as above, presented in the financial statements as of
               December 31, 2003 (the transition date), served as the point of
departure                for financial reporting as of January 1, 2004. Additions
made during the                reporting period are presented in nominal shekel values.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | The
amounts of non-monetary assets do not necessarily reflect the economic or
               realizable value of such assets. Rather, they reflect the reported value
of the                assets.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | The
term cost as used in the financial statements refers to cost in
               reported values.
| | -- | -----------------------------------------------------------------------------------------------------

| | d. | Comparative
data for prior periods were adjusted to the Israeli Consumer Price                Index
of December 2003.
| | -- | ---------------------------------------------------------------------------------------------------------------------

| | 5. | Financial
statements in reported amounts
| | -- | ----------------------------------------

| | a. | Balance
sheet
| | -- | -------------

| | 1. | Non-monetary
items are presented in reported amounts.
| | -- | -----------------------------------------------------

| | 2. | Monetary
items are presented in the balance sheet in nominal values as of the           balance
sheet date.
| | -- | -----------------------------------------------------------------------------------------------------------

| | b. | Income
statement
| | -- | ----------------

| | 1. | Revenues
and expenses deriving from non-monetary items or from reserves           included in the
balance sheet are derived from the difference between the           reported amount at
the beginning of the period and the reported amount at the           end of the period.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | The
remainder of the income statement items are presented in nominal amounts.
| | -- | -----------------------------------------------------------------------------

| | c. | Statement
of changes in shareholders equity A dividend declared                during
the reporting period is presented at nominal values (regardless of                whether
paid or not).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | Convenience
translation into US dollars (dollars or                     US$) The NIS figures at December 31, 2004 and for the year                     then
ended have been translated into dollars using the representative exchange
                    rate of the dollar at December 31, 2004 (US$ 1 = NIS 4.308).
The                     translation was made solely for convenience. The translated
dollar figures                     should not be construed as a representation that the
Israeli currency amounts                     actually represent, or could be converted
into, dollars.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 49

---

---

# SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (cont.)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | B. | Assets
and liabilities denominated in, or linked to, foreign currency
| | -- | ---------------------------------------------------------------------

| | 1. | Assets
and liabilities denominated in, or linked to, foreign currency are
                    presented on the basis of the representative rate of exchange as of
the balance                     sheet date.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Assets
and liabilities linked to the Index are presented on the basis of the
                    linkage terms of each balance.
| | -- | -------------------------------------------------------------------------------------------------------------------------------

| | 3. | Linkage
and exchange rate differentials are recorded when incurred.
| | -- | -------------------------------------------------------------------

| | 4. | Data
pertaining to the rate of increase (decrease) of the I.C.P.I. and the
                    exchange rates of the U.S dollar are presented below:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|                                            | Year ended December 31,
|------------------------------------------- | -----------------------
|
|
|
|
|I.C.P.I                                     |                        
|Representative exchange rate of U.S. dollar |                        

| | C. | Principles
of consolidation
| | -- | ---------------------------

| | The
consolidated financial statements include the financial statements of the Company and its
wholly-owned subsidiary. Significant intercompany transactions and balances were
eliminated in consolidation.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Cash
and cash equivalents
| | -- | -------------------------

| | The
Company considers all highly liquid investments to be cash equivalents. These include
short-term (up to three month) bank deposits that are not restricted as to withdrawal or
use, with original periods to maturity which do not exceed three months.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Marketable
securities
| | -- | ---------------------

| | Investments
in marketable securities which constitute short-term investments are presented at market
value. Changes in the value of these securities are reported as income or expenses as part
of the financing component.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | Allowance
for doubtful accounts
| | -- | -------------------------------

| | The
allowance for doubtful debts is determined partially on the basis of specific debts and
partially on the basis of a global calculation, in respect of debts, the collection of
which, Company (or Subsidiary) Management believes to be doubtful.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. | Inventory
of tools and spare parts
| | -- | ----------------------------------

| | The
inventory of tools and spare parts is presented at the lower of cost or market value.
| | -----------------------------------------------------------------------------------------

| | H. | Investments
| | -- | -----------

| | The
investment in a private investment fund is presented on the basis of the equity method.
| | -------------------------------------------------------------------------------------------

| | I. | Fixed
assets
| | -- | ------------

| | Fixed
assets are stated at cost, net of accumulated depreciation. Depreciation is computed using
the straight-line method, at annual rates considered adequate to fully depreciate the
assets over their estimated useful lives.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 50

---

---

# SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (cont.)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | J. | Deferred
taxes
| | -- | --------------

| | Deferred
taxes are computed in respect of timing differences of income and expenses as reported in
the financial statements and as reported for income tax purposes, as well as in respect of
the adjustment of non-monetary assets, between their adjusted value and their value as
recognized for tax purposes. The deferred taxes were computed according to the tax rates
expected to prevail when they are realized, on the basis of the tax laws that were
applicable on the balance sheet date.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
computing the deferred taxes, we did not take into consideration any taxes that would be
due in the event of the sale of the investment in the Subsidiary, as long as there is a
high degree of certainty that the subsidiary will not be sold in the foreseeable future,
and that the Companys policy regarding withdrawal of a dividend from the Subsidiary
will not generate any additional tax liability for the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | K. | Revenue
recognition
| | -- | -------------------

| | Revenues
from subscriptions are recognized pro rata over the subscription period.
| | ---------------------------------------------------------------------------------

| | Revenues from
operating services and sales of spare parts are recognized when the service is rendered or
the merchandise is supplied to the customers, as applicable.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
fees are recognized pro rata over the service period.
| | ----------------------------------------------------------------

| | Rental
revenues are recognized over the rental period.
| | ------------------------------------------------------

| | L. | Impairment
of assets
| | -- | --------------------

| | The
Company periodically assesses the need to write-down the value of its assets in accordance
with the provisions of Israeli Accounting Standard No. 15  Impairment of assets
(hereinafter  the Standard). The standard sets down the required
accounting treatment and presentation in the event of a decline in asset value. The
Standard mandates recognition of a loss on the value of an asset whenever the assets
book value exceeds its recoverable amount.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | M. | Use
of estimates in preparing financial statements
| | -- | --------------------------------------------------

| | The
preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts
of assets and liabilities reported in the financial statements, the disclosure of
contingent assets and liabilities as of the balance sheet date, and amounts of revenues
and expenses reported during the period under report. Actual results may differ from those
estimates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | N. | Disclosure
of the effects of new accounting standards in the period prior toimplementation
| | -- | ------------------------------------------------------------------------------------------

| | In
July 2004, the Israeli Accounting Standards Board issued Accounting Standard No. 19 
Taxes on Income. The standard stipulates the required accounting treatment (recognition,
measurement, presentation, and disclosure) for taxes on income.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
standard applies to the financial statements in respect of periods commencing on or after
January 1, 2005 and will be adopted, except for extraordinary circumstances, by way of a
cumulative effect as of the beginning of the year of a change in accounting method.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is of the opinion that the effect of the new standard on the results of its
operations, its financial position and its cash flows will be immaterial.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 51

