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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, 2003 |  | 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:

114,529,974

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:                            YesxNoo

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

| | Item
  17oItem 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 TIMETABLE                  | 5                                                           |   
|       |         |                                                            |                                                             |   
|       | ITEM 3. | KEY
  INFORMATION                                          | 5                                                           |   
|       |         |                                                            |                                                             |    | 
|       |         | A.                                                         | SELECTED
  FINANCIAL DATA                                   | 5  | 
|       |         |                                                            |                                                             |    | 
|       |         | B.                                                         | CAPITALIZATION
  AND INDEBTEDNESS                           | 5  | 
|       |         |                                                            |                                                             |    | 
|       |         | C.                                                         | REASONS
  FOR THE OFFER AND USE OF PROCEEDS                 | 5  | 
|       |         |                                                            |                                                             |    | 
|       |         | D.                                                         | RISK
  FACTORS                                              | 5  | 
|       |         |                                                            |                                                             |   
|       | ITEM 4. | INFORMATION
  ON THE COMPANY                               | 14                                                          |   
|       |         |                                                            |                                                             |    | 
|       |         | A.                                                         | HISTORY
  AND DEVELOPMENT OF THE COMPANY                    | 14 | 
|       |         |                                                            |                                                             |    | 
|       |         | B.                                                         | BUSINESS
  OVERVIEW                                         | 19 | 
|       |         |                                                            |                                                             |    | 
|       |         | C.                                                         | ORGANIZATIONAL
  STRUCTURE                                  | 24 | 
|       |         |                                                            |                                                             |    | 
|       |         | D.                                                         | PROPERTY,
  PLANTS AND EQUIPMENT                            | 24 | 
|       |         |                                                            |                                                             |   
|       | ITEM 5. | OPERATING
  AND FINANCIAL REVIEW AND
  PROSPECTS           | 24                                                          |   
|       |         |                                                            |                                                             |    | 
|       |         | A.                                                         | OPERATING
  RESULTS                                         | 24 | 
|       |         |                                                            |                                                             |    | 
|       |         | B.                                                         | LIQUIDITY
  AND CAPITAL RESOURCES                           | 31 | 
|       |         |                                                            |                                                             |    | 
|       |         | C.                                                         | RESEARCH
  AND DEVELOPMENT                                  | 32 | 
|       |         |                                                            |                                                             |    | 
|       |         | D.                                                         | TREND
  INFORMATION                                         | 34 | 
|       |         |                                                            |                                                             |    | 
|       |         | E.                                                         | OFF
  BALANCE SHEET ARRANGEMENTS                            | 34 | 
|       |         |                                                            |                                                             |    | 
|       |         | F.                                                         | CONTRACTUAL
  OBLIGATIONS                                   | 35 | 
|       |         |                                                            |                                                             |   
|       | ITEM 6. | DIRECTORS,
  SENIOR MANAGEMENT AND
  EMPLOYEES             | 35                                                          |   
|       |         |                                                            |                                                             |    | 
|       |         | A.                                                         | DIRECTORS
  AND SENIOR MANAGEMENT                           | 35 | 
|       |         |                                                            |                                                             |    | 
|       |         | B.                                                         | COMPENSATION                                                | 37 | 
|       |         |                                                            |                                                             |    | 
|       |         | C.                                                         | BOARD
  PRACTICES                                           | 37 | 
|       |         |                                                            |                                                             |    | 
|       |         | D.                                                         | EMPLOYEES                                                   | 38 | 
|       |         |                                                            |                                                             |    | 
|       |         | E.                                                         | SHARE
  OWNERSHIP                                           | 39 | 
|       |         |                                                            |                                                             |   
|       | ITEM 7. | MAJOR
  SHAREHOLDERS AND RELATED PARTY
  TRANSACTIONS      | 39                                                          |   
|       |         |                                                            |                                                             |    | 
|       |         | A.                                                         | MAJOR
  SHAREHOLDERS                                        | 39 | 
|       |         |                                                            |                                                             |    | 
|       |         | B.                                                         | RELATED
  PARTY TRANSACTIONS                                | 41 | 
|       |         |                                                            |                                                             |    | 
|       |         | C.                                                         | INTERESTS
  OF EXPERTS AND COUNSEL                          | 42 | 
|       |         |                                                            |                                                             |    | 
|       | ITEM 8. | FINANCIAL
  INFORMATION                                    | 42                                                          |   
|       |         |                                                            |                                                             |    | 
|       |         | A.                                                         | CONSOLIDATED
  STATEMENTS AND OTHER FINANCIAL
  INFORMATION | 42 | 
|       |         |                                                            |                                                             |    | 
|       |         | B.                                                         | SIGNIFICANT
  CHANGES                                       | 43 | 
|       |         |                                                            |                                                             |   
|       | ITEM 9. | THE OFFER
  AND LISTING                                    | 43                                                          |   

3

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|         |           | A.                                                                               | OFFER AND
  LISTING DETAILS              | 43 | 
|-------- | --------- | -------------------------------------------------------------------------------- | ---------------------------------------- | -- | 
|         |           |                                                                                  |                                          |    | 
|         |           | B.                                                                               | PLAN OF
  DISTRIBUTION                   | 43 | 
|         |           |                                                                                  |                                          |    | 
|         |           | C.                                                                               | MARKETS                                  | 44 | 
|         |           |                                                                                  |                                          |    | 
|         |           | D.                                                                               | SELLING
  SHAREHOLDERS                   | 44 | 
|         |           |                                                                                  |                                          |    | 
|         |           | E.                                                                               | DILUTION                                 | 44 | 
|         |           |                                                                                  |                                          |    | 
|         |           | F.                                                                               | EXPENSES
  OF THE ISSUE                  | 44 | 
|         |           |                                                                                  |                                          |   
|         | ITEM 10.  | ADDITIONAL
  INFORMATION                                                         | 44                                       |   
|         |           |                                                                                  |                                          |    | 
|         |           | A.                                                                               | SHARE
  CAPITAL                          | 44 | 
|         |           |                                                                                  |                                          |    | 
|         |           | B.                                                                               | MEMORANDUM
  AND ARTICLES OF ASSOCIATION | 44 | 
|         |           |                                                                                  |                                          |    | 
|         |           | C.                                                                               | MATERIAL
  CONTRACTS                     | 46 | 
|         |           |                                                                                  |                                          |    | 
|         |           | D.                                                                               | EXCHANGE
  CONTROLS                      | 47 | 
|         |           |                                                                                  |                                          |    | 
|         |           | E.                                                                               | TAXATION
  AND GOVERNMENT PROGRAMS       | 47 | 
|         |           |                                                                                  |                                          |    | 
|         |           | F.                                                                               | DIVIDENDS
  AND PAYING AGENTS            | 50 | 
|         |           |                                                                                  |                                          |    | 
|         |           | G.                                                                               | STATEMENT
  BY EXPERTS                   | 50 | 
|         |           |                                                                                  |                                          |    | 
|         |           | H.                                                                               | DOCUMENTS
  ON DISPLAY                   | 50 | 
|         |           |                                                                                  |                                          |    | 
|         |           | I.                                                                               | SUBSIDIARY
  INFORMATION                 | 51 | 
|         |           |                                                                                  |                                          |   
|         | ITEM 11.  | QUANTITATIVE
  AND QUALITATIVE DISCLOSURES
  ABOUT MARKET RISK                   | 51                                       |   
|         |           |                                                                                  |                                          |   
|         | ITEM 12.  | DESCRIPTION
  OF SECURITIES OTHER THAN EQUITY
  SECURITIES                       | 52                                       |   
|         |           |                                                                                  |                                          |    | 
|PART II  |           |                                                                                  |                                          | 52 | 
|         |           |                                                                                  |                                          |   
|         | ITEM 13.  | DEFAULTS,
  DIVIDEND AVERAGES AND
  DELINQUENCIES                                | 52                                       |   
|         |           |                                                                                  |                                          |   
|         | ITEM 14.  | MATERIAL MODIFICATIONS
  TO THE RIGHTS OF
  SECURITY HOLDERS AND USE OF PROCEEDS | 52                                       |   
|         |           |                                                                                  |                                          |   
|         | ITEM 15.  | CONTROLS
  AND PROCEDURES                                                        | 52                                       |   
|         |           |                                                                                  |                                          |   
|         | ITEM 16.  | [RESERVED]                                                                       | 52                                       |   
|         |           |                                                                                  |                                          |   
|         | ITEM 16A. | AUDIT
  COMMITTEE FINANCIAL EXPERT                                               | 52                                       |   
|         |           |                                                                                  |                                          |   
|         | ITEM 16B. | CODE OF
  ETHICS                                                                 | 52                                       |   
|         |           |                                                                                  |                                          |   
|         | ITEM 16C. | PRINCIPAL
  ACCOUNTANT FEES AND SERVICES                                         | 53                                       |   
|         |           |                                                                                  |                                          |   
|         | ITEM 16D. | EXEMPTIONS
  FROM THE LISTING STANDARDS FROM AUDIT
  COMMITTEES                  | 53                                       |   
|         |           |                                                                                  |                                          |   
|         | ITEM 16E. | PURCHASES
  OF EQUITY SECURITIES BY THE ISSUER AND
  AFFILIATED PARTIES          |                                          |   
|         |           |                                                                                  |                                          |    | 
|PART III |           |                                                                                  |                                          | 53 | 
|         |           |                                                                                  |                                          |   
|         | ITEM 17.  | FINANCIAL
  STATEMENTS                                                           | 53                                       |   
|         |           |                                                                                  |                                          |   
|         | ITEM 18.  | FINANCIAL
  STATEMENTS                                                           | 53                                       |   
|         |           |                                                                                  |                                          |   
|         | ITEM 19.  | EXHIBITS                                                                         | 53                                       |   

4

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PART I.

ITEM
1.          IDENTITY OF
DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM
2.          OFFER STATISTICS
AND EXPECTED TIMETABLE

Not applicable.

ITEM
3.          KEY INFORMATION

A.           SELECTED
FINANCIAL DATA

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

B.           CAPITALIZATION
AND INDEBTEDNESS

Not applicable.

C.           REASONS
FOR THE OFFER AND USE OF PROCEEDS

Not applicable.

D.           RISK
FACTORS

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

General
Risks Factors Relating to Our Company

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

We
have a history of net losses.

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. With the exception of
2003, we have incurred a net loss in each year of our existence. In December
2003, our accumulated deficit was approximately $81.9 million.  In 2001 and 2002, we incurred annual net
losses of approximately $9.5 million and $7.6 million, respectively. We have
suffered substantial losses from our formerly owned subsidiary, NexusData, Inc.
(NexusData). Although we discontinued the operations of NexusData in the third
quarter of 2002, sold NexusData in February 2003 (see Item 4. Recent
Developments) and have reduced our operational on-going expenses, we may not
achieve or sustain significant revenues on a quarterly or annual basis in the
future. If we continue to sustain prolonged net losses or losses from
continuing operations, we may have to cease our operations.

5

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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
an agreement entered into on April 25, 2004, we purchased all of the securities
of Pointer (Eden Telecom Group) Ltd., in consideration for the issuance of a
number of ordinary shares and warrants with an aggregate value equal to
approximately 26% of our issued share capital, on a fully diluted basis (For
further information regarding our agreements with Pointer see Item 4. Recent
Developments). 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. If we issue any equity or
convertible debt securities, this may substantially dilute the interests of our
current shareholders.  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 recent downturn in the world economy, the securities markets in general
have recently experienced increased volatility, which has particularly affected
the securities and operations of many high-technology 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 have affected our ability to realize investments at
favorable terms. Our Argentinean subsidiary, Tracsat, is experiencing
difficulties in obtaining bank credit lines despite its business achievements,
primarily due to the economic and political conditions in Argentina. Under some
circumstances, if we are unable to secure additional financing, we may have to
stop our operations.

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, 2003, three of our customers accounted for
approximately 91% of our revenues.  (See
further Notes 1(d) and 16(b)(3) of our consolidated financial statements).  In light of our sale of NexusData, we no
longer engage in the automated meter reading industry and our operations are
concentrated on our location based systems (LBS) activities, which activities
were halted in the United States, China, and Chile during 2002 principally as a
result of the inability of the domestic operators in such countries to finance
their operations.  In addition, our
customer in Venezuela ceased issuing purchase orders to us from mid-2002, as a
result of the prevailing foreign currency restrictions imposed by the
Venezuelan government and the economic and political situation in Venezuela,
but began issuing such purchase orders again at the beginning of 2004. Due to continuous
political and economical uncertainties in Venezuela, we cannot be sure whether
we will receive any further purchase orders from this customer or when such
orders will be received.  Thus, our
current revenues are generated mainly from the continued sales of our products
and services to our customers in Israel, Argentina and Russia. If such
customers were to reduce purchasing our products or services, our business
would be adversely affected.

Our
operations are primarily concentrated on one industry and in few territories.

Since
the change in ownership and management of our company in April 2003 (see Item 4
Recent Developments), we have decided to primarily focus our marketing
efforts on the sale of Stolen Vehicle Retrieval (SVR) products and services in
Latin America. Consequently, there will be fewer outlets for us to generate
revenues in the future. While our SVR operations have been our most significant
source of revenue, we no longer offer a diversified array of products and
solutions. The concentration of our operations on one facet of the location
based systems industry exposes us to considerable risk were this business line
to undergo a downturn.

6

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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 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 may not be able to adapt to customer preferences or
new technologies.

The
market for wireless communications systems has been characterized by rapid
technological developments. Our ability to increase revenue in the future
depends on the commercial success of our SVR systems and on our ability to
adapt to changing technologies, industry standards and customer preferences in
a timely and cost-effective manner. We have focused our development on our
location based security and management services in the area of SVR systems and
Industrial Monitoring (Scada) and have discontinued our research and
development and marketing efforts for our two-way paging systems due to overall
market considerations.

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.

We
face intense competition in the markets in which we operate. Our primary
competitors in the markets in which we currently operate are Lo-Jack and
Ituran, which to the best of our knowledge currently offer vehicle location
systems utilizing land-based radio networks in limited areas that resemble our
solutions. Some offer a similar solution to Nexus 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.

7

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In
addition, some primary competitors in the market for automatic vehicle location
systems, such as OmniTracks, @Track, Onstar, Satellite Security (GlobalGuard),
and others are employing a combination of GPS (satellite-based location
technology) over cellular-like systems. The systems offered by these companies
use satellite-based technologies which usually require the use of tracking
receivers installed in vehicles that work in conjunction with map display and
fleet management software, position reporting formats, and other communications
hardware and components.

Some
of our other competitors offer location based services, which conform with a
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, such as True Position, Xypoint, CPS
and SnapTrack). In the industrial monitoring market, our main competitor is
Motorola (MOSCAD systems).

Most
of our competitors have substantially greater capital resources and larger
research and development staffs, facilities, marketing and distribution
networks, name recognition and more extensive customer bases than us. While we
plan to continue to improve our products and provide greater functionality than
our products currently provide, we cannot guarantee that we will successfully
differentiate our products from those of our competitors or that the
marketplace will consider our products superior to alternative products. In
addition, our competitors may develop products that render our products
obsolete or less competitive.

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

Systems
based on our products and systems are currently installed in Venezuela,
Israel, Argentina, 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 were 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.

8

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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 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 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 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 systems 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 Argentinian
subsidiary and Pointer (Eden Telecom Group) Ltd., our recently acquired
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 which we do not control are essentially
limited to Venezuela and Russia, while we do control such operations in Israel
and Argentina. If we were to experience any setbacks regarding such operators,
this would have a material adverse effect on our business.

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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, 2003, we incurred
inventory write-offs of $111,000. 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 shareholder has a controlling stake in our
company.

Pursuant
to the share purchase agreement of March 2003, wherein DBSI Investments Ltd.
(DBSI) and other investors invested approximately $2.6 million in our company,
and the investments completed in second half of 2003, wherein DBSI and other
investors invested approximately  $1.2
million,  DBSI currently owns approximately 37.8% (on a fully diluted
basis), following the acquisition of Pointer (Eden Telecom Group) Ltd.,
discussed below) of our issued and outstanding shares. Accordingly, DBSI has a
controlling interest in our company. Pursuant to an amendment to our
manufacturing agreement with AMS Electronics Ltd. (AMS) that was concluded in
March 2003, AMS was issued 12.9% of our issued and outstanding shares (on a
fully diluted basis), which was reduced to 6.1% following the acquisition of
Pointer, and executed a proxy in favor of DBSI. (For further information
regarding the AMS transaction see Item 4.  Recent Developments -
Manufacturing Agreement with AMS Electronics Ltd.). As a result of receiving
that proxy, DBSI currently controls approximately 44% of our voting power and
effectively has the ability to control matters requiring the approval of our
shareholders. Furthermore, DBSI has the right
to appoint four out of our seven directors on our Board of Directors, and thus
effectively controls our Board of Directors.

Risk Factors Relating to our Ordinary
Shares

We do not expect to distribute cash dividends.

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

| | 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 products under development by us or our
  competitors;
| | regulatory development in
  the United States, Israel and other countries;                                          

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| | delays in our testing and
  development schedules;                               
|- | ---------------------------------------------------------------------------------
| | events or announcements
  relating to our collaborative relationship with others;
| | economic, political and
  other external factors; and                            
| | period-to-period
  fluctuations in our operating results.                        

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.

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. New 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.

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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, and our headquarters
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 has continued with varying levels of severity
through 2003, and negotiations between Israel and Palestinian representatives
have ceased. 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, R&D center and facility and those of many of our subcontractors
are located in Israel, which is currently experiencing civil unrest, terrorist
activity and military action. Since we do not have a detailed disaster recovery
plan that would allow us to quickly resume business activity, we could
experience serious disruptions if acts associated with this conflict result in
any serious damage to our facilities. Our business interruption insurance may
not adequately compensate us for losses that may occur and any losses or
damages incurred by us could have a material adverse effect on our business. We cannot give any assurance that security
and political conditions will not have such an effect in the future. Any future
armed conflicts or political instability in the region would likely negatively
affect business conditions and harm our results of operations.

Furthermore,
all non-exempt male adult permanent residents of Israel especially under the
age of 40, including some of our office holders and employees, are obligated to
perform military reserve duty and may be called to active duty under emergency
circumstances. 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
major part of our costs in Israel are 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. While in the twelve months ended
December 31, 2003, the Israeli economy recorded negative inflation of
approximately 1.9% where the U.S. dollar devalued against the NIS by
approximately ­­­­7.6%, this is not typical. 
For further discussion of such devaluation, see Item 5. Impact of Inflation and Devaluation 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, tax benefits 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, programs and tax benefits from the Israeli Government,
the European Union and the BIRD Foundation. 
To remain eligible for these grants, programs and tax benefits, we must
comply with certain conditions. In addition, some of these programs may
restrict our right to manufacture products or transfer our intellectual
property outside of Israel. If we do not meet these conditions in the future,
the benefits we receive could be canceled and we may have to refund payments
previously received under these programs. We cannot guarantee that these
programs and tax benefits will be continued in the future, at their current
levels, or at all. During 2003 and 2004, we received several letters from the
Israel Investment Center asserting that we did not fully implement our approved
investment program and as such, all of the benefits we received under this
approved investment program may be cancelled. If these programs and tax
benefits are ended, our business, financial condition and results of operations
could be adversely affected.

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Service and enforcement of legal process.

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

Risks
Affecting Our Subsidiaries

We are dependent upon the success of Tracsat S.A., our
subsidiary in Argentina.

Revenues
generated by Tracsat, our subsidiary in Argentina, have increased consistently
since the beginning of 2002. We depend on the ability of Tracsat to maintain
its growth and market penetration. We cannot be sure that Tracsat will be able
to operate successfully in the future because its operations are dependent upon
many factors, many of which Tracsat does not control, such as:

|         General
  political and economic circumstances in Argentina;                                                                                     
|-----------------------------------------------------------------------------------------------------------------------------------------------------------
|         Trends in the Argentinean insurance
  industry;                                                                                                  
|         Rate of car theft, value of cars and other
  inherent factors related to the SVR business, such as the success of law enforcement
  programs; and
|         Competition and consumer satisfaction.                                                                                                           

Tracsat depends on a small number of customers and
business partners.

Tracsat
depends on a small number of customers and business partners and its future
depends on its ability to maintain existing customers and business partners and
attract new customers and business partners. Revenues in Argentina are mainly
generated from two customers. If any of our current customers cease to do
business with us, or if we fail to attract new customers or business partners.
our operations could seriously be harmed or we may have to cease operations
under certain circumstances.

The
volatile exchange rate between the Argentinean Peso and the U.S. dollar may negatively
impact the results of our operations.

Due
to the increasing impact of the results of Tracsat on our consolidated
financial results, and the fact that most of its revenues are not denominated
in dollars, the significant devaluation in the Argentinean Peso and continuing
economic instability in Argentina could have a severe negative effect on the
business and overall profitability of Tracsat. Because we depend on the
profitability of Tracsat, our business could also be severely damaged as a
consequence. Under certain circumstances, we may be forced to cease operations
as a result.

The
future operations of Tracsat may depend on its ability to obtain additional
financing.

Although
Tracsat has reached its operational stage through our effective management
efforts, it still depends on our financial support, primarily due to economic
conditions in Argentina. We cannot assure that we will have the ability to
continue to finance Tracsat or to find other financing alternatives for Tracsat
in a timely manner. Tracsats future operations may be materially affected if
we do not continue to provide it with additional funding at the level currently
being made by us.

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Our
acquisition of Pointer could result in operating difficulties and other adverse
consequences.

On June 27,
2004, we acquired 100% of the shares of Pointer (Eden Telecom Group) Ltd.
(Pointer), an Israeli company which specializes in providing location-based
services for vehicles including SVR and fleet management and in marketing
protection products for vehicles in Israel. 
The process of integrating Pointer is risky and may create unforeseen
operating difficulties and expenses. The areas in which we may encounter
difficulties include:

| | diversion of
  management time (both ours and that of the Pointer) from the ongoing
  development of our businesses, issues of integration and future products and
  services; and
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | the need to
  implement controls, procedures and policies in Pointer appropriate for a
  public company that prior to its acquisition was a private company.                      

We have
limited experience in managing this integration process.  Moreover, the anticipated benefits of this
acquisition may not be realized.

We acquired Pointer on an as is basis.

Prior to
our acquisition of Pointer, certain of its shareholders guaranteed bank loans
to Pointer in the amount of approximately $1.6 million. As part of the
acquisition we agreed to indemnify such guarantors in the event that the banks
recall the loans from such guarantors. We acquired Pointer on an as is basis.
Should we discover significant problems with Pointer of which we are currently
not aware, or should we be required to indemnify such former shareholders of
Pointer for the full or a material part of the $1.6 million loan, this could
result in the cessation of our operations.

Pointer
has a history of losses.

Pointer
has suffered recurring operating losses and 
has a working capital deficiency. These conditions raise substantial
doubt about the Companys ability to continue as a going concern. Pointers
recuperation plan and the investments of its shareholders may reverse this
trend; however, Pointer has yet to record net profits throughout its
existence. While its revenues have grown over the years, there is no guarantee
that its business will ever be profitable. Since Pointer only operates in
Israel, its business is affected by changes in the Israeli market. Changes such
as the reduction in car theft resulting from the building of the separation
fence between Israel and the West Bank, improved law enforcement initiatives,
the decline in the purchases of new cars and changes in the automobile
insurance market will adversely affect the business of Pointer. Should we fail
to develop a successful business strategy to deal with such changes, this will
have a material adverse affect on our business.

ITEM 4.    INFORMATION ON THE COMPANY

A.           HISTORY
AND DEVELOPMENT OF THE COMPANY

We
develop, manufacture and market low energy and cost effective wireless
communications and location based information systems through the application
of digital spread spectrum technologies. Security and safety operations and
services, based on our system and technology, are performed by local operators,
predominantly in Israel and Latin America. Since April 2003, we have decided to
strategically own or become more involved in operating companies, in addition
to our holdings in Tracsat (our operator in Argentina).  Consequently, we have increased our holdings
in Pointer (our operator in Israel) from 14% to 100%.

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We
were 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 NXUS.  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,
Tracsat S.A., are located in Buenos Aires, Argentina. The headquarters of our
subsidiary, Pointer Ltd, are located in Petach-Tikva, Israel. 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, 2003, the following important events have occurred to us:

Sale of NexusData and the discontinuance of
our AMR operations

We
previously engaged in the Automated Meter Reading (AMR) industry through our
wholly-owned U.S. subsidiary, NexusData, Inc. In June 2001, NexusData entered
into a major contract with IMServ, a division of Invensys PLC, to deliver the
first full utility deployment of its AMR system to service the Atlanta Gas
Light Corporation. The minimum contract commitment for $50,000,000 was to have
serviced at least 1.3 million homes and businesses with daily automated gas
consumption reads; however, due to facts unknown to us, the entire project was
abandoned and caused severe financial damage to NexusData and to us.  This severe setback caused us to reach our
decision to discontinue our AMR operations and sell all of our holdings in NexusData,
in February of 2003, to Storm Consulting Inc. (Storm) for the consideration
of $1 and waiving of all debt owed to Nexus by NexusData.  In addition, NexusData agreed to pay our
company $1 million in the event of NexusData having four consecutive cash
positive quarters and net assets in the forth such quarter of at least $10
million. Pursuant to its purchase of NexusData, Storm has assumed certain
liabilities of NexusData and has undertaken to invest the necessary resources
to maintain NexusDatas core technology and business relationships with
existing and potential customers. As a result, the Company recorded a gain of
$8.5 million one-time
non-cash capital gain from discontinued operations (See note 1B and 18 of
Financial Statements).

Sale of Ordinary Shares and Warrants to
DBSI and additional investors

In
April 2003, DBSI Investments Ltd. acquired a controlling stake in our company
pursuant to a share purchase agreement with us, dated March 2003 (the March
Agreement). The March Agreement with DBSI and certain other investors provided
for additional investments in our company through October 2003. Pursuant to the
March Agreement, DBSI invested an aggregate of $2.6 million in our share
capital, from March to October.

Pursuant
to the March Agreement, through October 2003, additional investors invested an
aggregate of approximately  $1.2 in our
share capital, under the same terms and conditions set forth in the March
Agreement.  Amongst these investors was
Mr. Arik Avni, our Chief Executive Officer who invested $44,000 in our share
capital.  For further information
regarding this investment see Item 7. Related Party Transactions.

Overall,
DBSI and the other investors invested an aggregate of approximately $3.8
million. In consideration for their investment they acquired 86,804,543
ordinary shares and warrants to purchase 60,763,183 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 March
Agreement. Pursuant to the March Agreement, DBSI is entitled to designate four
of the seven members of our Board of Directors. Under the March Agreement, the
investors were granted certain demand and piggyback registration rights. In
addition, all preemptive rights granted to shareholders of Nexus have also been
terminated pursuant to the March Agreement and there are no longer any
preemptive rights in the Company.

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In
connection with the share purchase agreement, we reached an agreement with AMS
Electronics Ltd. (AMS), the primary manufacturer of our end products (See Item
4. Manufacturing Agreement with AMS Electronics Ltd.). Pursuant to this
agreement, AMS converted $723,000 of convertible debentures and interest
accrued thereon, issued to it on January 15, 2002, into 16,431,818 ordinary
shares at a conversion price of $0.044 per share, and we repaid AMS
approximately $300,000.

As
part of the share purchase agreement, we also reached certain agreements
with bank Hapoalim, our Bank, regarding new terms for long term and short term
loans, overdraft and bank guarantees in favor of the company, and issued Bank
Hapoalim a warrant exercisable into 5,113,636 ordinary shares of our company at
an exercise price of $0.044 per share.

Under
the 2003 share purchase agreement, and ancillary documents thereto, DBSI and
the other investors, AMS, and Bank Hapoalim were granted certain registration
rights, pursuant to which we have filed a registration statement on Form F-3
with the Securities and Exchange Commission for the resale of their ordinary
shares, including those ordinary shares underlying the currently exercisable
warrants issued to DBSI and the investors, AMS and Bank Hapoalim. The
registration statement has not yet been declared effective.

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 in April 2003, to be paid in equal
quarterly installments of $45,000.  At
the end of the initial three-year term, and at the end of each subsequent term
thereafter, the agreement will be automatically renewed for additional 12-month
terms unless terminated by either of the parties.

Manufacturing Agreement with AMS Electronics
Ltd.

In
January 2002, we entered into a major manufacturing agreement with AMS
Electronics Ltd. (AMS), for the manufacture of a significant portion of our end
units and those of NexusData, minimally valued at $36 million.  Pursuant to the share purchase agreement
with DBSI Investments Ltd., a letter agreement was signed between AMS and Nexus
in March 2003 (the Letter Agreement), amending the Manufacturing and Purchase
Agreement, such that we were released from our undertaking to issue purchase
orders to AMS minimally valued at $36 million and instead 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 the
Manufacturing and Purchase Agreement and in no event shall a claim be made by
AMS against us relating to NexusDatas liabilities.  Pursuant to the amendment to the Manufacturing and Purchase
Agreement, AMS was granted exclusivity and/or rights of first refusal in
connection with its manufacture of our products.

Employment Agreement with our Chief
Executive Officer

In
June 2003, our Audit Committee and Board of Directors approved an agreement
with Mr. Arik Avni to serve as our chief executive officer. Pursuant to the
agreement, Mr. Avni receives an annual gross
salary of NIS 300,000 and is eligible to receive an annual bonus
equivalent to 8% of our annual earnings before income tax. In addition to the
customary benefits in Israel, Mr. Avni was also granted options to
purchase 6,850,000 of our ordinary shares at an exercise price of $0.044 per
share. For further information see Item 7. Related Party Transactions.

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Successful completion of the Assets
Surveillance & Protection (ASAP) project

As
part of our Nexusphere System, we were formerly involved in developing
applications to provide solutions in the field of Assets Surveillance &
Protection (ASAP). ASAP is based on a terminal, which is attached to the asset
and a terrestrial communication and location system and can provide instant
warning and location in the event of hazardous chemical leakage or road
accidents.  A Nexus-led two-year project
with a consortium of eight European companies, consisting of technology
developers and transportation companies, was established in December 2001 to
develop and test an ASAP solution. The project was successfully completed in
October 2003.  At the end of 2003, we
expected to receive a 210,000 Euro grant from the European community in
connection with the project.  In June
2004, an additional grant in the amount of approximately 185,000 Euro was
approved. In June 2004, we received 210,000 Euro from these grants.

Cooperation
and Share Exchange Agreements with Pointer (Eden Telecom Group) Ltd.

On
February 25, 2004, we entered into a cooperation agreement with Pointer (Eden
Telecom Group) Ltd. (Pointer Ltd.), the operator of our system in Israel.
Pointer specializes in providing location-based services for vehicles including
SVR and fleet management and in marketing protection products for vehicles in
Israel.  Protection products include
alarm systems, immobilizers and a distress button, which is an integral part of
the system, allowing one to immediately alert assistance services allocated at
a twenty-four hour manned telephone service center, which locates the vehicle
and immediately sends the required service to the vehicle.

As
part of this agreement, Pointer renewed its commitment to purchase exclusively
from us end units for its stolen vehicle retrieval system. Pointer 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 Pointer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
Pointer, whereby we increased our holdings in Pointer from 14% to 100% of its
issued share capital. Upon completion of the agreement on June 27, 2004, we
purchased all the outstanding shares and options to purchase shares of Pointer.
Upon completion of the transaction, we purchased from certain of Pointers
shareholders their rights to repayment by Pointer of an aggregate of
$5,215,043.50 pursuant to loans which they provided to Pointer. 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 Pointer which provided bank guarantees to Pointer 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 Pointer held by its employees were
converted into options of our company, constituting an aggregate of 2.7% of our
share capital on a fully diluted basis. In consideration for all of the above,
we transferred a number of our ordinary shares and warrants with an aggregate
value equal to approximately 26% of our issued share capital on a fully diluted
basis, post transaction. Prior to the completion of the acquisition, the
directors of Pointer resigned from its board of directors and we assumed full
control of Pointer.

Based
on Israeli GAAP, revenues for the year 2003, of Pointer were NIS 44.3 million,
representing an increase of 15% compared to the year 2002 and operating profits
of NIS 1.5 million. As of December 31, 2003 Pointers shareholders deficiency
amounted to NIS 105.6 million.

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 $800,000 worth of infrastructure equipment and end units.
During the years 2001 and 2002, our revenues from this Venezuelan operation,
exceeded $10 million. 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.

17

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Exercise of warrants by Bank Hapoalim and
other minority investors­­

As
of June 15, 2004, 13,459,546 warrants were exercised into Ordinary shares of
the Company of NIS 0.03 par value each. 10,191,818 warrants were exercised by a
cashless exercise into 9,118,833 Ordinary shares, and another 3,267,728
warrants were exercised into Ordinary shares, in consideration of approximately
$ 144,000.

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.

Investments
and Divestitures

During
the first quarter of 2001, we signed an agreement with the shareholders of
Global Wireless Holding Inc, or GWH, for the purchase of 92.5% of the
issued share capital of Tracsat S.A. in consideration for $1 million,
which has since been reduced to approximately 86.5%. The consideration for the
shares was paid through the issuance of 167,667 of our shares, valued at
$367,000, according to their market value at the time the agreement was signed,
forgiveness of a loan extended to GWH in the amount of $500,000 and a cash payment
of $153,000. (For additional information see note 1C of our consolidated
Financial Statements).

During
2001 we invested $392,000 in Ubinet Telecom S.A, or Ubinet (a Chilean company)
increasing our shareholding in the company to 15% of its issued share capital.
In 2001, we wrote off all of our investments in Ubinet.

In
2001, we invested $180,000 in Florida Wyoming Inc. (renamed as Tri-
Angle in 2002) in exchange for 18% of its issued share capital. During
2002, we wrote off this investment.

Investment in Property and Equipment

During
the years 2003, 2002 and 2001, we had capital expenditures of $1.1 million,
$1.2 million and $0.7 million, respectively, related mainly to the installment
of equipment used by Tracsat, our subsidiary in Argentina.

Sale of NexusData

We
previously engaged in the Automated Meter Reading (AMR) industry through our
wholly-owned U.S. subsidiary, NexusData, Inc. In June 2001, NexusData entered
into a major contract with IMServ, a division of Invensys PLC, to deliver the
first full utility deployment of its AMR system to service the Atlanta Gas
Light Corporation. The minimum contract commitment for $50,000,000 was to have
serviced at least 1.3 million homes and businesses with daily automated gas
consumption reads; however, due to facts unknown to us, the entire project was
abandoned and caused severe financial damage to NexusData and to us.  This severe setback caused us to reach our
decision to discontinue our AMR operations and sell all of our holdings in
NexusData, in February of 2003, to Storm Consulting Inc. (Storm) for a total
consideration of $1 and the waiving of all debt owed to Nexus by
NexusData.  In addition, NexusData
agreed to pay our company $1 million in the event of NexusData having four
consecutive cash positive quarters and net assets in the fourth such quarter of
at least $10 million. Pursuant to its purchase of NexusData, Storm has assumed
certain liabilities of NexusData and has undertaken to invest the necessary
resources to maintain NexusDatas core technology and business relationships
with existing and potential customers. As a result, the Company recorded a gain
of $8.5 million resulting from a one-time non-cash capital gain from discontinued
operations (See note 1B and 18 of our consolidated Financial Statements).

18

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B.           BUSINESS
OVERVIEW

Location Based Services

We
are engaged in the development, production and marketing of our Nexusphere
which can deploy an array of commercial wireless applications in the fields of
Location Based Services, as well as the provision of related services through
our subsidiaries. In April 2003, we decided to focus on specific applications
including (i) stolen vehicles recovery (SVR) services utilizing our AVL
architecture and Remote Mobile end-unit devices (RMUs), and (ii) remote
monitoring and control of commercial assets through our Industrial Monitoring
and Control (IMU) end-user devices. We believe that our Nexusphere technology
will generally provide a cost-effective alternative for security, safety, asset
location based management services offering increased operational reliability
and lower operational costs.

The Nexusphere Network

Our
Nexusphere network specializes in developing spread spectrum technology (SPSP)
intended for wide area networks (WAN). Among the advantages of the 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
Nexusphere network was developed in order to fulfill a gap in demand for cost
effective, low payload data burst communication, incorporating location-based
services.

The
following are some of the available applications of the Nexusphere:

Stolen Vehicles Recovery (SVR) and
Additional Car Related Services:

The
Nexusphere system comprises unique features, which provide the following SVR
solutions:

| | Inclusion of communication
  & location.                                 
|- | -------------------------------------------------------------------------
| | Concealed terminal.                                                      
| | Resistance to jamming.                                                   
| | Indoor positioning.                                                      
| | Low cost.                                                                
| | Integrated
  alarm system.                                               
| | Road-side assistance.                                                    
| | Remote command.                                                          
| | Accuracy.                                                                
| | Back-Up Power Supply.                                                    
| | Time synchronization.                                                    
| | 24x7 redundant command and
  control center (CCC).                       
| | Roaming capability.                                                      
| | Remote display stations
  connected either directly or over the Internet.