---

---

# SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (cont.)(In thousands)

|NOTE 3 |  | SHORT-TERM INVESTMENTS
|------ | - | ----------------------

| | Composition:
| | ------------

|                                                 | Conveniencetranslationinto US$(Note 2A6) | New Israel Shekels
|------------------------------------------------ | ---------------------------------------- | ------------------
|
|
|
|
|Marketable securities:                           |                                          |                   
|                                                 |                                          |                   
|Government bonds                                 |                                          |                   
|Corporate bonds                                  |                                          |                   
|Trust funds                                      |                                          |                   
|Others                                           |                                          |                   
|                                                 |                                          |                   
|                                                 |                                          |                   
|Bank deposit - linked to the ICPI bearing annual |                                          |                   
|interest at 2.9%                                 |                                          |                   
|                                                 |                                          |                   
|                                                 |                                          |                   
|                                                 |                                          |                   

|NOTE 4 |  | TRADE ACCOUNTS RECEIVABLE
|------ | - | -------------------------

| | Composition:
| | ------------

|                                       | Conveniencetranslationinto US$(Note 2A6) | New Israel Shekels
|-------------------------------------- | ---------------------------------------- | ------------------
|
|
|
|Open accounts                          |                                          |                   
|Post-dated checks                      |                                          |                   
|Credit companies                       |                                          |                   
|Income receivable                      |                                          |                   
|                                       |                                          |                   
|                                       |                                          |                   
|                                       |                                          |                   
|Less:  allowance for doubtful accounts |                                          |                   
|                                       |                                          |                   
|                                       |                                          |                   
|                                       |                                          |                   

F - 52

---

---

SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (cont.) 
(In thousands)

|NOTE 5 |  | ACCOUNTS RECEIVABLE AND OTHER DEBIT BALANCES
|------ | - | --------------------------------------------

| | Composition:
| | ------------

|                      | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|--------------------- | ------------------------------------------- | ------------------
|
|
|
|
|Institutions          |                                             |                   
|Advances to suppliers |                                             |                   
|Prepaid expenses      |                                             |                   
|Loans to employees    |                                             |                   
|                      |                                             |                   
|                      |                                             |                   
|                      |                                             |                   

|NOTE 6 |  | INVESTMENT
IN PRIVATE INVESTMENT FUND
|------ | - | -------------------------------------

| | A. | The amount represents the investment in a private investment fund (hereinafter
                the Fund) in which the Company holds a 7.1% share (through
               its subsidiary). The Fund deals mainly in investing a variety of companies.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Composition:
| | -- | ------------

|                                                  | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|------------------------------------------------- | ------------------------------------------- | ------------------
|
|
|
|
|Cost of investment                                |                                             |                   
|Accumulated losses from date of investment in the |                                             |                   
|Fund                                              |                                             |                   
|Distributions                                     |                                             |                   
|                                                  |                                             |                   
|                                                  |                                             |                   
|                                                  |                                             |                   

F - 53

---

---

SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (cont.) 
(In thousands)

|NOTE 7 |  | FIXED
ASSETS, NET
|------ | - | -----------------

# Composition:

|                             | New Israel Shekels
|---------------------------- | ------------------
|
|
|
|
|Cost                         |                   
|                             |                   
|Balance at January 1, 2004   |                   
|Acquisitions                 |                   
|Disposals                    |                   
|                             |                   
|Balance at December 31, 2004 |                   
|                             |                   
|Accumulated depreciation     |                   
|                             |                   
|Balance at January 1, 2004   |                   
|Acquisitions                 |                   
|Disposals                    |                   
|                             |                   
|Balance at December 31, 2004 |                   
|                             |                   
|Depreciated cost             |                   
|                             |                   
|December 31, 2004            |                   
|                             |                   
|December 31, 2003            |                   
|                             |                   
|Annual depreciation rates    |                   
|                             |                   

|                           | Convenience translation into US$ (Note 2A6)
|-------------------------- | -------------------------------------------
|
|
|
|
|Cost                       |                                            
|                           |                                            
|Balance at January 1, 2004 |                                            
|Acquisitions               |                                            
|Disposals                  |                                            
|                           |                                            
|Balance at                 |                                            
|December 31, 2004          |                                            
|                           |                                            
|Accumulated depreciation   |                                            
|                           |                                            
|Balance at January 1, 2004 |                                            
|Acquisitions               |                                            
|Disposals                  |                                            
|                           |                                            
|Balance at                 |                                            
|December 31, 2004          |                                            
|                           |                                            
|Depreciated cost           |                                            
|                           |                                            
|December 31, 2004          |                                            
|                           |                                            

F - 54

---

---

SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (cont.) 
(In thousands)

|NOTE 8 |  | TRADE
ACCOUNTS PAYABLE
|------ | - | ----------------------

| | Composition:
| | ------------

|                  | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|----------------- | ------------------------------------------- | ------------------
|
|
|
|
|Open accounts     |                                             |                   
|Post-dated checks |                                             |                   
|                  |                                             |                   
|                  |                                             |                   
|                  |                                             |                   

|NOTE 9 |  | ACCOUNTS
PAYABLE AND OTHER CREDIT BALANCES
|------ | - | ------------------------------------------

| | Composition:
| | ------------

|                                              | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|--------------------------------------------- | ------------------------------------------- | ------------------
|
|
|
|
|Employees and institutions in respect thereof |                                             |                   
|Government institutions                       |                                             |                   
|                                              |                                             |                   
|                                              |                                             |                   
|                                              |                                             |                   

|NOTE 10 |  | LIABILITY
IN RESPECT OF EMPLOYEE RIGHTS UPON RETIREMENT, NET
|------- | - | ------------------------------------------------------------

| | A. | Composition:
| | -- | ------------

|                                               | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|---------------------------------------------- | ------------------------------------------- | ------------------
|
|
|
|
|Liability in respect of employee rights upon   |                                             |                   
|retirement                                     |                                             |                   
|Less:  funded portion in provident and pension |                                             |                   
|funds with insurance companies                 |                                             |                   
|                                               |                                             |                   
|                                               |                                             |                   
|                                               |                                             |                   