Fleet Management & Telematics

Nexusphere
provides limited Fleet Management capabilities, which ensure that vehicles, and
their merchandise, arrive when and where they are expected. The transceiver 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
transceiver 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 terminals 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. In practice, Nexus terminals
provide a full array of protection and security services for individual persons,
vehicles, homes, boats and industrial and personal assets.

Assets
Surveillance & Protection (ASAP)

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 a terminal, 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. 
The consortium members and the European Union, through its Information
Society Technologies committee, co-sponsored the research and development. The
European Union agreed to fund approximately 50% of the overall project cost for
a period of 24 months.  This project was
successfully concluded in November 2003. Nevertheless, we have no current
intentions to commercialize this technology.

Nexusphere System Architecture System Layout

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.                                                                                     

20

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Location Process

Accurate,
reliable data reception and location capability is the key to security related
wireless communications systems. Land-based AOA (Angle of Arrival) technologies
offer two-way messaging and positioning solutions that provide a high degree of
reliability, resistance to interference, and receiver sensitivity.

Sales and Marketing

In order to
provide services (such as Stolen Vehicle Recovery services) a domestic operator
(which will be our customer with the exception of our operator subsidiaries,
which are currently Tracsat S.A. in Argentina, and our subsidiary Pointer in
Israel) has to purchase from us, and deploy, the CCC and sufficient base
stations to cover the required territory as predetermined by our site-survey.

The
domestic operators are responsible for the commercialization of the services 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.

From the
moment at which a domestic operator that is our customer (i.e. excluding
Tracsat and Pointer) begins to provide services to its customers (or
subscribers), the majority of revenues generated by our company are from the
sale of end units and sale of additional base stations or components to base
stations, in order to enlarge the covered territory or the capacity of the
system. In addition, we may also generate revenues from the sale of spare
parts, royalties or from the provision of technical support services. At the
same time, the domestic operator generates revenues from either selling
end-units to its customers and/or from the provision of services, such as stolen
vehicle recovery services, industrial monitoring, home security and others.

Therefore, our sales and marketing efforts are focused in three main
channels:

| | The
  initiation of new domestic operators that will undertake to provide Location
  Based Services (LBS) including Stolen Vehicle Retrieval (SVR) services and
  industrial monitoring in new territories. The identification of such new
  domestic operators involves contacting local partners, who will either
  initiate such operation by themselves (in which case the domestic operator
  will be our customer), or as a joint venture with us, where we may have
  control, to a certain extent, over the operator. We are currently
  concentrating our efforts in this channel towards expanding our presence in
  Latin America;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Continuous
  support of and sales to existing domestic operators, which are already our
  customers, offering new applications and additional services residing over
  the Nexusphere system; and                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | In cases
  where the domestic operator is our subsidiary (such as Pointer in Israel and
  Tracsat in Argentina), their efforts are focused on sales and marketing to
  customers in their designated territory, who may benefit from the services
  they provide.                                                                                                                                                                                                                                                                                                                                                                            

In order to execute our sales and marketing initiatives, we employ an
in house sales force, and in some cases we also employ independent agents in
specific territories.

Our business is not seasonal.

21

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Sales and Marketing of our Subsidiaries

Tracsat, S.A.

Tracsat is our Argentinian subsidiary. We currently own approximately
86.5%  of Tracsats issued share
capital. Tracsat is the Argentinean operator of our AVL systems and products,
focusing mainly on the SVR (Stolen Vehicle Recovery) business line. In August
2001, we initiated the commercialization process of Tracsat in Gran Buenos
Aires. Since our acquisition of Tracsat in 2001, the companys management, its
infrastructure and supporting services have changed. Furthermore, end user
device installations have been performed through direct sales and stolen
vehicle recovery service agreements, primarily with local insurance companies.
Tracsats commercial operations are progressing to our satisfaction as its
subscriber base is steadily increasing and as it also achieves satisfactory
recovery rates.

Pointer (Eden
Telecom Group) Ltd., Israel

Our recent
purchase of our primary customer and operator in Israel, Pointer Ltd., reflects
our commitment to our policy not only to serve as a technology company, but also
as an operator. Pointer specializes in providing location-based services for
vehicles including SVR and fleet management and in marketing protection
products for vehicles in Israel. 
Protection products include alarm systems, immobilizers and distress
buttons, which are an integral part of the system, allowing one to immediately
alert assistance services located at a twenty-four hour manned telephone
service center, which locates the vehicle and immediately sends the required
service to the vehicle.

For further information regarding the
acquisition of Pointer see Item 4. Recent Developments.

Pointer directs its sales and marketing
efforts to promoting its products and abilities among entities in the vehicle
and insurance markets in Israel as follows:

In the vehicle market: among vehicle
importers, automobile dealers and authorized installers of electronic
accessories for vehicles.

In the insurance
market: among insurance companies and insurance
agents.

Pointer directs the sales of its safety products and car units for
installment to private customers, business customers and vehicle fleets.
Products are sold either directly or through Pointers network of  approximately 60 authorized installers
across Israel.

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

|                |  | 2003           |       | 2002                     |  | 2001           | 
|--------------- |  | -------------- | ----- | ------------------------ |  | -------------- | 
|                |  |                |       |                          |  |                | 
|                |  | In
  thousands |       | % of our
  total
  sales |  | In
  thousands | 
|                |  |                |       |                          |  |                | 
|Israel          |  |                | 2,543 |                          |  | 49.4           | 
|                |  |                |       |                          |  |                | 
|U.S.A           |  |                | -     |                          |  | -              | 
|                |  |                |       |                          |  |                | 
|South
  America |  |                | 2,392 |                          |  | 46.4           | 
|                |  |                |       |                          |  |                | 
|Other           |  |                | 215   |                          |  | 4.2            | 
|                |  |                |       |                          |  |                | 
|                |  |                |       |                          |  |                | 
|Total           |  |                | 5,150 |                          |  | 100.0          | 
|                |  |                |       |                          |  |                | 

Patents and Licenses

Our Company
is 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.

22

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Government Regulations

Our
products 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
America 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. Our local operators in Venezuela and
Argentina have been required to obtain domestic licenses for the deployment of
our Nexusphere systems in these countries. In Israel, the Ministry of
Communications has allocated the 960 to 968 MHz band for similar applications.

The FCCs
technical requirements for unlicensed spread spectrum devices operating in the
902 to 928 MHz band can be found in Part 15, Section 247 of the FCCs rules. In
general, these rules permit greater output power for spread spectrum systems
(up to 1 watt) than other unlicensed devices due to the lower interference
potential of spread spectrum systems. Although an FCC license for the use of
spread spectrum devices operating within the technical parameters applicable to
the 902 to 928 MHz band is not necessary, FCC authorization of spread spectrum
transmitting equipment is nonetheless required. We have obtained such
authorization for our RMU.

Nexusphere
technology involves joining FCC-licensed conventional paging service with an
FCC-authorized unlicensed service to provide a new service that replicates
FCC-licensed two-way messaging and/or automotive vehicle monitoring services.
The use of Nexusphere technology to provide these services may accordingly
attract the scrutiny of the FCC, particularly if the companies offering
services using Nexusphere technology make substantial inroads in the market and
competitors who have purchased (or will purchase) spectrum licenses in the FCC
auction seek relief from the FCC. While the FCC has the authority to amend its
rules and regulations in ways that could have a material adverse effect on our
ability to exploit Nexusphere technology, it is uncertain whether the FCC would
do so.

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

Governmental
regulations in certain other countries which are potential markets for
Nexusphere products and services will require the issuance of a license to use
a portion of the radio frequency spectrum and authorization for the use of
end-user units employing our technology.

Competition

We face
intense competition in the markets in which we operate. Our primary competitors
in the markets in which we currently operate are Lo-Jack and Ituran, which to
the best of our knowledge currently offer vehicle location systems utilizing
land-based radio networks in limited areas, which resemble our solutions. Some
of our competitors offer a solution similar toours, while others, such as
Lo-Jack, use a VHF based messaging unit, without a wide area network, which is
sold to its customers and connected via radio to local law enforcement
communication networks.

23

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In
addition, some of our primary competitors in the market for automatic vehicle
location systems are OmniTracks, @Track, Onstar, Satellite Security (Global
Guard), and others. These companies employ a combination of GPS
(satellite-based location technology) over cellular-like systems. The systems
offered by these companies use satellite-based technologies which usually
require the use of tracking receivers installed in vehicles that work in
conjunction with map display and fleet management software, position reporting
formats, and other communications hardware and components.

Some of our
other competitors 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),
such as True Position, Xypoint, CPS and SnapTrack.

In the
industrial monitoring market, our main competitor is Motorola (MOSCAD systems).

Most of our
competitors have substantially greater capital resources and larger research
and development staffs, facilities, marketing and distribution networks, name
recognition and more extensive customer bases than we do. While we plan to
continue to improve our products and provide greater functionality than our
products currently provide, we cannot guarantee that we will successfully
differentiate our products from those of our competitors or that the
marketplace will consider our products superior to alternative products. In
addition, our competitors may develop products that render our products
obsolete or less competitive.

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 S.A.                      | Argentina                    
|Pointer (Eden Telecom Group) Ltd. | Israel                       

See the
Appendix to our consolidated financial statements included elsewhere in this
annual report for information regarding the ownership of our subsidiaries as of
December 31, 2003.

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
$96,000. Tracsats offices and operations facility are located in Buenos Aires.
Tracsat currently leases 700 square meters with an annual lease payment of
$52,000.  Pointer currently leases 730
square meters with annual lease payments of $51,000.  For further information, see Note 12c of our
consolidated financial statements.

See Note 12
of our Consolidated Financial Statements for information on our liens, pledge
and guarantees.

ITEM 5.
          OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A.
           OPERATING RESULTS

Critical Accounting Policies

In response
to the Securities Exchange Commissions Release No. 33-8040, Cautionary Advice
Regarding Disclosure About Critical Accounting Policies, we identified the
most critical accounting principles upon which our financial statements are
based. We determined the critical principles by considering accounting policies
that involve highly complex or subjective decisions or assessments. We
identified our most critical accounting policies to be those related to revenue
recognition and impairment of long-lived assets.

24

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Revenue recognition:

We generate
our revenues primarily from sales of products and systems, including base
stations and end user units, and from sales of Stolen Vehicle Recovery
services. To a lesser extent revenues are also derived from technical support
services and from royalties. Revenues from products and systems sales are
recognized in accordance with Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, (SAB No. 101), upon delivery, when
persuasive evidence of an agreement exists, the fee is fixed and determinable
and collectibility is probable. We assess collectibility separately for new
customers and existing ones. For new customers, we require 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. We cannot be certain that our estimations will prove correct as to any
one of our customers. Certain agreements include a contractual obligation for
installation. Such installation is not essential to the functionality of the
system. However, when installation is required by the customer, the entire
revenues are deferred until installation is performed. 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.

We are
entitled to royalties from certain of our customers. We have generated, during
the reported years, revenues from royalties, which were based on the number of
the customers subscribers. The royalties are recognized when such royalties
are reported to us by customers.
          Revenues generated
from technical support services are recognized when such services are rendered.
Revenues from installation and de-installation (of end-units) fees are
recognized when such services are rendered.

We follow
the directives of Statement of Financial Accounting Standard No. 48, Revenue
Recognition when Right of Return Exists. Based on our experience, no such
provision was recorded.

Impairment of long-lived assets:

Our
investments in investees are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an investment may not be
recoverable, in accordance with Accounting Principle Board Opinion No. 18 The
Equity Method of Accounting for Investments in Common Stock, (APB No. 18).
During the years 2002 and 2001, impairments of $680 and $ 695, respectively,
were recorded (see Note 17c to our financial statements). Estimates of
recoverability of our investments are made by our management based upon their
assessment of factors such as market conditions and the historic and projected
operations and financial performance of such companies.

We have
stated these accounting policies in Note 2 to the consolidated financial
statements, which are incorporated herein by reference.

25

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Selected Financial Data

We derived
the following selected consolidated financial data presented below for each of
the years ended December 31, 2001, 2002 and 2003 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, 1999 and 2000 have been derived from audited
financial statements not included in this annual report.

In 2003, we
prepared our consolidated financial statements for the year ended December 31,
2003, in accordance with accounting principles generally accepted in United
States (US GAAP). Previously, our annual financial statements were prepared
in accordance with accounting principles generally accepted in Israel. Prior
years financial statements have been restated and are presented in accordance
with U.S. GAAP.

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 Notes 18 and 1b 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.

|                                                                    |  | 2003                                                      |        | 2002 |   | 2001    |   | 2000 |        | 1999 |  
|------------------------------------------------------------------- |  | --------------------------------------------------------- | ------ | ---- | - | ------- | - | ---- | ------ | ---- | -
|                                                                    |  |                                                           |        |      |   |         |   |      |        |      |  
|                                                                    |  | US Dollars in Thousands (except share and per share data) |       
|Statement of
  Income Data:                                         |  |                                                           |        |      |   |         |   |      |        |      |  
|Revenues,
  sales                                                   |  | $                                                         | 2,774  |      | $ | 5,196   |   | $    | 12,375 |      | $
|Revenues,
  services                                                |  |                                                           | 2,376  |      |   | 1,165   |   |      | 184    |      |  
|Total
  Revenues                                                    |  |                                                           | 5,150  |      |   | 6,361   |   |      | 12,559 |      |  
|Cost of
  revenues, sales                                           |  |                                                           | 2,099  |      |   | 3,528   |   |      | 9,355  |      |  
|Cost of
  revenues, services                                        |  |                                                           | 2,075  |      |   | 948     |   |      | 1,333  |      |  
|Total Cost
  of Revenues                                            |  |                                                           | 4,174  |      |   | 4,476   |   |      | 10,688 |      |  
|Gross profit
  (loss)                                               |  |                                                           | 976    |      |   | 1,885   |   |      | 1,871  |      |  
|Research and
  development costs, net                               |  |                                                           | 664    |      |   | 1,377   |   |      | 1,654  |      |  
|Selling,
  general and administrative
  expenses                    |  |                                                           | 2,031  |      |   | 3,391   |   |      | 5,028  |      |  
|Amortization
  of deferred stock compensation                       |  |                                                           | 400    |      |   | -       |   |      | -      |      |  
|Operating
  loss                                                    |  |                                                           | 2,119  |      |   | 2,883   |   |      | 4,811  |      |  
|Financial
  expenses                                                |  |                                                           | 1,105  |      |   | 266     |   |      | 209    |      |  
|Other income
  (expenses)                                           |  |                                                           | (32    | )    |   | (440    | ) |      | 563    |      |  
|                                                                    |  |                                                           |        |      |   |         |   |      |        |      |  
|Loss from
  continuing operations before
  minority interest        |  |                                                           | 3,256  |      |   | 3,589   |   |      | 4,457  |      |  
|Minority
  interest in losses of a
  subsidiary                     |  |                                                           | -      |      |   | -       |   |      | 191    |      |  
|Loss from
  continuing operations                                   |  |                                                           | 3,256  |      |   | 3,589   |   |      | 4,266  |      |  
|Loss from
  discontinued operations, net                            |  |                                                           | -      |      |   | 4,000   |   |      | 5,204  |      |  
|Gain from
  disposal of discontinued
  operations                   |  |                                                           | 8,524  |      |   | -       |   |      | -      |      |  
|Net income
  (loss)                                                 |  |                                                           | 5,268  |      |   | (7,589  | ) |      | (9,470 | )    |  
|Basic and
  diluted net loss per share from
  continuing operations |  | $                                                         | 0.04   |      | $ | 0.32    |   | $    | 0.42   |      | $
|Basic and
  diluted net earning (loss) per
  share                  |  | $                                                         | 0.06   |      | $ | (0.67   | ) | $    | (0.93  | )    | $
|Weighted
  average number of shares
  outstanding (in thousands)    |  |                                                           | 85,567 |      |   | 11,289  |   |      | 10,162 |      |  
|                                                                    |  |                                                           |        |      |   |         |   |      |        |      |  
|Balance
  Sheet Data:                                               |  |                                                           |        |      |   |         |   |      |        |      |  
|Total assets                                                        |  |                                                           | 8,290  |      |   | 10,098  |   |      | 13,488 |      |  
|Net assets
  (liabilities) of continuing operations                 |  |                                                           | 718    |      |   | (2,057  | ) |      | 2,248  |      |  
|Working
  capital (deficit)                                         |  |                                                           | (147   | )    |   | (1,454  | ) |      | (1,888 | )    |  
|Convertible
  debentures                                            |  |                                                           | -      |      |   | 1,020   |   |      | -      |      |  
|Shareholders
  equity (deficiency)                                 |  |                                                           | 718    |      |   | (10,581 | ) |      | (3,639 | )    |  
|Share
  capital                                                     |  |                                                           | 773    |      |   | 94      |   |      | 91     |      |  
|Additional
  paid-in capital                                        |  |                                                           | 83,239 |      |   | 77,373  |   |      | 76,402 |      |  

26

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Operating Results

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

Revenues.
Our revenues are derived primarily from the sale of our Nexusphere products and
systems, including base stations, end user units, technical support and
services to the systems and royalties calculated on the number of users
connected to our Nexusphere network as well as from the provision of our Stolen
Vehicle Recovery services in Argentina through Tracsat. A substantial portion
of our sales each year, and the majority of our yearly revenues from sales, in
terms of dollar amounts as well as volume of sales, are generated by repeat
orders from our existing customer base, which included in 2003 two major
customers.  We depend on a small number
of operators in specific territories and our future depends on our ability to
maintain them, as well as attract new customers, consequently, an addition of a
new customer or the loss of an existing customer may have a significant impact.
Changes in demand from our existing customers may be the result of a number of
factors related to events occurring in their territories, which may not be
predicted by us. 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.
Cost of revenues consists of direct and indirect materials, subcontracting
works, direct labor, depreciation and amortization, and other operating
indirect costs. 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 Costs. Research and development costs
consist primarily of salaries and related costs of employees engaged in ongoing
research and development, costs of materials, subcontractors, depreciation and
other expenditures. 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 ASAP project
as compared to $520,000 in 2002. The ASAP project was completed in October
2003. For further information see Item 4. Business Overview  Assets
Surveillance and Protection.