F - 55

---

---

SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (cont.) 
(In thousands)

|NOTE 10 |  | LIABILITY
IN RESPECT OF EMPLOYEE RIGHTS UPON RETIREMENT, NET (cont.)
|------- | - | --------------------------------------------------------------------

| | B. | The liability of the Company and its subsidiary (hereinafter  the Group)
               for employee severance pay in respect of most of the employees is covered by
               regular deposits to provident and pension funds, insurance companies, and a
               deposit in a central severance pay fund. Amounts accumulated in the pension and
               provident funds, in the insurance companies, and in the central fund are under
               the control and management of the companies. The liability of the Group
               companies in respect of employee rights upon retirement that are covered by
               insurance plans that are neither managed or controlled by the companies are not
               included in the financial statements.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
funded portion includes accrued income and can be withdrawn only in accordance with the
provisions of the Severance Pay Law.
| | --------------------------------------------------------------------------------------------------------------------------------

|NOTE 11 |  | COMMITMENTS
|------- | - | -----------

| | A. | Subsequent to the balance sheet date, on January 3, 2005, an agreement was
               signed between the Company and its subsidiary (Shagrir) and Pointer
               (of Eden Telecom) Ltd. for the sale of the business activity of Shagrir. See
               Note 1B above.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | As part of the agreement described in Note 1B above, it was stipulated that at
               the date of consummation, Neksus Telocation Systems Ltd., the parent company of
               the Purchaser (Neksus), will grant Shagrir an option (the
               Shagrir Option) to purchase from Neksus up to 25,000,000 ordinary
               shares of Neksus, par value NIS 0.03 each, listed for trade in the U.S. The
               Shagrir Option is exercisable commencing on the Date of Consummation, for a
               24-month period from that date. The exercise price of each option is
               U.S.$ 0.18 a share (subject to adjustments, as explained in the Option
               agreement).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
quoted share value of Neksus as of the date of the signing of the agreement and the date
of the signing of the financial statements was US$ 0.12 and US$ 0.17,
respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Shagrir
is entitled to transfer the Shagrir Option to its shareholders and/or part of them.
| | -------------------------------------------------------------------------------------------

|NOTE 12 |  | REVENUES
|------- | - | --------

| | Composition:
| | ------------

|                                             | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|-------------------------------------------- | ------------------------------------------- | ------------------
|
|
|
|
|Subscriptions                                |                                             |                   
|Operational activity and sale of spare parts |                                             |                   
|Others                                       |                                             |                   
|                                             |                                             |                   
|                                             |                                             |                   
|                                             |                                             |                   

F - 56

---

---

SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (cont.) 
(In thousands)

|NOTE 13 |  | COST
OF REVENUES
|------- | - | ----------------

| | Composition:
| | ------------

|                                            | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|------------------------------------------- | ------------------------------------------- | ------------------
|
|
|
|
|Payroll and related expenses                |                                             |                   
|Rent of replacement vehicles                |                                             |                   
|Cost of maintenance of replacement vehicles |                                             |                   
|Operation of towing and service vehicles    |                                             |                   
|Purchase of spare parts for sale            |                                             |                   
|Subcontractors                              |                                             |                   
|Depreciation                                |                                             |                   
|Others                                      |                                             |                   
|                                            |                                             |                   
|                                            |                                             |                   
|                                            |                                             |                   

| | (*) | Reclassified.
| | --- | -------------

|NOTE 14 |  | SELLING
AND MARKETING EXPENSES
|------- | - | ------------------------------

| | Composition
:
| | -------------

|                             | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|---------------------------- | ------------------------------------------- | ------------------
|
|
|
|
|Payroll and related expenses |                                             |                   
|Advertising                  |                                             |                   
|                             |                                             |                   
|                             |                                             |                   
|                             |                                             |                   

F - 57

---

---

SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (cont.) 
(In thousands)

|NOTE 15 |  | GENERAL
AND ADMINISTRATIVE EXPENSES
|------- | - | -----------------------------------

|                                             | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|-------------------------------------------- | ------------------------------------------- | ------------------
|
|
|
|
|Payroll and related expenses                 |                                             |                   
|Depreciation                                 |                                             |                   
|Professional services                        |                                             |                   
|Office and related expenses                  |                                             |                   
|Insurance                                    |                                             |                   
|Vehicle maintenance                          |                                             |                   
|Taxes and levies                             |                                             |                   
|Expenses (income) in respect of doubtful and |                                             |                   
|bad accounts                                 |                                             |                   
|Others                                       |                                             |                   
|                                             |                                             |                   
|                                             |                                             |                   
|                                             |                                             |                   

| | (*) | Reclassified.
| | --- | -------------

|NOTE 16 |  | FINANCING
INCOME (EXPENSES), NET
|------- | - | --------------------------------

|                                           | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|------------------------------------------ | ------------------------------------------- | ------------------
|
|
|
|
|Gain (loss) from marketable securities (*) |                                             |                   
|Interest from short-term deposits, net     |                                             |                   
|Others (including 2003 and 2002 erosion of |                                             |                   
|monetary items, net)                       |                                             |                   
|                                           |                                             |                   
|                                           |                                             |                   
|                                           |                                             |                   

| | (*) | Including
interest on income from investment in bonds.
| | --- | ------------------------------------------------------

F - 58

---

---

SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (cont.) 
(In thousands)

|NOTE 17 |  | OTHER
INCOME, NET
|------- | - | -----------------

|                                    | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|----------------------------------- | ------------------------------------------- | ------------------
|
|
|
|
|Gain on sale of fixed assets        |                                             |                   
|Losses from private investment fund |                                             |                   
|                                    |                                             |                   
|                                    |                                             |                   
|                                    |                                             |                   

|NOTE 18 |  | TAXES
ON INCOME (TAX BENEFITS)
|------- | - | ------------------------------

| | A. | Tax
expense (benefit)
| | -- | ---------------------

| | Composition:
| | ------------

|                                | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|------------------------------- | ------------------------------------------- | ------------------
|
|
|
|
|Current taxes                   |                                             |                   
|Deferred taxes                  |                                             |                   
|Taxes in respect of prior years |                                             |                   
|                                |                                             |                   
|                                |                                             |                   
|                                |                                             |                   

F - 59

---

---

SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (cont.) 
(In thousands)

|NOTE 18 |  | TAXES
ON INCOME (TAX BENEFITS) (cont.)
|------- | - | --------------------------------------

| | B. | Deferred
taxes
| | -- | --------------

| | 1) | Composition:
| | -- | ------------

|                                          | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|----------------------------------------- | ------------------------------------------- | ------------------
|
|
|
|
|Assets:                                   |                                             |                   
|                                          |                                             |                   
|Timing differences of income and expenses |                                             |                   
|Depreciable assets                        |                                             |                   
|Carry forward tax losses                  |                                             |                   
|                                          |                                             |                   
|                                          |                                             |                   
|                                          |                                             |                   
|                                          |                                             |                   
|Liabilities:                              |                                             |                   
|                                          |                                             |                   
|Depreciable assets                        |                                             |                   
|                                          |                                             |                   

| | 2) | Deferred taxes are computed at a tax rate of 34% and presented in the balance
                    sheets as follows:
| | -- | --------------------------------------------------------------------------------------------------------------------

|                                           | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|------------------------------------------ | ------------------------------------------- | ------------------
|
|
|
|
|Assets:                                    |                                             |                   
|                                           |                                             |                   
|As part of current assets                  |                                             |                   
|As part of long-term investments and debit |                                             |                   
|balances                                   |                                             |                   
|                                           |                                             |                   
|                                           |                                             |                   
|                                           |                                             |                   
|                                           |                                             |                   
|Liabilities:                               |                                             |                   
|                                           |                                             |                   
|As part of long-term liabilities           |                                             |                   
|                                           |                                             |                   

| | 3) | The debit balance of deferred taxes is presented in accordance with management
                    estimates of the reasonability of the realization of the benefits in the coming
                    years.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 60

---

---

SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (cont.) 
(In thousands)

|NOTE 18 |  | TAXES
ON INCOME (TAX BENEFITS) (cont.)
|------- | - | --------------------------------------

| | C. | Following is the difference between the amount of tax computed at ordinary tax
               rates and the amount of tax presented in the financial statements:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                      | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|------------------------------------- | ------------------------------------------- | ------------------
|
|
|
|
|Tax (tax benefit) calculated based on |                                             |                   
|regular tax rates(*)                  |                                             |                   
|Increase (decrease) in tax liability  |                                             |                   
|as a result of:                       |                                             |                   
|Prior years' taxes                    |                                             |                   
|Differences for which no deferred     |                                             |                   
|taxes were provided, net              |                                             |                   
|Erosion of tax advances               |                                             |                   
|Non-deductible expenses, net of tax   |                                             |                   
|exempt income                         |                                             |                   
|Effect of change in tax rates on      |                                             |                   
|deferred taxes in opening balance     |                                             |                   
|Effect of implementation of the       |                                             |                   
|Adjustment Law on the calculation of  |                                             |                   
|taxable income                        |                                             |                   
|Other differences, net                |                                             |                   
|                                      |                                             |                   
|                                      |                                             |                   
|                                      |                                             |                   
|                                      |                                             |                   
|(*) Tax rates                         |                                             |                   
|                                      |                                             |                   

| | D. | Final
tax assessments
| | -- | ---------------------

| | The
Company and its subsidiary have final tax assessments through the 2000 tax year.
| | ------------------------------------------------------------------------------------

| | E. | Taxes
under inflationary conditions
| | -- | -----------------------------------

| | The
Company and its subsidiary are subject to the provisions of the Income Tax Law
(Inflationary Adjustments)  1985. Under this law, the results of operations are
measured for tax purposes after having been adjusted for changes in the Israeli Consumer
Price Index.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | Reduction
in corporate tax rates
| | -- | --------------------------------

| | On
June 29, 2004, the Israeli Parliament passed Amendment to the Income Tax Ordinance (No.
140 and Temporary Order)  2004, gradually reducing the tax rate applicable to the
Company, commencing on January 1, 2004, from 35% in 2004 to 30% in 2007. Publication of
the Amendment in respect of 2004 resulted in a reduction of NIS 130 thousand in the
consolidated tax expense for the year ended December 31, 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 61

---

---

SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (cont.) 
(In thousands)

|NOTE 19 |  | RELATED
PARTIES
|------- | - | ---------------

| | A. | Balances
with related parties
| | -- | -----------------------------

|                              | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|----------------------------- | ------------------------------------------- | ------------------
|
|
|
|
|Trade accounts receivable (*) |                                             |                   

| | (*) | The credit terms of related parties are identical with those granted to other
          customers.
| | --- | --------------------------------------------------------------------------------------------------

| | B. | Transactions
with related parties
| | -- | ---------------------------------

|                                       | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|-------------------------------------- | ------------------------------------------- | ------------------
|
|
|
|
|Revenue from services                  |                                             |                   
|Purchase of fixed asset and a fleet of |                                             |                   
|vehicles                               |                                             |                   

|NOTE 20 |  | EFFECT
ON THE CONSOLIDATED FINANCIAL STATEMENTS OF MATERIALDIFFERENCES BETWEEN ISRAELI GAAP AND
US GAAP
|------- | - | -------------------------------------------------------------------------------------------------------

| | The
consolidated financial statements of the Company are prepared in accordance with
accounting principles generally accepted in Israel (Israel GAAP), which differ in certain
respects from accounting principles generally accepted in the United States (US GAAP), as
described below:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A. | Financial
statements in adjusted NIS:
| | -- | -------------------------------------

| | In
accordance with Israeli GAAP, throughout December 31, 2003, the group adjusted the
financial statements for the effects of inflation in Israel. According to Accounting
Standard No. 12, the adjustments for changes in the Israeli Consumer Price Index are
no longer required (see also Note 2A).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | US
GAAP does not generally provide for the adjustment of financial statements for the impact
of inflation for entities which do not operate in an hyperinflationary economy. Pursuant
to Securities and Exchange Commission requirements applicable to foreign private issuers,
the Company has not included the impact of inflationary accounting applied under Israeli
GAAP in the accompanying reconciliation to US GAAP.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 62

---

---

SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (cont.) 
(In thousands)

|NOTE 20 |  | EFFECT
ON THE CONSOLIDATED FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES
BETWEEN ISRAELI GAAP AND US GAAP (cont.)
|------- | - | ----------------------------------------------------------------------------------------------------------------

| | B. | Impairment
of assets:
| | -- | ---------------------

| | The
Company applies Israeli Accounting Standard No. 15 regarding impairment of assets.
According to this Standard, if the carrying amount of an asset exceeds its recoverable
amount, an impairment loss should be recognized for the amount by which the carrying
amount of the asset exceeds its recoverable amount. Recoverable amount is defined as the
higher of an assets selling price and its value in use. Value in use in the present
value of estimated future cash flows expected to arise from the continuing use of an
asset and from its disposal at the end of its useful life.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to US GAAP (SFAS 144  Accounting for the Impairment of Disposal of
Long-Lived Assets) an impairment loss is recognized only if the carrying amount of
an asset is not recoverable. The carrying amount is not recoverable if it exceeds the
estimated undiscounted future cash flows expected to result from the use of the asset. If
the carrying amount is not recoverable, an impairment loss should be recorded for the
amount by which the carrying value of the asset exceeds its fair value.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result, certain circumstances which would require an impairment loss to be recorded
under Israeli GAAP would not require an impairment loss to be recorded under US GAAP.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
Israeli GAAP an impairment loss previously recognized should be reversed when there has
been a change in the estimates used to determine the assets recoverable amount
since the impairment was recognized.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
US GAAP restoration of a previously recognized impairment loss is prohibited. The
adjusted carrying amount of the asset impaired is its new cost basis.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Dividend
declared subsequent to balance sheet date:
| | -- | ---------------------------------------------------