Selling and
Marketing Expenses. Selling expenses consist of
costs relating to promotion, marketing, labor costs, trade shows and
exhibitions, sale commissions, sales support, travel and travel-related
expenses. During 2003, we decreased our selling and marketing costs by 44% to
$621,000 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.

27

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General and
Administrative Expenses. General and administrative
expenses consist of labor costs for management and administration personnel,
office maintenance and administrative costs, legal and accounting expenses,
provision for doubtful debts and management fees. General and administrative
expenses decreased by approximately 38% from $2.3 million in 2002 to $1.4
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. This
compensation is expected to result in $567,000 in additional non-cash expenses
in 2004 and 2005.

Financial Expenses
(Net). Financial expenses consists of interest
derived on short-term bank deposits, and expenses with respect to bank charges
and interest on a short term bank credit, interest on convertible debentures
and differences in the rate of exchange between the US dollar and other
currencies (mainly to the New Israel Shekel and Argentinian Peso). 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.

Twelve Months Ended
December 31, 2002 Compared with Twelve Months Ended December 31, 2001

Revenues.  Our revenues are derived primarily from the
sale of our Nexusphere products and systems, including base stations, end user
units, technical support and services to the systems and royalties calculated
on the number of users connected to our Nexusphere network as well as from the
provision of our Stolen Vehicle Recovery services in Argentina through Tracsat.
A substantial portion of our sales each year, and the majority of our yearly
revenues from sales, in terms of dollar amounts as well as volume of sales, are
generated by repeat orders from our existing customer base, which included in
2002 two major customers, and from our operation in Argentina. We depend on a
small number of operators in specific territories and our future depends on our
ability to maintain them, as well as attract new customers, consequently, an
addition of a new customer or the loss of an existing customer may have a
significant impact. Changes in demand from our existing customers may be the
result of a number of factors related to events occurring in their territories,
which may not be predicted by us. Revenues sharply decreased 49%, or $6.2 million,
to $6.4 million in 2002, from $12.6 million in 2001, due mainly
to the decrease in revenues resulting from the sharp decrease in end unit sale
volume to our customer in Venezuela, which was partly offset by the increase in
the provision of our SVR services in Argentina.

Cost of Revenues.
Cost of revenues consists of direct and indirect materials, subcontracting
works, direct labor, depreciation and amortization and other operating indirect
costs. In 2002, our cost of sales decreased by $6.2 million to $4.5 million
from $10.7 million in 2001. This decrease was primarily the result of the
decrease in revenues from sales and a decrease in the cost of services, mainly
due to the effects of the US dollar-Argentinian Peso exchange rate, offset by
an increase in the volume of services and an increase in Tracsats subscriber
base in 2002.

Gross Profit.As
a result of the foregoing, gross profit increased by $14,000 from a gross
profit of $1,871,000 in 2001 to a gross profit of $1,885,000 in 2002.

28

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Research and
Development Costs. Research and development costs
consist primarily of salaries and related costs of employees engaged in ongoing
research and development, costs of materials, subcontractors, depreciation and
other expenditures. Net research and development expenses decreased by 17% to
$1.4 million in 2002 from  $1.7 million
in 2001. Research and development costs were reduced in 2002 as a consequence
of the deduction of grants from the European community due to our participation
in the ASAP project which commenced in December 2001(for more information see
Item 4. Business Overview  Assets Surveillance and Protection).

Selling and
Marketing Expenses.  Selling expenses consist of costs relating to promotion,
marketing, labor costs, trade shows and exhibitions, sale commissions, sales
support, travel and travel-related expenses. During 2002, we decreased our
selling and marketing costs by 50%, from $2.2 million in 2001 to $1.1 million
in 2002, mainly due to decreased commission payments derived from decreased
sales and reduced labor costs.

General and
Administrative Expenses. General and
administrative expenses consist of labor costs for management and
administration personnel, office maintenance and administrative costs, legal
and accounting expenses and provision for doubtful debts. General and
administrative expenses decreased from $2.8 million in 2001 to $2.3 million in
2002, primarily due to reduced expenses in Tracsat S.A. operations, mainly as a
result of the effects of the depreciation of the Argentinian Peso against the
US dollar in 2002.

Operating Loss.
As a result of the foregoing, our operating loss in 2002 decreased to $2.9
million compared to an operating loss of $4.8 million in 2001.

Financial Expenses
(Net). Financial expenses (net) consisted of
interest derived on short-term bank deposits, and expenses with respect to bank
charges and interest on a short term bank credit, interest on convertible
debentures and differences in the rate of exchange between the US dollar and
other currencies (mainly to the New Israel Shekel). In 2002, our net financial
expenses amounted to $266,000 compared to $209,000 in 2001, due mainly to an
increase in interest on short-term credits which was partly off-set by
translation adjustment gains from currency exchange rates.

Net Loss.  In 2002, we had a net loss of $7.6 million
as compared to a net loss of $9.5 million in 2001. The decrease in our net loss
was mainly due to the fact that NexusDatas discontinued operations contributed
to a loss of $4 million in 2002, as compared to $5.2 million in 2001 and as a
result of the foregoing.

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

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

We believe
that inflation in Israel and fluctuations in the U.S. dollar - NIS exchange
rate may have some effects on our business, primarily on our expenses and, as a
result, on 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 2003, 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 2003 from a high of NIS 4.924 to the dollar
to a low of NIS 4.283 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:

29

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|MONTH           |  | HIGH
  1 U.S. dollar = |  | LOW
  1 U.S. dollar = | 
|--------------- |  | ---------------------- |  | --------------------- | 
|                |  |                        |  |                       | 
|December
  2003 |  | 4.441                  |  | 4.352                 | 
|January 2004    |  | 4.483                  |  | 4.371                 | 
|February
  2004 |  | 4.493                  |  | 4.437                 | 
|March 2004      |  | 4.535                  |  | 4.483                 | 
|April 2004      |  | 4.599                  |  | 4.515                 | 
|May 2004        |  | 4.634                  |  | 4.555                 | 

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,
  1999  December 31, 1999 |  | 4.1396 NIS/$1 | 
|January 1,
  2000  December 31, 2000 |  | 4.0733 NIS/$1 | 
|January 1,
  2001  December 31, 2001 |  | 4.213 NIS/$1  | 
|January 1, 2002  December 31, 2002   |  | 4.7378 NIS/$1 | 
|January 1,
  2003  December 31, 2003 |  | 4.512 NIS/$1  | 

In 1999,
the rate of inflation was approximately 1.3% and the rate of devaluation was
-0.3%.     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%. 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 2003, but they did not materially
affect our results of operations in such periods.

Due to the
increasing impact of the results of Tracsat on our consolidated financial
results, and the fact that most of its 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 are
denominated in US dollars. In 2003, the U.S. dollar - Argentinian Peso exchange
rate fluctuated between 3.37 and 2.746 Pesos to the dollar. From January 1,
2003 to December 31, 2003, the value of the Argentinian Peso increased by
approximately 12.8% against the US dollar. This increase had no material effect
on our business during 2003.

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

Governmental and
Fiscal Policies which May Affect Our Business

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 may reduce the rate of car theft and
adversely affect our business in the future.

30

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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, 2003, we had a negative working capital of $147,000, our current assets to
current liabilities ratio was 0.96:1, we had cash and cash equivalents of
$708,000 and unused credit facility of $160,000.

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 or
the BIRD Foundation.

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 86,804,543 ordinary shares and warrants to purchase 60,763,183
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. (For further information
see Item 4. Recent Developments and Note 13 of our consolidated financial
statements for a description of our agreements with DBSI and AMS).

As of
December 31, 2003, we had a credit facility for approximately $4.25 million
with Bank Hapoalim of which $3 million was a five-year long-term loan for the
period beginning April 2003, and an additional short term credit facility in
the amount of $1.25 million, of which $160,000 remains as of December 31, 2003
available for our use.

In 2003,
net cash used in our continuing operating activities amounted to $2,132,000 as
compared to net cash used in continuing operating activities of $937,000 in
2002. In 2003, net cash used in our continuing investing activities was
$1,037,000 as compared to $1,118,000 net cash used in our continuing investing
activities in 2002. In 2003, net cash provided by financing activities was
$3,798,000 as compared to $2,487,000 provided by continuing financing
activities in 2002. In 2003 there was no net cash used in discontinued
operations as compared to $1,363,000 in 2002.

Current
liabilities decreased from $4,648,000 in 2002 to $3,881,000 at December 31,
2003, mainly due to a decrease of trade payables balance. Long-term liabilities
decreased from $4,865,000 in December 31, 2002 to $3,691,000 in December 31,
2003 mainly due to conversion and repayment of convertible debentures
previously issued to AMS.

We
anticipate that we will continue to incur significant operating expenses 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. 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 products or succeed
to obtain such additional sources of equity or debt financing. In raising
additional funds, we will 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-term $3 million bank loan and additional
credit facility from our bank of approximately $1,250,000, 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.

31

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

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, 2003 and December 31,
2002, totaled approximately $664,000, and $1,377,000, respectively. We expect
that we will continue to commit substantial resources to research and
development in the future.  As of April
31, 2004, the Company employed 10 persons in research and development. Our
gross research and development expenses constituted approximately 22.1 %and
29.8% of our revenues, and our net research and development expenses
constituted approximately 12.9% and 21.6% of such sales, in the respective
years ended December 31, 2003 and 2002. For additional information concerning
commitments for research development programs See Note 12 to our financial
statements included elsewhere in this annual report.

The
Government of Israel encourages research and development projects oriented
towards products for export through the Office of the Chief Scientist of the
Ministry of Industry and Commerce of the State of Israel. Under the terms of
Israel Government participation, a royalty of 2% to 5% of the net sales of
products developed from a project funded by the Chief Scientist must be paid,
beginning with the commencement of sales of products developed with grant funds
and ending when 100% to 150% of the grant is repaid. The terms of the Israeli
government participation also require that the manufacture of products
developed with government grants be performed in Israel, unless a special
approval has been granted. Separate Israeli government consent is required to
transfer to third parties technologies developed through projects in which the
government participates. Such restrictions do not apply to exports from Israel
of products developed with such technologies. Royalty bearing grants received
from the State of Israel for research and development are 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,
2003, our contingent obligation to the BIRD Foundation was $1,958,000.

32

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In
addition, we are conducting three major research and development projects aimed
at enhancing our various systems. These projects involve an upgrade of the
database utilized by our Nexusphere system, development of a significantly
smaller remote mobile unit (volume is reduced by 50%), which can be compatible
with a GPS system for anti-theft and fleet-management applications concurrently
and development of an enhanced base station receiver for the Nexusphere to
further expand its applications. We expect to continue to commit substantial
resources to research and development in the future such as:

| | Improved
  location algorithm, which will enable sparser deployment of base stations.   
|- | ----------------------------------------------------------------------------------------
| | Long-life
  RMU for applications that do not provide power such as parcel tracking.     
| | 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.

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.

33

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---

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 this 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.

In recent
years, we have concentrated our operations on our location based security
services in the areas of Automotive Vehicle Location and on the Stolen Vehicle
Recovery markets, due to the decision of our management to focus on our more
lucrative business opportunities, while sharply minimizing our research and
development and marketing efforts of our two-way paging systems due to overall
market trends, such as (a) the collapse of the paging industry as a whole where
the income and number of customers has dropped sharply; (b) the absence of
advances in technology of two-way paging, as a result of this technology being
largely abandoned; and (c) the growth in competition from more modern
technologies such as short messaging service (SMS), which is both cheaper and
more convenient. In addition, the recent increase in terror has emphasized, for
many, the need for personal security, a trend which we expect to directly or
indirectly increase the demand for services such as those we, our subsidiaries
and our domestic operators provide.

In February
2003, we sold our share in NexusData, and we no longer operate in the automatic
meter reading systems industry.

We now
operate predominantly in Israel and Latin America. Our focus for the
establishment of new operations continues to be Latin America.

In Israel,
we recently purchased our primary customer and operator in Israel, Pointer
(Eden Group) Ltd., which will expand our operations and increase our revenues
in Israel. The transaction reflects our policy not only to serve as a
technology company but also as an operator, providing operating services to the
general public.  On June 30, we will
consolidate our balance sheets, and from the second half of 2004, we will
consolidate our statement of operations with those of Pointer.

Our
Argentinian subsidiary, Tracsat, has been negatively affected by economic and
political instability in Argentina.  In
the future, we may also be negatively affected by the recent success of law
enforcement programs, which have reduced the rate of car theft in Argentina.

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.

E.
          OFF-BALANCE SHEET ARRANGEMENTS

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

34

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F.
          CONTRACTUAL OBLIGATIONS

|Contractual Obligations December 31,
  2003     |  |  |   | Total |  | Less
  than 1
  Year |  | 1-3
  Years |       | 3-5
  Years |  | More
  than 5
  Years | 
|----------------------------------------------- |  |  | - | ----- |  | -------------------- |  | ----------- | ----- | ----------- |  | --------------------- | 
|                                                |  |  |   |       |  |                      |  |             |       |             |  |                       | 
|Short term
  debt and other current liabilities |  |  | 1 |       |  | 3,881                |  |             | 3,881 |             |  | -                     | 
|Long-term
  loan                                |  |  | 2 |       |  | 3,391                |  |             | 126   |             |  | 2,758                 | 
|Accrued
  severance pay, net                    |  |  | 3 |       |  | 189                  |  |             | -     |             |  | -                     | 
|                                                |  |  |   |       |  |                      |  |             |       |             |  |                       | 
|Management
  fees to DBSI                       |  |  | 4 |       |  | 420                  |  |             | 180   |             |  | 240                   | 
|Operating
  lease obligations                   |  |  | 5 |       |  | 724                  |  |             | 310   |             |  | 414                   | 
|Purchase
  Obligations                          |  |  |   |       |  | 363                  |  |             | 363   |             |  | -                     | 
|Royalties to
  BIRD                             |  |  | 6 |       |  | 1,958                |  |             | -     |             |  | -                     | 
|                                                |  |  |   |       |  |                      |  |             |       |             |  |                       | 
|Total
  contractual obligations                 |  |  |   |       |  | 10,926               |  |             | 4,860 |             |  | 3,412                 | 

---

1 Short term debt and other current
liabilities include short term bank credit, trade accounts payable for equipment
and services that have already been supplied and other accrued expenses.2 Long term loan includes principal and
interest payments in accordance with the terms of the agreement with Bank
Hapoalim signed in April 2003 (See Item 5- Liquidity and Capital Resources).3Accrued severance pay maturity depends on
the date our employees will actually cease being employed. The amount is net of
outstanding severance pay funds.4The company shall pay annual fees $180,000
in consideration for DBSI management services for the period of three years
commencing April 2003. For further information see Item 4. Recent
developments.5Operating lease obligations include rental
payments of offices, cars, and other premises and equipment.6 Royalties to BIRD include the amount
received by BIRD foundation indexed as per the agreement, which the company has
undertaken to pay based on sales of a specific product.  The Company does not anticipate selling this
product and therefore, does not anticipate paying these contingent royalties
(See Note 12 to our Financial Statements).

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 |  | 48  |  | Chairman of
  Board of Directors                    
|Arik Avni          |  | 44  |  | President
  and CEO                                 
|Alicia
  Rotbard   |  | 58  |  | External
  Director                                 
|Gov Ben Ami        |  | 77  |  | External
  Director                                 
|Barak Dotan        |  | 36  |  | Director                                            
|Ken Lalo           |  | 46  |  | Director                                            
|Yoel
  Rosenthal   |  | 49  |  | Director                                            
|Hanoch Yokev       |  | 56  |  | Vice
  President, R&D and Chief Technology Officer  
|Ronen Stein        |  | 37  |  | Vice
  President and Chief Financial Officer        
|Zvika Weber        |  | 43  |  | Vice
  President, Business Development and Marketing

Yossi  Ben Shalom was
appointed as our new Chairman of the Board of Directors in 2003. He had been
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.

Arik Avniwas
appointed as our President and Chief Executive Officer in April 2003. He most
recently served as President and Chief Executive Officer of Rav Bariach
Securities, and Executive Vice President and Chief Financial Officer of the Rav
Bariach Group, from 1999 to 2001. Prior to that he served as Tadiran
Telecommunication Chief Financial Officer from 1996 to 1999. He held diverse
positions in Tadiran from 1983 to 1996. Mr. Avni holds a B.A. in Economics and
Statistics and an M.A. in Economics from Tel Aviv University.

35

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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.

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

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

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

Ronen Steinwas
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.

36

---

---

Zvika Weberwas
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,
2003, was approximately $569,000, including amounts expended by us for
automobiles made available to our officers, expenses reimbursed to officers
(including professional and business association dues and expenses) and other
fringe benefits commonly reimbursed or paid by companies in Israel, but excluding amounts set aside or accrued to
provide pension, retirement or similar benefits, which amounted to $74,000.

In
addition, during 2003 a total of 7,950,000 options were granted to all persons
as a group who served in the capacity of director or executive officer, at an
exercise price of $0.044, 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 successor has been elected. Between our annual meetings, the
Board of Directors may appoint or dismiss directors by a majority vote of the
Directors, provided that the maximum number of directors shall not exceed eight
and shall be no less than two, unless determined otherwise by our shareholders
by an ordinary resolution. Officers serve at the discretion of the Board of
Directors.

Pursuant
to Israeli law we are required to appoint two outside directors. These
directors must be residents of Israel and unaffiliated with Nexus and our
principals. Any committee of the Board of Directors that is authorized to
exercise any function of the board must include at least one outside director.

Outside directors are to be elected by a majority
vote at a shareholders meeting, provided that such majority includes at least
one-third of the shares held by non-controlling shareholders voted at the
meeting, or the total number of shares held by non-controlling shareholders
voted against the election of the director does not exceed one percent of the
aggregate voting rights in the company.

The initial term of an outside director is three
years and may be extended for one additional term of three years. Outside
directors may be removed only by the same percentage of shareholders as is
required for their election, or by a court, and then only if the outside
directors cease to meet the statutory qualifications for their appointment or
if they violate their duty of loyalty to the company.

An outside director is entitled to compensation
as provided in regulations adopted under the new Companies Law and is otherwise
prohibited from receiving any other compensation, directly or indirectly, in
connection with service provided as an outside director.

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

An
outside director is entitled to compensation as provided in regulations adopted
under the new Companies Law and is otherwise prohibited from receiving any
other compensation, directly or indirectly, in connection with the services
provided as an outside director.

37

---

---

The 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 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
new 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 Spira 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; see Note 19 to our consolidated financial statements) at the end of
each of the last three years:

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

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

|                           |  | Israel |    | U.S.A. |  | Other |  | Total |   
|-------------------------- |  | ------ | -- | ------ |  | ----- |  | ----- | --
|                           |  |        |    |        |  |       |  |       |   
|2001                       |  |        |    |        |  |       |  |       |   
|Sales and
  Marketing      |  |        | 3  |        |  | 1     |  |       | 3 
|Administration             |  |        | 14 |        |  | 0     |  |       | 3 
|Research and
  Development |  |        | 22 |        |  | 0     |  |       | 0 
|Other                      |  |        | 16 |        |  | 0     |  |       | 9 
|Total                      |  |        | 55 |        |  | 1     |  |       | 15

38

---

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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, 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 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 1, 2004, of our directors and officers,
none 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 47.6% of our issued share capital held by DBSI.

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

Employee Share Option Plans

For
information concerning our employee share option plans, see as incorporated by
reference, Note 13c of our consolidated financial statements.

ITEM 7.          MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.
           MAJOR SHAREHOLDERS

The
following table and notes thereto set forth certain information as of June 27,
2004 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.

39

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|Name of Beneficial Owner           |  | Number of Shares
  Beneficially Owned (1) |        | Percent of Shares
  Beneficially Owned |     
|---------------------------------- |  | ----------------------------------------- | ------ | -------------------------------------- | ----
|                                   |  |                                           |        |                                        |     
|DBSI Investment Ltd.(2)(3)         |  | 100,489,546                               | (4)    |                                        | 47.6
|Polar Communications Ltd.          |  | 21,019,724                                | (5)    |                                        | 11.9
|Clal Information Technologies Ltd. |  | 17,744,277                                | (6)(7) |                                        | 10.1
|Pelephone Communications Ltd.      |  | 16,527,549                                | (9)    |                                        | 9.4 
|M. Vertheim (Holdings Ltd.)        |  | 13,475,731                                | (10)   |                                        | 7.7 
|AMS Electronics Ltd.               |  | 10,745,556                                | (11)   |                                        | 6.3 

|(1) | The number
  of ordinary shares issued and outstanding on June 27, 2004 was 169,831,941.
  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) | Pursuant to
  a proxy instrument granted to DBSI Investment
  Ltd. by AMS Electronics Ltd. with respect to all of the voting power in the
  Company held by AMS, DBSI may be deemed to have actual voting power of 44%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(3) | As office
  holders of DBSI, Messrs. Barak Dotan and Yossi Ben Shalom may be considered
  to be the beneficial holders of the 47.6% of our issued share capital held by
  DBSI.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(4) | Includes
  41,363,637 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) | Messrs.
  Nochi Dankner, Shelly Dankner-Bergman, Ruth Manor and Avraham Livnat control
  Clal Information Technologies Ltd. through the IDB Group companies controlled
  by them as follows: 
(i) Ganden Investments I.D.B. Ltd. (Ganden), a
  private Israeli company, controlled by Nochi Dankner (who is the chairman of
  IDBH, IDBD and CII) and his sister Shelly Bergman (who is a director of IDBH,
  IDBD and CII), which holds 31.14% of the equity of and voting power in IDBH;                                                                                                                                                                                                                                                                 
|    | (ii) Manor
  Investments  IDB Ltd. (Manor), a private Israeli company controlled by
  Ruth Manor (whose husband, Isaac Manor, and their son, Dori Manor, are
  directors of IDBH, IDBD and CII), which holds 10.38% of the equity of and
  voting power in IDBH; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | (iii) Avraham
  Livnat Investments (2002) Ltd. (Livnat), a private Israeli company
  controlled by Avraham Livnat (Avraham Livnats son, Zvi Livnat, is director
  and Executive Vice President of IDBH, Deputy Chairman of IDBD and Co-Chief
  Executive Officer of CII. Avraham Livnats son, Shay Livnat, is director of
  IDBD and CII), which holds 10.38% of the equity of and voting power in
  IDBH.                                                                                                                                                                                                                                                                                                                                               
|    | Ganden,
  Manor and Livnat, owning in the aggregate approximately 51.9% of the equity
  of and voting power in IDBH, entered into a Shareholders Agreement relating,
  among other things, to their joint control of IDBH, the term of which is
  until May 19, 2023.  In addition, Ms.
  Bergman owns approximately 4.92% of the equity and voting power of IDBH.
  Consequently, the above-mentioned individuals may be considered to be the
  beneficial holders of the 10.1% of our issued share capital held by Clal
  Information Technologies Ltd. and the).85% held by its affiliates.                                                                                                                                                               

40

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|(9)  | Includes
  6,609,219 ordinary shares issuable upon the exercise of a currently
  exercisable warrant.
|---- | -----------------------------------------------------------------------------------------------------
|     |                                                                                                      
|(10) | Includes
  5,441,116 ordinary shares issuable upon the exercise of a currently
  exercisable warrant.
|     |                                                                                                      
|(11) | Includes
  165,000 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 Pointer in 2004. For further information regarding
such investments, conversion and acquisition see Item 4. Recent and
Investments and Divestitures.

B.          RELATED
PARTY TRANSACTIONS

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.

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.

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Employment Agreement
with our Chief Executive Officer.

In June
2003, our Audit Committee and Board of Directors approved an agreement with Mr.
Arik Avni to serve as our chief executive officer. Pursuant to the agreement, Mr. Avni receives an annual gross salary of NIS
300,000 and is also  eligible to receive
an annual bonus equivalent to 8% of our annual earnings before income tax. In
addition to the customary benefits in Israel, Mr. Avni was also granted options
to purchase 6,850,000 of our ordinary shares at an exercise price of $0.044 per
share. These options can be exercised in five tranches: 50% of such options may
be exercised following eighteen months of employment and the remaining 50% of
such options may be exercised in four equal amounts for each quarter
thereafter, pursuant to our 2003 option plan.

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

In September and October 2003, DBSI Investments Ltd., a controlling
shareholder of the Company (DBSI), Mr. Arik Avni - the Company's Chief
Executive Officer (the 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 Agreement between
the Company, DBSI and the Investors dated March 13, 2003. The amounts invested
were as follows: DBSI invested an aggregate amount of $600,000, in
consideration for which it was issued 13,636,364 shares and 9,545,455 warrants
exercisable at a price of $0.044 per share, the 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 4,577,272 of our ordinary shares and 3,204,090 warrants
exercisable at a price of $0.044 per share. 
(For further information, see Item 10. Related Party Transactions).

Cooperation and
Share Exchange Agreements with Pointer (Eden Telecom Group) Ltd.

On February
25, 2004, we entered into a cooperation agreement with Pointer (Eden Telecom
Group) Ltd. (Pointer Ltd.), the operator of our system in Israel. As part of
this agreement Pointer renewed its commitment to purchase exclusively from us
end units for its stolen vehicle retrieval system. Pointer 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 Pointer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
Pointer, to purchase 100% of the issued share capital of Pointer. Upon
completion of the agreement on June 27, 2004, we purchased all the outstanding
shares and options to purchase shares of Pointer. A number of options
held by its employees, were converted into options of our company,
constituting 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 approximately 26% of our issued share capital on a fully diluted
basis, post transaction. For information regarding our agreements with Pointer
see Item 4. Recent Developments.

C.          INTERESTS
OF EXPERTS AND COUNSEL

Not applicable

ITEM 8.          FINANCIAL
INFORMATION

A.          CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION

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

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Legal Proceedings

In
September 2000, Tracsat, our Argentinian subsidiary entered into a 30-month
contract with a third party. Pursuant to the contract, the subsidiary committed
itself to ordering a minimum level of unit installations from the third party.
In October 2001, Tracsat ceased to make minimum payments to the third party. A
suit was filed against Tracsat for the payment of the potential debt. Based on
a legal opinion, we recorded a provision in the amount of $151,000. The third
party sought to secure its claim, and in October 2003, an Argentinian court
ordered a lien on $86,000 of accounts receivable, owed to Tracsat by one of its
customers to secure part of the potential debt. For further information see
note 12d of our consolidated financial statements, attached hereto.

Our
aggregate potential exposure to all legal claims against us, excluding the
above-mentioned claim, represents less than $150,000.

B.          SIGNIFICANT
CHANGES

For a description
of significant events, which took place since the year ending December 31,
2003, 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. The table below sets forth the high and low closing prices of our
Ordinary Shares, as reported by Nasdaq or the OTC Bulletin Board during the
indicated periods.

| | Period                |  | High |       | Low | 
| | --------------------- |  | ---- | ----- | --- | 
| |                       |  |      |       |     | 
| |                       |  |      |       |     | 
| | May 2004              |  |      | 0.185 |     | 
| | April 2004            |  |      | 0.40  |     | 
| | March 2004            |  |      | 0.44  |     | 
| | February
  2004       |  |      | 0.48  |     | 
| | January 2004          |  |      | 0.58  |     | 
| | December
  2003       |  |      | 0.295 |     | 
| | Forth
  Quarter 2003  |  |      | 0.335 |     | 
| | Third
  Quarter 2003  |  |      | 0.26  |     | 
| | Second
  Quarter 2003 |  |      | 0.28  |     | 
| | First
  Quarter 2003  |  |      | 0.24  |     | 
| | Fourth
  Quarter 2002 |  |      | 0.35  |     | 
| | Third
  Quarter 2002  |  |      | 1.30  |     | 
| | Second
  Quarter 2002 |  |      | 1.50  |     | 
| | First
  Quarter 2002  |  |      | 2.35  |     | 
| | 2003                  |  |      | 0.335 |     | 
| | 2002                  |  |      | 2.35  |     | 
| | 2001                  |  |      | 4.689 |     | 
| | 2000                  |  |      | 13.44 |     | 
| | 1999                  |  |      | 4.44  |     | 

As of March
19, 2004, there were 83 record holders of Ordinary Shares, including 45 record
holders in the United States (who held 34,995,467 of our outstanding Ordinary
Shares).

B.          PLAN
OF DISTRIBUTION

Not applicable

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C.          MARKETS

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

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; Israel Companies Law

Articles of Association

In 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.

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 only be amended by a resolution carried
at a General Meeting by 75% of those who voted. The shareholders
rights may not be modified in any other way unless otherwise expressly provided
in the terms of issuance of the shares.

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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
  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 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 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
Companies Law codifies the fiduciary duties that office holders,
including directors and executive officers, owe to a company. An office holder,
is defined in the 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
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.

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.

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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. 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 are present in person or by proxy at the
meeting, 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.

In
addition, a private placement of securities that 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, requires approval by the board of
directors and the shareholders of the company. The regulations to the
Companies Law provide certain exceptions. Any placement of securities that does
not fit the above description may be issued at the discretion of the Board of
Directors.

Under the
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 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.

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

C.          MATERIAL
CONTRACTS

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

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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 at the rate of 36% of taxable
income. According to a proposed amendment to Israeli tax law, the company tax
rate may be reduced in the near future to 35%, and may be additionally reduced
in subsequent tax years.  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.

Law for the Encouragement of Capital
Investments, 1959

Certain of
our operations have been granted Approved Enterprise status under the Law for
the Encouragement of Capital Investments, 1959, as amended (referred to as the
Investment Law).

The
Investment Law provides that a capital investment in eligible facilities may,
upon application to the Investment Center of the Ministry of Industry and Trade
of the State of Israel (referred to as the Investment Center), be designated as
an Approved Enterprise. Each certificate of approval for an Approved Enterprise
relates to a specific investment program delineated both by its financial
scope, including its capital sources, and by its physical characteristics,
e.g., the equipment to be purchased and utilized pursuant to the program. The
tax benefits derived from any such certificate of approval relate only to
taxable income attributable to the specific Approved Enterprise.

Taxable
income of a company derived from an Approved Enterprise is subject to company
tax at the rate of up to 25% (rather than the ordinary company tax rate as
stated above) for a period of time termed the benefit period. The benefit
period is a period of seven years commencing with the year in which the
Approved Enterprise first generated taxable income. The benefit period may be
shorter as it is limited to 12 years from the commencement of production or 14
years from the date of approval, whichever is earlier. Under certain
circumstances (as further detailed below), the benefits period may extend to a
maximum of ten years from the commencement of the benefit period.
Notwithstanding the foregoing, taxable income, of a company located in certain
geographic locations, derived from an Approved Enterprise approved after
January 1, 1997, is tax exempt for the first two years of the Benefit Period
and is taxed at a rate of 25% for the remainder of the Benefit Period. A
company that operates under more than one approval or that has capital
investments that are only partly approved (such a company being designated as a
Mixed Enterprise), its effective Company Tax rate is the result of a weighted
combination of the various applicable rates.

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A company
that qualifies as a Foreign Investors Company is entitled to further
reductions in the tax rate normally applicable to Approved Enterprises. Such
benefits will be granted only to enterprises, which sought approval in
accordance with the applicable provisions of the Investment Law. Subject to
certain conditions, a Foreign Investors' Company is a company which has more
than 25% of its combined shareholders' investment in share capital (in terms of
rights to profits, voting and the appointment of directors) and in long term
shareholders' loans made by persons who are not residents of Israel. The
percentage owned by nonresidents of Israel for any tax year will be determined
by the lowest percentage of any of the above rights held by nonresidents during
that year. Such a company will pay company tax at reduced rates for an extended
ten-year (rather than the otherwise applicable seven-year) period and is exempt
from any other tax on the income from its Approved Enterprise:

For a
company with foreign investment of:

| | Rate of Foreign Investment    |  | Company Tax Rate |   
| | ----------------------------- |  | ---------------- | --
| | Over 25% but less than 49%    |  |                  | 25
| | 49% or more but less than 74% |  |                  | 20
| | 74% or more but less than 90% |  |                  | 15
| | 90% of more                   |  |                  | 10

In
addition, a company owning an Approved Enterprise may elect to forego certain
government grants extended to Approved Enterprises in return for an
alternative package of tax benefits (the Alternative Package). Under the
Alternative Package, a company's undistributed income derived from an Approved
Enterprise will be exempt from Company Tax for a period of between two and ten
years, depending in part on the geographic location of the Approved Enterprise
within Israel, and such company will be eligible for the tax benefits under the
Investment Law for the remainder of the Benefits Period.

A company
that has elected the Alternative Package and that subsequently pays a dividend
out of income derived from the Approved Enterprise(s) during the tax exemption
period will be subject to deferred company tax in respect of the amount
distributed (including the companys tax thereon) at the rate which would have
been applicable had such company not elected the Alternative Package. This rate
is generally 10% to 25%, depending on the extent to which non-Israeli shareholders
hold such companys shares.

The
dividend recipient is taxed at the reduced rate applicable to dividends from
Approved Enterprises (generally, 15% as compared to 25%), if the dividend is
distributed during the tax benefit period or within 12 years after this period.
However, the limitation does not apply if the company qualifies as a foreign
investors company. This tax must be withheld by such company at source,
regardless of whether the dividend is converted into foreign currency.

Subject to
certain provisions concerning income subject to mixed enterprises, all
dividends are considered to be attributable to the entire enterprise and the
effective tax rate on the dividend is the result of a weighted combination of
the various applicable tax rates. However, such company is not obliged to
distribute exempt retained profits under the Alternative Package, and such
company may generally decide from which years profits to declare dividends.

The
Investment Law also provides that an Approved Enterprise is entitled to
accelerated depreciation on its property and equipment that are included in an
approved investment program. We have not utilized this benefit.

48

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Each
application to the Investment Center is reviewed separately, and a decision as
to whether or not to approve such application is based, among other things, on
the then prevailing criteria set forth in the Investment Law, on the specific
objectives of the applicant company set forth in such application and on
certain financial criteria of the applicant company. Accordingly, there can be
no assurance that any such application will be approved. In addition, the
benefits available to an Approved Enterprise are conditional upon the
fulfillment of certain conditions stipulated in the Investment Law and its
regulations and the criteria set forth in the certificate of approval, as
described above. In the event that these conditions are violated, in whole or
in part, a company with an Approved Enterprise would be required to refund the
amount of tax benefits, with the addition of the Israeli CPI linkage
differences and interest.

It has
recently been announced that significant changes in the Investment Law,
including the tax benefits therein, can be expected in the near future.
Nonetheless, the Investment Law provides that terms and benefits included in
any certificate of approval already granted will remain subject to the
provisions of the law as they were on the date of such approval. Therefore, any
future changes in the Investment Law are likely to apply only to applications
approved after such changes are legislated.

In 2003 and
2004, we received several letters from the Israel Investment Center asserting
that we did not fully implement our approved investment program and as such,
all of the benefits we received under this approved investment program may be
cancelled. Since we have operated at a loss since our inception, we have not
been able to take advantage of the tax exemptions as an Approved Enterprise and
therefore the cancellation of our approved investment program may only have an
impact on our future operations.

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.

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As a result
of the recent tax reform legislation in Israel, gains from the sale of our
ordinary shares derived since January 1, 2003 will, in general, be liable
to capital gains tax of up to 15%.  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.

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.

50

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---

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 quarterly and year-end financial statements as well as other
information.

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

I.          SUBSIDIARY
INFORMATION

Not Applicable

ITEM
11.          QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risks

Our
exposure to market rate risk for changes in interest rates relates primarily to
funds borrowed by us from banks. We have not used interest derivative financial
instruments. As of December 31, 2003, we had financial assets totaling approximately
$794,000 bearing variable interest rates and total funds borrowed of
$4,204,000. The net decrease in our earnings for the next year resulting from
an increase of 10% in variable interest rates will be approximately $23,000,
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 increase in fair value
resulting from a hypothetical 10% decrease in the year-end dollar exchange
rate. Regarding our operations in Israel, as of December 31, 2003 we had net
liabilities of $1.6 million and expenses of $1.6 million, 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 $317,000 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, 2003 we had net liabilities of $200,000 and expenses of
$534,000, denominated in the Argetinian Peso. A hypothetical 10% devaluation of
the Argentinian Peso against the US dollar would thus result in approximately a
$73,000 net decrease in our earnings.

51

---

---

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 negative 1.9% (deflation), 6.5%
and 1.4% in 2003, 2002 and 2001, respectively. At the same time the U.S. dollar devalued against the NIS by
approximately ­­­­7.6% in 2003, while in 2002 and 2001 the NIS devalued against
the U.S. Dollar 7.3% and 9.3%, respectively. For further discussion with
respect to the devaluation of the NIS, see the discussion under the caption
Impact of Inflation and Devaluation on Results of Operations, Liabilities, and
Assets in Item 5.

ITEM
12.          DESCRIPTIONS OF
SECURITIES OTHER THAN EQUITY SECURITIES

Not Applicable.