| | In
accordance with Israeli GAAP, dividends declared subsequent to balance sheet date are
presented as a separate component in shareholders equity. Under US GAAP, the
dividends are not recorded as a separate component in shareholders equity.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Classification
of certain expenses:
| | -- | -----------------------------------

| | Under
Israeli GAAP gain on sale of fixed assets amounting to approximately NIS 1,805, NIS 1,288
and NIS 1,191 for the years ended December 31, 2004, 2003 and 2002
respectively, is included in non-operating income whereas in accordance with US GAAP such
items are included in operating income.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Liability
in respect of employee rights upon retirement:
| | -- | --------------------------------------------------------

| | According
to US GAAP, the liability in respect of employee rights upon retirement and related
funded amounts are presented in the balance sheet separately as a liability and asset,
respectively. Income from earnings on amounts funded is added to severance funds.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to Israeli GAAP, the liability in respect of employee rights upon retirement is included
in the balance sheet net of any related funded amounts including the income from earnings
on amounts funded.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 63

---

---

SHAGRIR TOWING
SERVICES LTD. AND ITS CONSOLIDATED COMPANY

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (cont.) 
(In thousands)

|NOTE 20 |  | EFFECT
ON THE CONSOLIDATED FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES
BETWEEN ISRAELI GAAP AND US GAAP (cont.)
|------- | - | ----------------------------------------------------------------------------------------------------------------

| | F. | Statements
of cash flows
| | -- | ------------------------

| | 1. | Classification
of marketable securities:
| | -- | ----------------------------------------

| | According
to Israeli GAAP, proceeds from sale or purchase of marketable securities are presented in
cash flows from investing activities in the statement of cash flows.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to US GAAP, proceeds from sale or purchase of marketable securities which are classified
by the Company as held for trading are included in cash flows from operating activities.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Classification of amounts in respect of severance pay liability and
                    amounts funded
| | -- | ------------------------------------------------------------------------------------------------------

| | Under
Israeli GAAP, amounts funded in respect of the severance pay liability are deducted from
the related liability. Under US GAAP, the amounts funded should be presented as a
long-term investment among the Companys assets. Correspondingly, under Israeli
GAAP, the change in the liability net of amounts funded are classified as operating
activity, while under US GAAP, the change in the amounts funded is to be classified as
investing activity.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Supplemental
disclosure of cash flow information:
| | -- | -------------------------------------------------

|                  | Convenience
translation
into US$
(Note 2A6) | New Israel Shekels
|----------------- | ------------------------------------------- | ------------------
|
|
|
|
|Interest paid     |                                             |                   
|                  |                                             |                   
|                  |                                             |                   
|Income taxes paid |                                             |                   
|                  |                                             |                   

F - 64

---

---

UNAUDITED PRO FORMA FINANCIAL INFORMATION

The
following unaudited pro forma condensed consolidated balance sheet and
statements of operations are set forth herein to give effect to the acquisition
(as more fully described below) of the activity of Shagrir Towing Services Ltd.
by Shagrir Motor Vehicle Systems (former Pointer (Eden Telecom Group) Ltd), a
subsidiary of Nexus Telocation Systems Ltd. (Nexus or the Company), which
closed on February 28, 2005 (closing) by combining the historical Statements
of Operations of Nexus and the historical Statements of Operations of Shagrir
Towing Services Ltd for the year ended December 31, 2004 as if such acquisition
had occurred as of January 1, 2004. In addition, the unaudited pro forma
condensed consolidated statement of operations combines the pro forma results
of Operations of Nexus and Shagrir Motor Vehicle Systems with the historical
Statements of Operations of Shagrir Motor Vehicle Systems for the period of six month ended June 30, 2004, as
if Shagrir Motor Vehicle Systems was acquired on January 1, 2004.

The
pro forma balance sheet combines the historical balance sheet as of December
31, 2004 of Nexus with the assets and liabilities acquired and the financing
that the Company obtained to finance the acquisition as if the acquisition has
occurred on December 31, 2004.

The
financial data included for Shagrir Towing services reflects the business and
operations which have been carved out from the financial statements of Shagrir
Towing services Ltd. using the historical results of operations of the business
that the Company acquired as if the acquired business was a separate entity.
The financial data include certain allocations of assets, liabilities income
and expenses. The statement of income includes the income and costs directly
attributable to the acquired business and includes charges for shared
facilities, functions and services. Management believes that the allocations
were made on a reasonable basis and would not have been materially different if
the acquired business had operated as a stand-alone entity.

The
condensed consolidated pro forma information is provided for illustrative
purposes only and is not necessarily indicative of the consolidated results of
operations that would have actually been reported on a historical basis, had
the acquisition occurred at the periods presented, nor do they represent a
forecast of the consolidated future results of operations for any future
period. All information contained herein should be read in conjunction with the
financial statements and the notes thereto of Nexus, which have been
incorporated herein by reference and the financial statements and notes thereto
of Shagrir Towing Services Ltd. included herein.

On
February 28, 2005, the Company announced the closing of the transaction for the
purchase of the activities, the assets and liabilities of Shagrir Towing
Services Ltd. and Shagrir (1985) Ltd. (a wholly owned subsidiary) by the
Companys subsidiary Shagrir Motor Vehicle Systems, in consideration for
approximately NIS 200,000 thousand. Shagrir Towing Services Ltd. is one of the
leading companies in Israel in the field of automobile repair services and
towing services. Shagrir Motor Vehicle Systems funded the acquisition as
follows:

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | NIS 100,000
  thousand ($ 22,952 thousand as of February 28, 2005) were funded by a
  loan provided to Shagrir Motor Vehicle Systems by Bank Hapoalim B.M.. NIS
  30,000 thousand represent a credit line for a period of two years with an
  interest rate of Prime + 0.5%. NIS 70,000 thousand were provided for a period
  of 8 years (an interest rate of 7.39% with respect to NIS 35,000 thousand and
  an interest rate of 5.5% and a linkage to the Israeli CPI with respect to the
  additional NIS 35,000 thousand). The Company granted to Bank Hapoalim B.M. a
  warrant to purchase up to 10,000,000 Ordinary shares of the Company, at a
  price per share of $ 0.18.