PART II

ITEM
13.          DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES

Not applicable.

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

Not applicable.

ITEM
15.          CONTROLS AND PROCEDURES

An
evaluation was performed under the supervision and with the participation of
our management, including our chief executive officer and chief financial
officer, of the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934, as amended). Based on that evaluation, which was completed within 90 days
of the filing date of this annual 20-F, our chief executive officers and chief
financial officer, concluded that our disclosure controls and procedures were
effective though we are constantly engaged in the process of improving these
controls and procedures. There have been no significant changes in our
disclosure controls or in other factors that could significantly affect
disclosure controls subsequent to the date of the evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

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.

52

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---

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND
SERVICES.

The following table presents fees for professional audit services
rendered by our principal auditors for the audit of the Companys consolidated annual
financial statements for the years ended December 31, 2003 and 2002

|                        |  | 2003                 |    | 2002 | 
|----------------------- |  | -------------------- | -- | ---- | 
|                        |  | In USD  in thousands |   
|Audit
  Fees(1)         |  |                      | 25 |      | 
|Audit-Related
  Fees(2) |  |                      | 18 |      | 
|Tax Fees(3)             |  |                      | 4  |      | 
|All Other
  Fees        |  |                      | -  |      | 

|(1) | Audit fees
  consist of fees for professional services rendered for the audit of the
  Companys consolidated financial statements and review of financial
  statements and services normally provided by the independent auditor in
  connection with statutory and regulatory filings or engagements.                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                   
|(2) | Audit-related
  fees are fees principally for services not provided in Audit Fees, such as
  services provided in connection with the preparation of our registration
  statement on Form F-3, filed with the SEC on December 9, 2003.                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                   
|(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.

ITEM 16D. EXEMPTIONS FROM THE LISTING
STANDARDS FROM AUDIT COMMITTEES.

Not
Applicable.

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

None.

PART III

ITEM 17.          FINANCIAL
STATEMENTS

Not Applicable.

ITEM 18.          FINANCIAL
STATEMENTS

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

ITEM 19.          EXHIBITS

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

1.2          Amended
Articles of Association, adopted August 26, 2003. 4.1              Share Purchase Agreement, dated January 15, 2002,
between A.M.S. Electronics Ltd. and us
filed by us as Exhibit 3.8 to our Annual Report on Form 20-F for the year ended
December 31, 2001, and incorporated herein by reference.

53

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---

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          Offer to
Acquire Agreement, dated as of December 24, 2002 between Storm International
and us, filed by us as Exhibit 3.10 to our Annual Report on Form 20-F for the
year ended December 31, 2002, and incorporated herein by reference.

4.4          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.

4.5          Share
Purchase Agreement, dated as of March 13, 2003 by and among DBSI and other
Investors and us, filed by us as Exhibit 3.12 to our Annual Report on Form 20-F
for the year ended December 31, 2002, and incorporated herein by reference.

4.6          English
summary of the lease agreement by and between Yahalomei Givatayim and us, dated
June 15, 2002.

4.7          Management
services Agreement by and between DBSI and us, dated August 6, 2003.

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 & Kasirer Certified
Public Accountants (Israel).

10.2       Consent of
Grant Thornton Argentina S.C.

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.

54

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---

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 30th day of June, 2004.

NEXUS TELOCATION SYSTEMS LIMITED

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

55

---

---

CERTIFICATIONS

I, Arik Avni, certify that:

1.    I have reviewed this annual report on Form
20-F of Nexus Telocation Systems Ltd.;

2.    Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;

3.    Based on my knowledge, the financial
statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of
operations and cash flows of the company as of, and for, the periods presented
in this annual report;

4.    The companys other certifying officer and I
are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13(a)-15(e)) for the company and
have:

| | (a)  Designed
  such disclosure controls and procedures , or caused such disclosure controls
  and procedures to be designed under our supervision, to ensure that material
  information relating to the company, including its consolidated subsidiaries,
  is made known to us by others within those entities, particularly during the
  period in which this annual report is being prepared;
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                   
| | (b)  Evaluated
  the effectiveness of the companys disclosure controls and procedures and
  presented in this report our conclusions about the effectiveness of the
  disclosure controls and procedures, as of the end of the period covered by
  this report based on such evaluation; 
  and                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                   
| | (c)  Disclosed
  in this report any change in the companys internal control over financial
  reporting that occurred during the period covered by the annual report that
  has materially affected, or is reasonably likely to materially affect, the
  companys internal control over financial reporting.                                                                                     

5.    The companys other certifying officers and I
have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the companys auditors and the audit committee of
companys board of directors (or persons performing the equivalent functions):

| | (a)  All
  significant deficiencies and material weaknesses in the design or operation
  of internal control over financial reporting which are reasonably likely to
  adversely affect the companys ability to record, process, summarize and
  report financial information; and
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                    
| | (b)  Any
  fraud, whether or not material, that involves management or other employees
  who have a significant role in the companys internal control over financial
  reporting .                                                                                                

June 30, 2004

|/S/    ARIK AVNI       
|-----------------------
|                       
|Arik Avni              
|Chief Executive Officer

56

---

---

CERTIFICATIONS

I, Ronen Stein, certify that:

1.    I have reviewed this annual report on Form
20-F of Nexus Telocation Systems Ltd.;

2.    Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;

3.    Based on my knowledge, the financial
statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of
operations and cash flows of the company as of, and for, the periods presented
in this annual report;

4.    The companys other certifying officer and I
are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13(a)-15(e)) for the company and
have:

| | (a)  Designed
  such disclosure controls and procedures, or caused such disclosure controls
  and procedures to be designed under our supervision, to ensure that material
  information relating to the company, including its consolidated subsidiaries,
  is made known to us by others within those entities, particularly during the
  period in which this annual report is being prepared;
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                  
| | (b)  Evaluated
  the effectiveness of the companys disclosure controls and procedures and
  presented in this report our conclusions about the effectiveness of the
  disclosure controls and procedures, as of the end of the period covered by
  this report based on such evaluation; 
  and                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                  
| | (c)  Disclosed
  in this report any change in the companys internal control over financial
  reporting that occurred during the period covered by the annual report that
  has materially affected, or is reasonably likely to materially affect, the
  companys internal control over financial reporting.                                                                                    

5.    The companys other certifying officers and I
have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the companys auditors and the audit committee of
companys board of directors (or persons performing the equivalent functions):

| | (a)  All
  significant deficiencies and material weaknesses in the design or operation
  of internal control over financial reporting which are reasonably likely to
  adversely affect the companys ability to record, process, summarize and
  report financial information; and
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                    
| | (b)  Any
  fraud, whether or not material, that involves management or other employees
  who have a significant role in the companys internal control over financial
  reporting; and                                                                                             

June 30, 2004

|/S/    RONEN STEIN     
|-----------------------
|                       
|Ronen Stein            
|Chief Financial Officer

57

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EXHIBIT 13.1

CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In
connection with the Annual Report of Nexus Telocation Systems Ltd. (the
Company) on Form 20-F for the year ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the Report), I, Arik
Avni, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002, that to my knowledge:

|                | 1.                        | the Report
  fully complies with the requirements of section 13(a) of
  the Securities Exchange Act of 1934; and                                          
|--------------- | ------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|                |                           |                                                                                                                                                           
|                | 2.                        | the
  information contained in the Report fairly presents, in all
  material respects, the financial condition and results of operations
  of the Company.
|                |                           |                                                                                                                                                           
|                | /S/ ARIK
  AVNI           |                                                                                                                                                           
|                |                           |                                                                                                                                                           
|                | Arik Avni                
|June 30,
  2004 | Chief
  Executive Officer
|                |                           |                                                                                                                                                           

A signed original of this written statement required by Section 906 has
been provided to the Company and will be retained by the Company and furnished
to the Securities and Exchange Commission or its staff upon request.

58

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---

EXHIBIT 13.2

CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In
connection with the Annual Report of Nexus Telocation Systems Ltd. (the
Company) on Form 20-F for the year ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the Report), I, Ronen
Stein, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002, that to my knowledge:

|                | 1.                        | the Report
  fully complies with the requirements of section 13(a) of
  the Securities Exchange Act of 1934; and                                          
|--------------- | ------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|                |                           |                                                                                                                                                           
|                | 2.                        | the
  information contained in the Report fairly presents, in all
  material respects, the financial condition and results of operations
  of the Company.
|                |                           |                                                                                                                                                           
|                | /S/ RONEN
  STEIN         |                                                                                                                                                           
|                |                           |                                                                                                                                                           
|                | Ronen Stein              
|June 30,
  2004 | Chief
  Financial Officer
|                |                           |                                                                                                                                                           

A signed original of this
written statement required by Section 906 has been provided to the Company and
will be retained by the Company and furnished to the Securities and Exchange
Commission or its staff upon request.

59

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NEXUS TELOCATION
SYSTEMS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED
FINANCIAL STATEMENTS

AS OF DECEMBER 31,
2003

IN U.S. DOLLARS

INDEX

|                                                             | Page  
|------------------------------------------------------------ | ------
|                                                             |       
|                                                             |       
|Report of Independent Auditors                               | 2     
|                                                             |       
|Consolidated Balance Sheets                                  | 3 - 4 
|                                                             |       
|Consolidated Statements of Operations                        | 5     
|                                                             |       
|Statements of Changes in Shareholders
  Equity (Deficiency) | 6     
|                                                             |       
|Consolidated Statements of Cash Flows                        | 7 - 8 
|                                                             |       
|Notes to Consolidated Financial Statements                   | 9 - 32

- - - - - - - - - - - -

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| |  |                       | Kost Forer
  Gabbay & Kasierer |                       | Phone: 972-3-6232525
| |  | ---------------------- | ------------------------------ | ---------------------- | --------------------
| |  | 3 Aminadav St.         |                                | Fax:     972-3-5622555
| |  | Tel-Aviv 67067, Israel |                                |                       

REPORT OF INDEPENDENT AUDITORS

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, 2003 and
2002 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, 2003. 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 Tracsat S.A., an Argentinian subsidiary, for the year ended
December 31, 2003, which statements reflect total assets constituting 31.8% as
of December 31, 2003 and total revenues constituting 46.11%, of the related
consolidated totals for the year then ended. Those statements were audited by
other auditors whose reports have been furnished to us, and our opinion,
insofar as it relates to data included for Tracsat S.A. is based solely on the
reports of 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. 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
audits and the report of other auditors provide a reasonable basis for our
opinion.

In our
opinion, based on our audits and the reports of 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, 2003 and 2002 and the consolidated results of
their operations and cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States.

As discussed
in Note 1, the Company has adopted United States generally accepted accounting
principles (U.S. GAAP) for preparation of its financial statements.
Previously, the Companys primary financial statements were prepared in
accordance with accounting principles generally accepted in Israel. Prior
years financial statements have been restated and are presented in accordance
with U.S. GAAP.

|Tel-Aviv, Israel | KOST FORER
  GABBAY & KASIERER  
|---------------- | --------------------------------
|March 7, 2004    | A Member of Ernst & Young Global

---

---

Grant Thornton

# Auditores y Consultors

# REPORT OF INDEPENDENT
AUDITORS

To the Shareholders ofTracsat SA

We have audited the accompanying
balance sheet of Tracsat S.A. as of December 31, 2003, and the related statements of
operations, changes in shareholders deficiency and cash flows for the year then
ended. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our
audit.

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

In our opinion, based on our audit,
the financial statements referred to above present fairly, in all respects, the financial
position of Tracsat S.A. as of December 31, 2003 and the results of its operations and
cash flows for the period then ended, in accordance with generally accepted accounting
principles in the United States.

GRANT THORNTON AREGENTINA
S.C.

/s/ Leonardo Fraga
Partner
Buenos Aires, Argentina
February 26, 2004



- 2 -

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

|                                                                                                                                    |  | December
  31, |      
|----------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -----
|                                                                                                                                    |  |                |      
|                                                                                                                                    |  | 2003           |      
|                                                                                                                                    |  |                |      
|ASSETS                                                                                                                              |  |                |      
|                                                                                                                                    |  |                |      
|CURRENT
  ASSETS:                                                                                                                   |  |                |      
|Cash
  and cash equivalents                                                                                                         |  | $              | 708  
|Short-term
  bank deposits                                                                                                          |  |                | 11   
|Trade
  receivables (net of allowance for doubtful accounts of $ 0 and $ 860
        at December 31, 2003 and 2002,
  respectively) |  |                | 1,417
|Other
  accounts receivable and prepaid expenses (Note 3)                                                                           |  |                | 641  
|Inventories
  (Note 4)                                                                                                              |  |                | 957  
|                                                                                                                                    |  |                |      
|                                                                                                                                    |  |                |      
|Total
  current assets                                                                                                              |  |                | 3,734
|                                                                                                                                    |  |                |      
|                                                                                                                                    |  |                |      
|LONG-TERM
  INVESTMENTS:                                                                                                            |  |                |      
|Other
  long-term accounts receivable                                                                                               |  |                | 75   
|Severance
  pay fund                                                                                                                |  |                | 502  
|Investment
  in investee (Note 5)                                                                                                   |  |                | 2,064
|                                                                                                                                    |  |                |      
|                                                                                                                                    |  |                |      
|                                                                                                                                    |  |                | 2,641
|                                                                                                                                    |  |                |      
|                                                                                                                                    |  |                |      
|PROPERTY AND
  EQUIPMENT, NET (Note 6)                                                                                              |  |                | 1,772
|                                                                                                                                    |  |                |      
|                                                                                                                                    |  |                |      
|INTANGIBLE
  ASSETS, NET (Note 7)                                                                                                   |  |                | 143  
|                                                                                                                                    |  |                |      
|                                                                                                                                    |  |                |      
|ASSETS
  ATTRIBUTED TO DISCONTINUED OPERATIONS (Note 19)                                                                            |  |                | -    
|                                                                                                                                    |  |                |      
|                                                                                                                                    |  |                |      
|Total
  assets                                                                                                                      |  | $              | 8,290
|                                                                                                                                    |  |                |      

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

- 3 -

---

---

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

|                                                                                                                                                                                                                 |  | December
  31, |        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------
|                                                                                                                                                                                                                 |  |                |        
|                                                                                                                                                                                                                 |  | 2003           |        
|                                                                                                                                                                                                                 |  |                |        
|LIABILITIES
  AND SHAREHOLDERS EQUITY (DEFICIENCY)                                                                                                                                                              |  |                |        
|                                                                                                                                                                                                                 |  |                |        
|CURRENT
  LIABILITIES:                                                                                                                                                                                           |  |                |        
|Short-term
  bank credit (Note 8)                                                                                                                                                                                |  | $              | 1,204  
|Trade
  payables                                                                                                                                                                                                 |  |                | 871    
|Other
  accounts payable and accrued expenses (Note 9)                                                                                                                                                           |  |                | 1,806  
|                                                                                                                                                                                                                 |  |                |        
|                                                                                                                                                                                                                 |  |                |        
|Total
  current liabilities                                                                                                                                                                                      |  |                | 3,881  
|                                                                                                                                                                                                                 |  |                |        
|                                                                                                                                                                                                                 |  |                |        
|LONG-TERM
  LIABILITIES:                                                                                                                                                                                         |  |                |        
|Long-term
  loan (Note 10)                                                                                                                                                                                       |  |                | 3,000  
|Accrued
  severance pay                                                                                                                                                                                          |  |                | 691    
|Convertible
  debenture (Note 11)                                                                                                                                                                                |  |                | -      
|                                                                                                                                                                                                                 |  |                |        
|                                                                                                                                                                                                                 |  |                |        
|                                                                                                                                                                                                                 |  |                | 3,691  
|                                                                                                                                                                                                                 |  |                |        
|                                                                                                                                                                                                                 |  |                |        
|LIABILITIES
  ATTRIBUTED TO DISCONTINUED OPERATIONS
     (Note 19)                                                                                                                                               |  |                | -      
|                                                                                                                                                                                                                 |  |                |        
|                                                                                                                                                                                                                 |  |                |        
|SHAREHOLDERS
  EQUITY (DEFICIENCY) (Note 13):                                                                                                                                                                   |  |                |        
|Share
  capital -                                                                                                                                                                                                |  |                |        
|Ordinary
  shares of NIS 0.03 par value:                                                                                                                                                                         |  |                |        
|Authorized -
  200,000,000 and 16,376,381 shares at December 31, 2003
           and 2002; Issued and
  outstanding - 114,529,974 and 11,289,932 shares
           at December 31, 2003
  and 2002, respectively |  |                | 773    
|Additional
  paid-in capital                                                                                                                                                                                     |  |                | 83,239 
|Deferred
  stock compensation                                                                                                                                                                                    |  |                | (566   
|Cumulative
  foreign currency translation adjustments                                                                                                                                                            |  |                | (840   
|Accumulated
  deficit                                                                                                                                                                                            |  |                | (81,888
|                                                                                                                                                                                                                 |  |                |        
|                                                                                                                                                                                                                 |  |                |        
|Total
  shareholders equity (deficiency)                                                                                                                                                                        |  |                | 718    
|                                                                                                                                                                                                                 |  |                |        
|                                                                                                                                                                                                                 |  |                |        
|                                                                                                                                                                                                                 |  | $              | 8,290  
|                                                                                                                                                                                                                 |  |                |        