F - 65

---

---



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 2. | NIS 36,400
  thousand ($ 8,354 thousand as of February 28, 2005) were funded by a
  group of investors lead by Gandyr Investments Ltd. and Egged Holdings Ltd.
  (Gandyr Investments Ltd. and Egged Holdings Ltd. will be referred to as the
  investors).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Shagrir
  Motor Vehicle Systems raised from the investors cash in consideration for the
  issuance of a convertible debt. The debt is for a period of 10 years,
  denominated in NIS linked to the Israeli CPI and bears annual interest of 4%
  for the first two years and 7.5% for the remaining period. The debt is
  convertible during the first 2 years into shares of the Company (at
  $ 0.18 per share) or into shares of Shagrir Motor Vehicle Systems (60%
  of the conversion rights at NIS 729 per share and 40% of the conversion
  rights at NIS 729-937 per share according to the exercise date), at the
  discretion of the debt holders (the Embedded Call Option). If the investors
  do not convert the debt into shares of Shagrir Motor Vehicle Systems or
  shares of the Company, Shagrir Motor Vehicle Systems, can, at the end of the
  first two-year period, force the conversion of the debt (up to 60% of the
  conversion rights) into Shagrir Motor Vehicle Systems shares at NIS 729 per
  share (the Embedded Put Option).
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 3. | NIS 8,714
  thousand ($ 2,000 thousand as of February 28, 2005) were funded by a
  convertible loan provided by Egged Holdings Ltd. The loan shall bear an annual
  interest rate of three months LIBOR +3.5%. The principle loan amount shall
  be repaid in 17 equal quarterly installments, commencing 36 months from the
  closing date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The lender
  shall be entitled to convert the loan into Ordinary shares of the Company (at
  a conversion price of $ 0.219 per share) or into shares of Shagrir Motor
  Vehicle Systems (at a conversion price of NIS 924). The conversion into
  shares of Shagrir Motor Vehicle Systems is limited to such number of shares
  that will enable the Company to retain holdings of at least 50.1% of the
  share capital of Shagrir Motor Vehicle Systems, on a fully diluted basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 4. | NIS 40,000
  thousand ($ 9,181 thousand as of February 28, 2005) were funded by a
  loan to be repaid by Shagrir Motor Vehicle Systems to Shagrir Towing Services
  Ltd. The loan will be repaid in 20 quarterly payments linked to the Israeli
  CPI and bears an annual interest rate of 6.5%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | In addition,
  the Company granted to Shagrir Towing Services Ltd. and Shagrir (1985) Ltd.
  together a warrant to purchase up to 25,000,000 Ordinary shares of the
  Company at a price per share of $ 0.18 for a period of 24 months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 5. | The Company
  invested an amount of NIS 4,550 thousand ($ 1,000 thousand) in the share
  capital of Shagrir Motor Vehicle Systems. In addition, the Company and the
  investors provided additional loans in the amount of NIS 10,000 thousand
  ($ 2,296 thousand) (NIS 5,000 thousand each).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The NIS
  10,000 thousand loans are linked to the Israeli CPI and bearing an annual interest
  rate of 6.5%. They shall be repaid in nine quarterly installments, commencing
  six months from February 28, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

F - 66

---

---



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | During
  February 2005, the Company completed a round of financing of $ 6,000
  thousand ($ 1,000 thousand of which was invested by DBSI Investments
  Ltd., a major shareholder of the Company), in consideration of 71,428,570 of
  the Companys Ordinary shares at a price per share of $ 0.084. Under the terms of the investment agreements,
  the investors were issued warrants to purchase up to 15,714,284 shares of the
  Company, with an exercise price of $ 0.084 per share. The warrants may
  be exercised at any time during the period, beginning on February 28, 2005
  and until the earlier of (i) April 6, 2006; or (ii) an M&A transaction.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The
  consideration comprised of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| |                                                            |  |                            |        | 
| | ---------------------------------------------------------- |  | -------------------------- | ------ | 
| |                                                            |  | U.S dollars in
  thousands |       
| |                                                            |  |                            |       
| | Cash                                                       |  | $                          | 34,828 | 
| | Fair value
  of the loan from Shagrir Towing Services Ltd. |  |                            | 8,006  | 
| | Warrants to
  purchase Nexus shares                        |  |                            | 644    | 
| | Transactions
  costs                                       |  |                            | 331    | 
| |                                                            |  |                            |        | 
| |                                                            |  |                            |        | 
| | Total
  consideration  purchase price                     |  | $                          | 43,809 | 
| |                                                            |  |                            |        | 

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

| |                                           |  |                                |        |  
| | ----------------------------------------- |  | ------------------------------ | ------ | -
| |                                           |  | U.S dollars 
  in 
  thousands |       
| |                                           |  |                                |       
| | Net working
  capital                     |  | $                              | (4,076 | )
| | Property and
  equipment and other assets |  |                                | 8,078  |  
| | Long-term
  liabilities                   |  |                                | (2,323 | )
| | Customer
  relationship                   |  |                                | 8,558  |  
| | Brand name                                |  |                                | 1,920  |  
| | Goodwill                                  |  |                                | 31,652 |  
| |                                           |  |                                |        |  
| |                                           |  |                                |        |  
| | Total
  purchase price                    |  | $                              | 43,809 |  
| |                                           |  |                                |        |  

| |  |                                                                                                                      
| |  | ---------------------------------------------------------------------------------------------------------------------
| |  | The
  amortization of the customer list and the brand name on a straight line basis
  is $ 1,310 thousands per annum.

F - 67

---

---



Nexus
Telocation Systems Ltd.
Unaudited Pro Forma Condensed Consolidated Statement of operations
For The Year Ended December 31, 2004
(U.S dollars in thousands)

|                                                       |  | Nexus
  Telocations
  Systems and
  its subsidiaries
  12 months
  ended
  December 31,
  2004 (actual) |             | Shagrir Towing
  Services Ltd.
  12 months
  ended
  December 31,
  2004
  (curved-out) |  | Pro FormaAdjustments 1 |   | Pro Forma as
  Adjusted for 
  the acquisition of Shagrir Towing |        | Shagrir Motor
  Vehicle
  Systems Ltd.
  6 months
  ended June 30,
  2004 (actual) |  | Pro FormaAdjustments 2 |   | Pro Forma asAdjusted |      
|------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------- | ----------- | --------------------------------------------------------------------------------------- |  | ---------------------- | - | ---------------------------------------------------------------- | ------ | ---------------------------------------------------------------------------------- |  | ---------------------- | - | -------------------- | -----
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  |        |                                                                                    |  |                        |   |                      |      
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  |        |                                                                                    |  |                        |   |                      |      
|Revenues                                               |  |                                                                                                         | 10,969      |                                                                                         |  | 25,450                 |   |                                                                  |        |                                                                                    |  | 36,419                 |   |                      | 5,923
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  |        |                                                                                    |  |                        |   |                      |      
|Cost of revenues                                       |  |                                                                                                         | 7,542       |                                                                                         |  | 16,811                 |   |                                                                  | (120   | ) A1                                                                               |  | 24,509                 |   |                      | 3,608
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  |        |                                                                                    |  |                        |   |                      |      
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  | 81     | B1                                                                                 |  |                        |   |                      |      
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  |        |                                                                                    |  |                        |   |                      |      
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  | 195    | C1                                                                                 |  |                        |   |                      |      
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  |        |                                                                                    |  |                        |   |                      |      
|Gross Profit                                           |  |                                                                                                         | 3,427       |                                                                                         |  | 8,639                  |   |                                                                  | (157   | )                                                                                  |  | 11,910                 |   |                      | 2,315
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  |        |                                                                                    |  |                        |   |                      |      
|Research and development, net                          |  |                                                                                                         | 482         |                                                                                         |  | -                      |   |                                                                  | -      |                                                                                    |  | 482                    |   |                      | -    
|Sales and marketing                                    |  |                                                                                                         | 1,588       |                                                                                         |  | 448                    |   |                                                                  | -      |                                                                                    |  | 2,036                  |   |                      | 876  
|General and administrative                             |  |                                                                                                         | 2,887       |                                                                                         |  | 2,001                  |   |                                                                  | (60    | ) Al                                                                               |  | 4,869                  |   |                      | 886  
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  | 41     | Bl                                                                                 |  |                        |   |                      |      
|Amortization of deferred stock-based
  compansation    |  |                                                                                                         | 465         |                                                                                         |  | -                      |   |                                                                  |        |                                                                                    |  | 465                    |   |                      | -    
|Amortization of intangible assets                      |  |                                                                                                         | 932         |                                                                                         |  | -                      |   |                                                                  | 1,273  | Cl                                                                                 |  | 2,205                  |   |                      | -    
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  |        |                                                                                    |  |                        |   |                      |      
|Total operating expenses                               |  |                                                                                                         | 6,354       |                                                                                         |  | 2,449                  |   |                                                                  | 1,254  |                                                                                    |  | 10,057                 |   |                      | 1,762
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  |        |                                                                                    |  |                        |   |                      |      
|Operating profit (loss)                                |  |                                                                                                         | (2,927      | )                                                                                       |  | 6,190                  |   |                                                                  | (1,411 | )                                                                                  |  | 1,852                  |   |                      | 553  
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  |        |                                                                                    |  |                        |   |                      |      
|Financial Income (expenses), net                       |  |                                                                                                         | (758        | )                                                                                       |  | 443                    |   |                                                                  | (328   | ) D1                                                                               |  | (3,636                 | ) |                      | (564 
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  | (2,994 | ) E1                                                                               |  |                        |   |                      |      
|Other income (expenses), net                           |  |                                                                                                         | (42         | )                                                                                       |  | 434                    |   |                                                                  |        |                                                                                    |  | 392                    |   |                      | -    
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  |        |                                                                                    |  |                        |   |                      |      
|Income (loss) before income taxes                      |  |                                                                                                         | (3,727      | )                                                                                       |  | 7,067                  |   |                                                                  | (4,733 | )                                                                                  |  | (1,392                 | ) |                      | (11  
|Income taxes                                           |  |                                                                                                         | (37         | )                                                                                       |  | (2,497                 | ) |                                                                  | 2,534  | F1                                                                                 |  | -                      |   |                      |      
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  |        |                                                                                    |  |                        |   |                      |      
|Net income (loss)                                      |  |                                                                                                         | (3,764      | )                                                                                       |  | 4,570                  |   |                                                                  | (2,199 | )                                                                                  |  | (1,392                 | ) |                      | (11  
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  |        |                                                                                    |  |                        |   |                      |      
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  |        |                                                                                    |  |                        |   |                      |      
|Basic and Diluted Pro forma net loss per common share: |  |                                                                                                         | (0.03       | )                                                                                       |  |                        |   |                                                                  |        |                                                                                    |  | (0.006                 | ) |                      |      
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  |        |                                                                                    |  |                        |   |                      |      
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  |        |                                                                                    |  |                        |   |                      |      
|Pro forma weighted average shares outstanding          |  |                                                                                                         | 145,746,990 |                                                                                         |  |                        |   |                                                                  |        |                                                                                    |  | 216,980,401            |   |                      |      
|                                                       |  |                                                                                                         |             |                                                                                         |  |                        |   |                                                                  |        |                                                                                    |  |                        |   |                      |      

|A1 | Elimination
  of current depreciation costs with respect to real estate (offices in Holon)
  which is not aquired along with the other operational assets.      
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                 
|B1 | Additional
  lease expenses with respect to real estate (offices in Holon) which is not
  aquired along with the other operational assets.                      
|   |                                                                                                                                                                 
|C1 | Amortization
  of intangible assets acquired by Shagrir Motor vehicle Systems.                                                                                  
|   |                                                                                                                                                                 
|D1 | Elimination
  of financial income derived from deposits, cash and cash equivalents which
  are not transferred along with all other operational assets.         
|   |                                                                                                                                                                 
|E1 | Financial
  expenses derived from financing the transaction.                                                                                                    
|   |                                                                                                                                                                 
|F1 | Elimination
  of Shagrir Towing services tax expenses since after its acquisition by
  Shagrir Motor Vehicle Systems, the consolidated company will bear loses.
|   |                                                                                                                                                                 
|A2 | Eliminations of inter-company sales (out of which 49,000 $ reflects purchasing of
  property and equipment in Shagrir Motor Vehicle Systems).                   
|   |                                                                                                                                                                 
|B2 | Amortization
  of intangibles assets incurred in the acquisition of Pointer for the 6 months ended June 30, 2004.                                               