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

- 4 -

---

---

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

|                                                                                                |  | Year ended
  December 31, |       
|----------------------------------------------------------------------------------------------- |  | ------------------------- | ------
|                                                                                                |  |                           |       
|                                                                                                |  | 2003                      |       
|                                                                                                |  |                           |       
|Revenues:                                                                                       |  |                           |       
|Sales                                                                                           |  | $                         | 2,774 
|Services                                                                                        |  |                           | 2,376 
|                                                                                                |  |                           |       
|                                                                                                |  |                           |       
|Total
  revenues (Note 16b)                                                                     |  |                           | 5,150 
|                                                                                                |  |                           |       
|                                                                                                |  |                           |       
|Cost of
  revenues:                                                                             |  |                           |       
|Sales                                                                                           |  |                           | 2,099 
|Services                                                                                        |  |                           | 2,075 
|                                                                                                |  |                           |       
|                                                                                                |  |                           |       
|Total cost
  of revenues                                                                        |  |                           | 4,174 
|                                                                                                |  |                           |       
|                                                                                                |  |                           |       
|Gross profit                                                                                    |  |                           | 976   
|                                                                                                |  |                           |       
|                                                                                                |  |                           |       
|Operating
  expenses:                                                                           |  |                           |       
|Research
  and development, net (Note 17a)                                                      |  |                           | 664   
|Selling
  and marketing                                                                         |  |                           | 621   
|General
  and administrative                                                                    |  |                           | 1,410 
|Amortization
  of deferred stock compensation *)                                                |  |                           | 400   
|                                                                                                |  |                           |       
|                                                                                                |  |                           |       
|Total
  operating expenses                                                                      |  |                           | 3,095 
|                                                                                                |  |                           |       
|                                                                                                |  |                           |       
|Operating
  loss                                                                                |  |                           | 2,119 
|Financial
  expenses, net (Note 17b)                                                            |  |                           | 1,105 
|Other income
  (expenses), net (Note 17c)                                                       |  |                           | (32   
|                                                                                                |  |                           |       
|                                                                                                |  |                           |       
|Loss from
  continuing operations before minority interest                                      |  |                           | 3,256 
|Minority
  interest in losses of a subsidiary                                                   |  |                           | -     
|                                                                                                |  |                           |       
|                                                                                                |  |                           |       
|Loss from
  continuing operations                                                               |  |                           | 3,256 
|Loss from
  discontinued operations (Note 19)                                                   |  |                           | -     
|Gain from
  disposal of discontinued operations                                                 |  |                           | 8,524 
|                                                                                                |  |                           |       
|                                                                                                |  |                           |       
|Net income
  (loss)                                                                             |  | $                         | 5,268 
|                                                                                                |  |                           |       
|                                                                                                |  |                           |       
|Basic and
  diluted net loss per share from continuing
     operations (in U.S. $)              |  | $                         | 0.04  
|Basic and
  diluted net earnings (loss) per share from
     discontinued operations (in U.S. $) |  |                           | 0.10  
|                                                                                                |  |                           |       
|                                                                                                |  |                           |       
|Basic and
  diluted net earnings (loss) per share (in U.S. $)                                   |  | $                         | 0.06  
|                                                                                                |  |                           |       
|                                                                                                |  |                           |       
|Weighted
  average number of shares outstanding (in
     thousands)                             |  |                           | 85,567
|                                                                                                |  |                           |       
|                                                                                                |  |                           |       
|*)  Stock-based
  compensation relates to the following:                                        |  |                           |       
|Research
  and development                                                                      |  | $                         | 125   
|General
  and administrative                                                                    |  |                           | 275   
|                                                                                                |  |                           |       
|                                                                                                |  |                           |       
|Total                                                                                           |  | $                         | 400   
|                                                                                                |  |                           |       

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

- 5 -

---

---

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

|                                                                  |  | Share
  capital |     | Additional
  paid-in
  capital |   | Deferred
  stock
  compensation |  | Cumulative
  foreign
  currency
  translation
  adjustments |      | Accumulated
  deficit |   | Total
  shareholders
  equity
  (deficiency) |  
|----------------------------------------------------------------- |  | --------------- | --- | ------------------------------ | - | ------------------------------- |  | ----------------------------------------------------------- | ---- | --------------------- | - | --------------------------------------------- | -
|                                                                  |  |                 |     |                                |   |                                 |  |                                                             |      |                       |   |                                               |  
|                                                                  |  |                 |     |                                |   |                                 |  |                                                             |      |                       |   |                                               |  
|Balance as
  of January 1, 2001                                   |  | $               | 67  |                                | $ | 69,584                          |  | $                                                           | -    |                       | $ | -                                             |  
|                                                                  |  |                 |     |                                |   |                                 |  |                                                             |      |                       |   |                                               |  
|Issuance of
  shares, net                                         |  |                 | 13  |                                |   | 3,962                           |  |                                                             | -    |                       |   | -                                             |  
|Issuance of
  shares in respect of
     acquisition of subsidiary |  |                 | 3   |                                |   | 364                             |  |                                                             | -    |                       |   | -                                             |  
|Conversion
  of convertible debentures                            |  |                 | 8   |                                |   | 2,492                           |  |                                                             | -    |                       |   | -                                             |  
|Foreign
  currency translation adjustments                        |  |                 | -   |                                |   | -                               |  |                                                             | -    |                       |   | (565                                          | )
|Net loss                                                          |  |                 | -   |                                |   | -                               |  |                                                             | -    |                       |   | -                                             |  
|                                                                  |  |                 |     |                                |   |                                 |  |                                                             |      |                       |   |                                               |  
|                                                                  |  |                 |     |                                |   |                                 |  |                                                             |      |                       |   |                                               |  
|Balance as
  of December 31, 2001                                 |  |                 | 91  |                                |   | 76,402                          |  |                                                             | -    |                       |   | (565                                          | )
|                                                                  |  |                 |     |                                |   |                                 |  |                                                             |      |                       |   |                                               |  
|Issuance of
  shares, net                                         |  |                 | 3   |                                |   | 971                             |  |                                                             | -    |                       |   | -                                             |  
|Foreign
  currency translation adjustments                        |  |                 | -   |                                |   | -                               |  |                                                             | -    |                       |   | (327                                          | )
|Net loss                                                          |  |                 | -   |                                |   | -                               |  |                                                             | -    |                       |   | -                                             |  
|                                                                  |  |                 |     |                                |   |                                 |  |                                                             |      |                       |   |                                               |  
|                                                                  |  |                 |     |                                |   |                                 |  |                                                             |      |                       |   |                                               |  
|Balance as
  of December 31, 2002                                 |  |                 | 94  |                                |   | 77,373                          |  |                                                             | -    |                       |   | (892                                          | )
|                                                                  |  |                 |     |                                |   |                                 |  |                                                             |      |                       |   |                                               |  
|Issuance of
  shares, net                                         |  |                 | 570 |                                |   | 3,172                           |  |                                                             | -    |                       |   | -                                             |  
|Conversion
  of convertible debenture                             |  |                 | 109 |                                |   | 614                             |  |                                                             | -    |                       |   | -                                             |  
|Deferred
  stock compensation                                     |  |                 | -   |                                |   | 966                             |  |                                                             | (966 | )                     |   | -                                             |  
|Amortization
  of deferred stock
     compensation                |  |                 | -   |                                |   | -                               |  |                                                             | 400  |                       |   | -                                             |  
|Induced
  conversion of convertible
     debenture                |  |                 | -   |                                |   | 1,011                           |  |                                                             | -    |                       |   | -                                             |  
|Issuance of
  warrants to bank                                    |  |                 | -   |                                |   | 103                             |  |                                                             | -    |                       |   | -                                             |  
|Foreign
  currency translation adjustments                        |  |                 | -   |                                |   | -                               |  |                                                             | -    |                       |   | 52                                            |  
|Net income                                                        |  |                 | -   |                                |   | -                               |  |                                                             | -    |                       |   | -                                             |  
|                                                                  |  |                 |     |                                |   |                                 |  |                                                             |      |                       |   |                                               |  
|                                                                  |  |                 |     |                                |   |                                 |  |                                                             |      |                       |   |                                               |  
|Balance as
  of December 31, 2003                                 |  | $               | 773 |                                | $ | 83,239                          |  | $                                                           | (566 | )                     | $ | (840                                          | )
|                                                                  |  |                 |     |                                |   |                                 |  |                                                             |      |                       |   |                                               |  

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

- 6 -

---

---

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

|                                                                                                     |  | Year ended
  December 31, |       
|---------------------------------------------------------------------------------------------------- |  | ------------------------- | ------
|                                                                                                     |  |                           |       
|                                                                                                     |  | 2003                      |       
|                                                                                                     |  |                           |       
|Cash flows
  from operating activities:                                                              |  |                           |       
|Net
  income (loss)                                                                                  |  | $                         | 5,268 
|Adjustments
  required to reconcile net income (loss) net cash
        used in operating activities: |  |                           |       
|Loss
  (gain) from discontinued operations                                                           |  |                           | (8,524
|Depreciation
  and amortization                                                                      |  |                           | 1,171 
|Interest
  on convertible debenture                                                                  |  |                           | 3     
|Accrued
  severance pay, net                                                                         |  |                           | (146  
|Minority
  interest in losses of subsidiary                                                          |  |                           | -     
|Impairment
  of investments                                                                          |  |                           | -     
|Write-off
  of inventories                                                                           |  |                           | 111   
|Loss
  (gain) from sale of property and equipment                                                    |  |                           | 21    
|Decrease
  (increase) in trade receivables                                                           |  |                           | (265  
|Decrease
  in other accounts receivable and prepaid expenses                                         |  |                           | 111   
|Increase
  in other long-term accounts receivable                                                    |  |                           | (26   
|Decrease
  (increase) in inventories                                                                 |  |                           | 196   
|Increase
  (decrease) in trade payables                                                              |  |                           | (1,145
|Decrease
  in other accounts payable and accrued expenses                                            |  |                           | (261  
|Increase
  in customer advances                                                                      |  |                           | -     
|Erosion
  of long-term loan and capital note investment in
           investee                       |  |                           | (57   
|Amortization
  of deferred stock compensation in respect of
           options and warrants          |  |                           | 400   
|Induced
  conversion of convertible debenture                                                        |  |                           | 1,011 
|                                                                                                     |  |                           |       
|                                                                                                     |  |                           |       
|Net cash
  used in continuing operations operating activities                                        |  |                           | (2,132
|                                                                                                     |  |                           |       
|Net cash
  used in discontinued operations operating activities                                      |  |                           | -     
|                                                                                                     |  |                           |       
|                                                                                                     |  |                           |       
|Net cash
  used in operating activities                                                              |  |                           | (2,132
|                                                                                                     |  |                           |       
|                                                                                                     |  |                           |       
|Cash flows
  from investing activities:                                                              |  |                           |       
|Purchase
  of property and equipment                                                                 |  |                           | (1,099
|Proceeds
  from (investment in) short-term bank deposits                                             |  |                           | 62    
|Investment
  in other assets                                                                         |  |                           | -     
|Proceeds
  from sale of property and equipment                                                       |  |                           | -     
|Investment
  in investees                                                                            |  |                           | -     
|Acquisition
  of subsidiary consolidated for the first time, net
        of cash acquired (a)        |  |                           | -     
|                                                                                                     |  |                           |       
|                                                                                                     |  |                           |       
|Net cash
  used in continuing operations investing activities                                        |  |                           | (1,037
|                                                                                                     |  |                           |       
|Net cash
  provided by (used in) discontinued operations
     investing activities                   |  |                           | -     
|                                                                                                     |  |                           |       
|                                                                                                     |  |                           |       
|Net cash
  used in investing activities                                                              |  |                           | (1,037
|                                                                                                     |  |                           |       

*)
Reclassified.

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

- 7 -

---

---

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

|                                                                                           |  | Year ended
  December 31, |      
|------------------------------------------------------------------------------------------ |  | ------------------------- | -----
|                                                                                           |  |                           |      
|                                                                                           |  | 2003                      |      
|                                                                                           |  |                           |      
|Cash flows
  from financing activities                                                     |  |                           |      
|Proceeds
  from issuance of convertible debenture                                          |  | $                         | -    
|Proceeds
  from issuance of shares, net                                                    |  |                           | 3,742
|Repayment
  of convertible debenture                                                       |  |                           | (300 
|Short-term
  bank credit, net                                                              |  |                           | 356  
|                                                                                           |  |                           |      
|                                                                                           |  |                           |      
|Net cash
  provided by continuing operations financing
       activities                   |  |                           | 3,798
|                                                                                           |  |                           |      
|Net cash
  provided by discontinued operations financing
       activities                 |  |                           | -    
|                                                                                           |  |                           |      
|                                                                                           |  |                           |      
|Net cash
  provided by financing activities                                                |  |                           | 3,798
|                                                                                           |  |                           |      
|                                                                                           |  |                           |      
|Effect of
  exchange rate on cash and cash equivalents                                     |  |                           | 8    
|                                                                                           |  |                           |      
|                                                                                           |  |                           |      
|Increase
  (decrease) in cash and cash equivalents                                         |  |                           | 637  
|Increase in
  cash classified as assets attributed to
       discontinued operations       |  |                           | -    
|Cash and
  cash equivalents at the beginning of the year                                   |  |                           | 71   
|                                                                                           |  |                           |      
|                                                                                           |  |                           |      
|Cash and
  cash equivalents at the end of the year                                         |  | $                         | 708  
|                                                                                           |  |                           |      
|                                                                                           |  |                           |      
|Supplemental
  disclosure of cash flow transaction:                                        |  |                           |      
|Cash paid
  during the year for interest                                                   |  | $                         | 229  
|                                                                                           |  |                           |      
|                                                                                           |  |                           |      
|(a)  Acquisition
  of Tracsat S.A.                                                         |  |                           |      
|Fair
  value of assets acquired and liabilities assumed at
           date of acquisition: |  |                           |      
|Accounts
  receivable                                                                      |  | $                         | -    
|Inventories                                                                                |  |                           | -    
|Property
  and equipment                                                                   |  |                           | -    
|Issuance
  of shares                                                                       |  |                           | -    
|Other
  accounts payable                                                                   |  |                           | -    
|Trade
  payables                                                                           |  |                           | -    
|Minority
  interest                                                                        |  |                           | -    
|                                                                                           |  |                           |      
|                                                                                           |  |                           |      
|                                                                                           |  | $                         | -    
|                                                                                           |  |                           |      
|                                                                                           |  |                           |      
|(b)  Non-cash
  investing and financing activities:                                        |  |                           |      
|Conversion
  of convertible debenture                                                      |  | $                         | 723  
|                                                                                           |  |                           |      
|Deferred
  stock compensation                                                              |  | $                         | 966  
|                                                                                           |  |                           |      
|Issuance
  of warrants to bank                                                             |  | $                         | 103  
|                                                                                           |  |                           |      
|                                                                                           |  |                           |      
|Conversion
  of trade receivables into long-term loan to
     investee                     |  | $                         | -    
|                                                                                           |  |                           |      

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

- 8 -

---

---

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

|NOTE 1:- | GENERAL
|-------- | -------
|         |        
|         | a.     
|         |        
|         | b.     
|         |        
|         |        
|         |        
|         |        
|         |        
|         | c.     
|         |        
|         |        
|         |        
|         |        
|         |        
|         | d.     

- 9 -

---

---

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

|NOTE 1:- | GENERAL (Cont.)                                                                                                                                           
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                           
|         | e.                                                                                                                                                        
|         |                                                                                                                                                           
|         | f.                                                                                                                                                        
|         |                                                                                                                                                           
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                           
|         |                                                                                                                                                           
|         | The
  consolidated financial statements have been prepared in accordance with
  generally accepted accounting principles in the United States (US GAAP).
|         |                                                                                                                                                           
|         | a.                                                                                                                                                        
|         |                                                                                                                                                           
|         |                                                                                                                                                           
|         |                                                                                                                                                           
|         | b.                                                                                                                                                        
|         |                                                                                                                                                           
|         |                                                                                                                                                           
|         |                                                                                                                                                           
|         |                                                                                                                                                           

- 10 -

---

---

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

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         |                                        
|         |                                        
|         | c.                                     
|         |                                        
|         |                                        
|         |                                        
|         | d.                                     
|         |                                        
|         |                                        
|         |                                        
|         | e.                                     
|         |                                        
|         |                                        
|         |                                        
|         | f.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | g.                                     
|         |                                        
|         |                                        

- 11 -

---

---

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

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

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

| |    | The
  Companys property and equipment are reviewed for impairment in accordance
  with Statement of Financial Accounting Standard No.144 Accounting for the
  Impairment or Disposal of Long-Lived Assets (SFAS No.144) whenever events
  or changes in circumstances indicate that the carrying amount of an asset may
  not be recoverable. Recoverability of assets to be held and used is measured
  by a comparison of the carrying amount of 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, 2003.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | i. | Other
  assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Patents are
  stated at amortized cost. Amortization is calculated using the straight-line
  method over the estimated useful lives of the assets, which is 8 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | The
  Companys other assets are reviewed for impairment in accordance with SFAS
  No. 144. No impairment losses have been identified as of December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | j. | Provision
  for warranty:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | The Company
  generally grants a one-year warranty for its products. The Company estimates
  the costs that may be incurred under its basic limited warranty and records a
  liability in the amount of such costs at the time which product revenue is
  recognized. Factors that affect the Company warranty liability include the
  number of installed units, historical and anticipated rates of warranty
  claims and cost per claim. The Company periodically assesses the adequacy of
  its recorded warranty liabilities and adjusts the amounts as necessary.                                                                                                                                                                                                                                                                                                                                                             

- 12 -

---

---

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

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

| | Balance, beginning of the year                        |  | $ | 113 |  
| | ----------------------------------------------------- |  | - | --- | -
| | Estimated
  cost of warranties issued during the year |  |   | 83  |  
| | Settlements
  made during the year                    |  |   | (28 | )
| | Expiration
  of warranties during the year            |  |   | (85 | )
| |                                                       |  |   |     |  
| |                                                       |  |   |     |  
| | Balance, end
  of year                                |  | $ | 83  |  
| |                                                       |  |   |     |  

| | k. | Revenue
  recognition:                                                                                                                                                                                                                                                                                                
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                       
| |    | The Company generates
  revenues primarily from sales of products and systems, including base
  stations and end user units, and from sales of Stolen Vehicle Recovery
  services. To a lesser extent revenues are also derived from technical support
  services and from royalties.                                 
| |    |                                                                                                                                                                                                                                                                                                                       
| |    | Revenues
  from products and systems sales are recognized in accordance with Staff
  Accounting Bulletin No. 101, Revenue Recognition in Financial Statements,
  (SAB No. 101), upon delivery when persuasive evidence of an agreement
  exists, the fee is fixed and determinable and collectibility is probable.
| |    |                                                                                                                                                                                                                                                                                                                       
| |    | Certain
  agreements include a contractual obligation for installation. Such
  installation is not essential to the functionality of the system. However,
  when installation is required by the customer, the entire revenues are
  deferred until installation is performed.                                        
| |    |                                                                                                                                                                                                                                                                                                                       
| |    | 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.                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                       
| |    | The Company
  is entitled to royalties from certain of its customers. The Company has
  generated during the reported years revenues from royalties, which were based
  on the number of the customers subscribers. The royalties are recognized
  when such royalties are reported to the Company.                  
| |    |                                                                                                                                                                                                                                                                                                                       
| |    | Revenues
  generated from technical support services are recognized when such services
  are rendered.                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                       
| |    | Revenues
  from installation and de-installation (of end-units) fees are recognized when
  such services are rendered.                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                       
| |    | The Company
  follows the directives of Statement of Financial Accounting Standard No. 48,
  Revenue Recognition when Right of Return Exists. Based on the Companys
  experience, no provision was recorded.                                                                                                       