F - 68

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Nexus Telocation Systems Ltd.
Unaudited Pro Forma Condensed Consolidated Balance sheet
As of December 31, 2004
(U.S dollars in thousands)

|                                                 |  |                                                                                           |        |                                                    |   |                                                   |  |   |        | 
|------------------------------------------------ |  | ----------------------------------------------------------------------------------------- | ------ | -------------------------------------------------- | - | ------------------------------------------------- |  | - | ------ | 
|                                                 |  | Nexus
  Telocations 
  Systems and its 
  subsidiaries 
  December 31, 
  2004
  (actual) |        | Acquisition
  of 
  Shagrir Towing 
  Services Ltd |   | Pro forma 
  balance sheet 
  December 31,
  2004 | 
|                                                 |  |                                                                                           |        |                                                    |   |                                                   | 
|                                                 |  |                                                                                           |        |                                                    |   |                                                   |  |   |        | 
|ASSETS                                           |  |                                                                                           |        |                                                    |   |                                                   |  |   |        | 
|                                                 |  |                                                                                           |        |                                                    |   |                                                   |  |   |        | 
|CURRENT
  ASSETS:                                |  |                                                                                           |        |                                                    |   |                                                   |  |   |        | 
|Cash and cash equivalents                        |  | $                                                                                         | 75     |                                                    | $ | 4,852                                             |  | $ | 4,927  | 
|Short-term investments                           |  |                                                                                           | 15     |                                                    |   | -                                                 |  |   | 15     | 
|Trade receivables                                |  |                                                                                           | 3,828  |                                                    |   | 5,785                                             |  |   | 9,613  | 
|Other accounts receivable and prepaid
  expenses |  |                                                                                           | 639    |                                                    |   | 337                                               |  |   | 976    | 
|Inventories                                      |  |                                                                                           | 1,343  |                                                    |   | 187                                               |  |   | 1,530  | 
|                                                 |  |                                                                                           |        |                                                    |   |                                                   |  |   |        | 
|                                                 |  |                                                                                           |        |                                                    |   |                                                   |  |   |        | 
|Total current assets                             |  |                                                                                           | 5,900  |                                                    |   | 11,161                                            |  |   | 17,061 | 
|                                                 |  |                                                                                           |        |                                                    |   |                                                   |  |   |        | 
|                                                 |  |                                                                                           |        |                                                    |   |                                                   |  |   |        | 
|LONG-TERM
  ASSETS:                              |  |                                                                                           |        |                                                    |   |                                                   |  |   |        | 
|Long-term accounts receivable                    |  |                                                                                           | 230    |                                                    |   | -                                                 |  |   | 230    | 
|Severance pay fund                               |  |                                                                                           | 751    |                                                    |   | 2,318                                             |  |   | 3,069  | 
|Property and equipment, net                      |  |                                                                                           | 2,670  |                                                    |   | 5,760                                             |  |   | 8,430  | 
|Goodwill                                         |  |                                                                                           | 13,154 |                                                    |   | 31,652                                            |  |   | 44,806 | 
|Other intangible assets, net                     |  |                                                                                           | 2,808  |                                                    |   | 10,478                                            |  |   | 13,286 | 
|                                                 |  |                                                                                           |        |                                                    |   |                                                   |  |   |        | 
|                                                 |  |                                                                                           |        |                                                    |   |                                                   |  |   |        | 
|Total long-term assets                           |  |                                                                                           | 19,613 |                                                    |   | 50,208                                            |  |   | 69,821 | 
|                                                 |  |                                                                                           |        |                                                    |   |                                                   |  |   |        | 
|                                                 |  |                                                                                           |        |                                                    |   |                                                   |  |   |        | 
|Total assets                                     |  | $                                                                                         | 25,513 |                                                    | $ | 61,369                                            |  | $ | 86,882 | 
|                                                 |  |                                                                                           |        |                                                    |   |                                                   |  |   |        | 

F - 69

---

---



Nexus Telocation Systems Ltd.
Unaudited Pro Forma Condensed Consolidated Balance sheet
As of December 31, 2004
(U.S dollars in thousands)

|                                                                        |  |                                                                                         |        |                                                    |   |                                                    |  |   |        | 
|----------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------- | ------ | -------------------------------------------------- | - | -------------------------------------------------- |  | - | ------ | 
|                                                                        |  | Nexus
  Telocations
  Systems
  and its
  subsidiaries
  December 31,
  2004
  (actual) |        | Acquisition
  of 
  Shagrir Towing 
  Services Ltd |   | Pro forma 
  balance sheet 
  December 31, 
  2004 | 
|                                                                        |  |                                                                                         |        |                                                    |   |                                                    | 
|LIABILITIES AND SHAREHOLDERS
EQUITY                                    |  |                                                                                         |        |                                                    |   |                                                    |  |   |        | 
|                                                                        |  |                                                                                         |        |                                                    |   |                                                    |  |   |        | 
|CURRENT LIABILITIES:                                                    |  |                                                                                         |        |                                                    |   |                                                    |  |   |        | 
|Short-term bank credit and current
  maturities of long-term bank loans |  | $                                                                                       | 7,064  |                                                    | $ | 4,265                                              |  | $ | 11,329 | 
|Trade payables                                                          |  |                                                                                         | 2,894  |                                                    |   | 1,216                                              |  |   | 4,110  | 
|Other accounts payable and accrued
expenses                             |  |                                                                                         | 2,640  |                                                    |   | 11,722                                             |  |   | 14,362 | 
|                                                                        |  |                                                                                         |        |                                                    |   |                                                    |  |   |        | 
|                                                                        |  |                                                                                         |        |                                                    |   |                                                    |  |   |        | 
|Total current
  liabilities                                             |  |                                                                                         | 12,598 |                                                    |   | 17,203                                             |  |   | 29,801 | 
|                                                                        |  |                                                                                         |        |                                                    |   |                                                    |  |   |        | 
|                                                                        |  |                                                                                         |        |                                                    |   |                                                    |  |   |        | 
|LONG-TERM LIABILITIES:                                                  |  |                                                                                         |        |                                                    |   |                                                    |  |   |        | 
|Long-term loans                                                         |  |                                                                                         | 4,572  |                                                    |   | 34,916                                             |  |   | 39,488 | 
|Accrued severance pay                                                   |  |                                                                                         | 1,257  |                                                    |   | 2,323                                              |  |   | 3,580  | 
|                                                                        |  |                                                                                         |        |                                                    |   |                                                    |  |   |        | 
|                                                                        |  |                                                                                         |        |                                                    |   |                                                    |  |   |        | 
|                                                                        |  |                                                                                         | 5,829  |                                                    |   | 37,239                                             |  |   | 43,068 | 
|                                                                        |  |                                                                                         |        |                                                    |   |                                                    |  |   |        | 
|                                                                        |  |                                                                                         |        |                                                    |   |                                                    |  |   |        | 
|Total shareholders equity                                              |  |                                                                                         | 7,086  |                                                    |   | 6,927                                              |  |   | 14,013 | 
|                                                                        |  |                                                                                         |        |                                                    |   |                                                    |  |   |        | 
|                                                                        |  |                                                                                         |        |                                                    |   |                                                    |  |   |        | 
|Total liabilities
  and shareholders equity                            |  | $                                                                                       | 25,513 |                                                    | $ | 61,369                                             |  | $ | 86,882 | 
|                                                                        |  |                                                                                         |        |                                                    |   |                                                    |  |   |        | 

F - 70

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