- 13 -

---

---

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

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         | l.                                     
|         |                                        
|         |                                        
|         |                                        
|         | m.                                     
|         |                                        
|         |                                        
|         |                                        
|         | n.                                     
|         |                                        
|         |                                        
|         |                                        
|         | o.                                     
|         |                                        
|         |                                        
|         |                                        
|         | p.                                     
|         |                                        
|         |                                        
|         |                                        
|         | q.                                     
|         |                                        
|         |                                        

- 14 -

---

---

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

| |                        |  | 2003    |   | 2002      |   | 2001      |  
| | ---------------------- |  | ------- | - | --------- | - | --------- | -
| |                        |  |         |   |           |   |           |  
| |                        |  |         |   |           |   |           |  
| | Dividend yield         |  | 0       | % | 0         | % | 0         | %
| | Expected volatility    |  | 55.6    | % | 141       | % | 141       | %
| | Risk-free interest     |  | 1       | % | 1.5       | % | 2         | %
| | Expected life of up to |  | 3 years |   | 2.5 years |   | 2.5 years |  

| |  | As for fair
  value of options issued, see Note 13c.
| |  | ----------------------------------------------------
| |  |                                                     
| |  | Pro forma
  information under SFAS 123 and SFAS 148:

| |                                                                                                      |  | Year ended
  December 31, |      
| | ---------------------------------------------------------------------------------------------------- |  | ------------------------- | -----
| |                                                                                                      |  |                           |      
| |                                                                                                      |  | 2003                      |      
| |                                                                                                      |  |                           |      
| |                                                                                                      |  |                           |      
| | Net income (loss) as reported                                                                        |  | $                         | 5,268
| | Add: Stock-based compensation in these
     financial statements                                     |  |                           | 400  
| | Deduct: Stock-based compensation expense
     determined under fair value method for all
     awards |  |                           | (546 
| |                                                                                                      |  |                           |      
| |                                                                                                      |  |                           |      
| | Pro forma net income (loss)                                                                          |  | $                         | 5,122
| |                                                                                                      |  |                           |      
| | Basic and diluted net earnings (loss) per
     share as reported                                     |  | $                         | 0.06 
| |                                                                                                      |  |                           |      
| |                                                                                                      |  |                           |      
| | Pro forma basic and diluted net earnings
     (loss) per share                                       |  | $                         | 0.06 
| |                                                                                                      |  |                           |      

- 15 -

---

---

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

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         | r.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | s.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | t.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        

- 16 -

---

---

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

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

- 17 -

---

---

|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, |    
| | -------------------------------- |  | -------------- | ---
| |                                  |  |                |    
| |                                  |  | 2003           |    
| |                                  |  |                |    
| |                                  |  |                |    
| | Government
  authorities         |  | $              | 154
| | Employees                        |  |                | 3  
| | Grants from
  European Community |  |                | 266
| | Prepaid
  expenses               |  |                | 124
| | Advance
  payment to suppliers   |  |                | -  
| | Others   *)                      |  |                | 94 
| |                                  |  |                |    
| |                                  |  |                |    
| |                                  |  | $              | 641
| |                                  |  |                |    

|         | *)          | Includes $ 86 as described in Note 12d.
|-------- | ----------- | ---------------------------------------
|         |             |                                        
|NOTE 4:- | INVENTORIES
|         |             |                                        

| | Raw
  material   |  | $ | 292 |  | $ | 250   | 
| | ---------------- |  | - | --- |  | - | ----- | 
| | Finished
  goods |  |   | 665 |  |   | 1,014 | 
| |                  |  |   |     |  |   |       | 
| |                  |  |   |     |  |   |       | 
| |                  |  | $ | 957 |  | $ | 1,264 | 
| |                  |  |   |     |  |   |       | 

|NOTE 5:- | INVESTMENT IN INVESTEE                                                                                                                                                                                                                  
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                                                         
|         | The Company
  holds approximately 14% of Pointer (Eden Telecom Group) Ltd.s (Eden) share
  capital and of the voting rights. Eden provides stolen vehicles recovery and
  location services based on Nexus Network System Technology.

| |                       |  | December
  31, |      
| | --------------------- |  | -------------- | -----
| |                       |  |                |      
| |                       |  | 2003           |      
| |                       |  |                |      
| |                       |  |                |      
| | Cost of
  shares      |  | $              | 1,398
| | Long-term
  loans (1) |  |                | 93   
| | Capital note
  (2)    |  |                | 573  
| |                       |  |                |      
| |                       |  |                |      
| |                       |  | $              | 2,064
| |                       |  |                |      

| | (1)                                        | A balance of
  $ 93 bears interest at Prime minus 0.3%. The maturity date has not yet been
  determined.
| | ------------------------------------------ | --------------------------------------------------------------------------------------------------------
| | (2)                                        | The capital
  note bears no interest and is linked to NIS.                                              
| |                                            |                                                                                                         
| | As for
  investment in Eden, see Note 18a.

- 18 -

---

---

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

|NOTE 6:- | PROPERTY AND EQUIPMENT
|-------- | ----------------------

| |                                       |  | December
  31, |      
| | ------------------------------------- |  | -------------- | -----
| |                                       |  |                |      
| |                                       |  | 2003           |      
| |                                       |  |                |      
| | Cost:                                 |  |                |      
| | Installed
  products                  |  | $              | 2,718
| | Computers
  and development equipment |  |                | 2,076
| | Office
  furniture and equipment      |  |                | 266  
| | Motor
  vehicles                      |  |                | 15   
| | Leasehold
  improvements              |  |                | 320  
| | Network
  installation                |  |                | 361  
| |                                       |  |                |      
| |                                       |  |                |      
| |                                       |  |                | 5,756
| |                                       |  |                |      
| | Accumulated
  depreciation:           |  |                |      
| | Installed
  products                  |  |                | 1,197
| | Computers
  and development equipment |  |                | 1,947
| | Office
  furniture and equipment      |  |                | 186  
| | Motor
  vehicles                      |  |                | 4    
| | Leasehold
  improvements              |  |                | 313  
| | Network
  installation                |  |                | 337  
| |                                       |  |                |      
| |                                       |  |                |      
| |                                       |  |                | 3,984
| |                                       |  |                |      
| |                                       |  |                |      
| | Depreciated
  cost                    |  | $              | 1,772
| |                                       |  |                |      

|         | Depreciation
  expenses for the years ended December 31, 2003, 2002 and 2001 were $ 1,104,
  $ 770 and $ 480, respectively.
|-------- | ---------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                            
|NOTE 7:- | INTANGIBLE ASSETS, NET                                                                                                     
|         |                                                                                                                            
|         | a.                                                                                                                         

| |                            |  | December
  31, |    
| | -------------------------- |  | -------------- | ---
| |                            |  |                |    
| |                            |  | 2003           |    
| |                            |  |                |    
| | Patents:                   |  |                |    
| | Original
  amounts         |  | $              | 639
| | Accumulated
  amortization |  |                | 496
| |                            |  |                |    
| |                            |  |                |    
| | Amortized
  cost           |  | $              | 143
| |                            |  |                |    

| | b. | Amortization
  expenses for the years ended December 31, 2003, 2002 and 2001 were $ 67, $ 76
  and $ 66, respectively.
| | -- | ----------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                       
| | c. | Estimated
  amortization expenses for the years ended:                                                                

| |                       |  | December 31, |  
| | --------------------- |  | ------------ | -
| |                       |  |              |  
| |                       |  |              |  
| | 2004                  |  |              | $
| | 2005                  |  |              |  
| | 2006                  |  |              |  
| | 2007                  |  |              |  
| | 2008 and
  thereafter |  |              |  
| |                       |  |              |  
| |                       |  |              |  
| |                       |  |              | $
| |                       |  |              |  

- 19 -

---

---

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

|NOTE 8:- | SHORT-TERM BANK CREDIT                                                                            
|-------- | --------------------------------------------------------------------------------------------------
|         |                                                                                                   
|         | Classified
  by currency, linkage terms and interest rates, the credit and loans are as
  follows:

| |                                       |  | December
  31,  | 
| | ------------------------------------- |  | --------------- | 
| |                                       |  |                 | 
| |                                       |  | Interest
  rate | 
| |                                       |  |                 | 
| |                                       |  | 2003            | 
| |                                       |  |                 | 
| |                                       |  | %               | 
| |                                       |  |                 | 
| | Short-term
  bank loans:              |  |                 | 
| | In, or
  linked to, U.S. dollars      |  | -               | 
| | In Israeli
  currency - unlinked      |  | 7.05            | 
| |                                       |  |                 | 
| |                                       |  |                 | 
| | Short-term
  bank credit:             |  |                 | 
| | In
  Argentinian Peso                 |  | 50              | 
| | In Israeli
  currency                 |  | -               | 
| |                                       |  |                 | 
| |                                       |  |                 | 
| |                                       |  |                 | 
| |                                       |  |                 | 
| |                                       |  |                 | 
| |                                       |  |                 | 
| |                                       |  |                 | 
| |                                       |  |                 | 
| | Approximate
  unutilized credit lines |  |                 | 
| |                                       |  |                 | 

|NOTE 9:- | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|-------- | -------------------------------------------

| |                                  |  | December
  31, |      
| | -------------------------------- |  | -------------- | -----
| |                                  |  |                |      
| |                                  |  | 2003           |      
| |                                  |  |                |      
| |                                  |  |                |      
| | Employees
  and payroll accruals |  | $              | 375  
| | Provision
  for warranty         |  |                | 83   
| | Accrued
  expenses               |  |                | 766  
| | Customer
  advances              |  |                | 376  
| | Others                           |  |                | 206  
| |                                  |  |                |      
| |                                  |  |                |      
| |                                  |  | $              | 1,806
| |                                  |  |                |      

|NOTE 10:- | LONG-TERM LOAN
|--------- | --------------

| |                          |  | Interest rate |  | Amount                    | 
| | ------------------------ |  | ------------- |  | ------------------------- | 
| |                          |  |               |  |                           | 
| |                          |  | December 31   |  | December 31,              | 
| |                          |  |               |  |                           | 
| |                          |  | 2003 and 2002 |  | 2003 and 2002             | 
| |                          |  |               |  |                           | 
| |                          |  | %             |  | U.S. dollars in thousands | 
| |                          |  |               |  |                           | 
| | Banks, in
  U.S. dollars |  | 3.9%          |  | $   3,000                 | 
| |                          |  |               |  |                           | 

| | In April
  2003, the Company signed an agreement with Bank Hapoalim according to which a
  short-term credit in the amount of $ 3,000 was converted to a long-term loan
  for a period of five years. The loan principal will be paid commencing two
  years after the date of this agreement.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 20 -

---

---

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

|NOTE 11:- | CONVERTIBLE DEBENTURE                                                                                                                                                                                                                                                                                                                                                 
|--------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                       
|          | In 2002, the
  Company issued a convertible debenture to AMS Electronics Ltd. (AMS) in the
  amount of $ 1,000 for a period of three years, bearing annual interest of
  LIBOR, which was to be paid on the maturity date. The debenture could be
  converted into Ordinary shares of the Company at a conversion rate of $ 3.5
  per share, subject to adjustments.
|          |                                                                                                                                                                                                                                                                                                                                                                       
|          | In March
  2003, the Company and AMS signed an agreement, according to which, AMS
  converted $ 723 (including interest accrued thereon) of the convertible
  debenture into 16,435,500 Ordinary shares at a conversion price of 4.4 cent
  per share. The balance in the amount of $ 300 was repaid.                                                                 
|          |                                                                                                                                                                                                                                                                                                                                                                       
|          | The Company
  followed Statement of Financial Accounting Standard Board (SFAS) No. 84,
  Induced Conversion of Convertible Debt, an amendment of APB Opinion No.
  26, as a result of the conversion and, accordingly, the Company recorded
  expense in the amount of $ 1,011 (see also Note 17b).                                                              
|          |                                                                                                                                                                                                                                                                                                                                                                       
|NOTE 12:- | COMMITMENTS AND CONTINGENT LIABILITIES                                                                                                                                                                                                                                                                                                                                
|          |                                                                                                                                                                                                                                                                                                                                                                       
|          | a.                                                                                                                                                                                                                                                                                                                                                                    
|          |                                                                                                                                                                                                                                                                                                                                                                       
|          | b.                                                                                                                                                                                                                                                                                                                                                                    
|          |                                                                                                                                                                                                                                                                                                                                                                       
|          |                                                                                                                                                                                                                                                                                                                                                                       
|          |                                                                                                                                                                                                                                                                                                                                                                       
|          |                                                                                                                                                                                                                                                                                                                                                                       

- 21 -

---

---

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

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

| |                       |  | U.S.
  dollars
  in thousands |  
| | --------------------- |  | ----------------------------- | -
| |                       |  |                               |  
| |                       |  |                               |  
| | 2004                  |  |                               | $
| | 2005                  |  |                               |  
| | 2006                  |  |                               |  
| | 2007 and
  thereafter |  |                               |  
| |                       |  |                               |  
| |                       |  |                               |  
| |                       |  |                               | $
| |                       |  |                               |  

| |    | Rent
  expenses for the years ended December 31, 2003, 2002 and 2001, were $ 180, $
  524 and $ 132, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   
| | d. | Litigation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |   
| |    | In September
  2000, the Argentinian subsidiary of the Company entered into a 30-month
  contract with a third party. Pursuant to the contract, the subsidiary
  committed itself to ordering from the third party a minimum level of unit
  installations. In October 2001 and thereafter the subsidiary ceased to make
  minimum payments to the third party. A suit was filed against the Company for
  payment of the potential debt and, based on a legal opinion, the Company
  recorded a provision in the amount of $ 151. The third party sought to secure
  its claim and in October 2003, an Argentinian court ordered a lien on $ 86 of
  accounts receivable owed by a customer to the Argentinian subsidiary to
  secure part of the potential debt. Such accounts receivable are classified as
  other accounts receivable.
| |   
| | e. | The Company
  and DBSI Investment Ltd. (DBSI) (see Note 13) have entered into a
  management services agreement pursuant to which DBSI shall provide management
  services in consideration for an annual management fees of $ 180 for a period
  of three years commencing on April 6, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |   
| |    | This
  agreement shall be automatically renewed for additional periods each twelve
  (12) months unless either party gives the other party a notice of termination
  three months prior to the beginning of a Renewal Term.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

- 22 -

---

---

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

|NOTE 12:- | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|--------- | ----------------------------------------------
|          |                                               
|          | f.                                            
|          |                                               
|NOTE 13:- | SHAREHOLDERS EQUITY (DEFICIENCY)             
|          |                                               
|          | a.                                            
|          |                                               
|          |                                               
|          |                                               
|          | b.                                            
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               

- 23 -

---

---

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

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

| |                                                           |  | 2003                |   | 2002                                  |       | 2001                |          
| | --------------------------------------------------------- |  | ------------------- | - | ------------------------------------- | ----- | ------------------- | ---------
| |                                                           |  |                     |   |                                       |       |                     |          
| |                                                           |  | Amount
  of options |   | Weighted
  average
  exercise
  price |       | Amount
  of options |          
| |                                                           |  |                     |   |                                       |       |                     |          
| |                                                           |  |                     |   |                                       |       |                     |          
| | Options
  outstanding at the
       beginning of the year |  | 1,203,731           |   | $                                     | 5.32  |                     | 984,364  
| | Granted                                                   |  | 7,950,000           |   | $                                     | 0.044 |                     | 286,500  
| | Exercised                                                 |  | -                   |   | $                                     | -     |                     | -        
| | Forfeited                                                 |  | (241,961            | ) | $                                     | 6.71  |                     | (67,133  
| |                                                           |  |                     |   |                                       |       |                     |          
| |                                                           |  |                     |   |                                       |       |                     |          
| | Outstanding
  at the end of
       the year               |  | 8,911,770           |   | $                                     | 0.57  |                     | 1,203,731
| |                                                           |  |                     |   |                                       |       |                     |          
| |                                                           |  |                     |   |                                       |       |                     |          
| | Options
  exercisable at the
       end of the year       |  | 1,892,352           |   | $                                     | 2.36  |                     | 660,025  
| |                                                           |  |                     |   |                                       |       |                     |          
| |                                                           |  |                     |   |                                       |       |                     |          
| | Weighted
  average fair
       value on the date of grant |  |                     |   |                                       | 0.02  |                     |          
| |                                                           |  |                     |   |                                       |       |                     |          

| |  |  | The
  following table summarizes information relating to stock options outstanding
  as of December 31, 2003, according to exercise price range:
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------

| |                           |  | Options
  outstanding                         |  | Options
  exercisable                               | 
| | ------------------------- |  | --------------------------------------------- |  | --------------------------------------------------- | 
| |                           |  |                                               |  |                                                     | 
| | Range of
  exercise price |  | Number
  outstanding at
  December 31,
  2003 |  | Weighted
  average
  remaining
  contractual
  life | 
| |                           |  |                                               |  |                                                     | 
| |                           |  |                                               |  | Years                                               | 
| |                           |  |                                               |  |                                                     | 
| |                           |  |                                               |  |                                                     | 
| | $0.044                    |  | 7,950,000                                     |  | 2.38                                                | 
| | $1.03-$ 2.55              |  | 613,436                                       |  | 2.57                                                | 
| | $7.5 - $16.5              |  | 348,334                                       |  | 0.59                                                | 
| |                           |  |                                               |  |                                                     | 
| |                           |  |                                               |  |                                                     | 
| |                           |  | 8,911,770                                     |  |                                                     | 
| |                           |  |                                               |  |                                                     | 

| |                                                    |  | Exercise
  price less than market price |       | Exercise
  price equal to market price | 
| | -------------------------------------------------- |  | --------------------------------------- | ----- | -------------------------------------- | 
| |                                                    |  |                                         |       |                                        | 
| |                                                    |  | 2003                                    |       | 2002                                   | 
| |                                                    |  |                                         |       |                                        | 
| | Weighted average
       exercise prices            |  | $                                       | 0.044 |                                        | 
| |                                                    |  |                                         |       |                                        | 
| |                                                    |  |                                         |       |                                        | 
| | Weighted-average
  fair
       value on grant date |  | $                                       | 0.13  |                                        | 
| |                                                    |  |                                         |       |                                        | 

- 24 -

---

---

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

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

| | Number |           | Year of
  issuance |  | Expiration
  date |  | Exercise
  price | 
| | ------ | --------- | ------------------ |  | ----------------- |  | ---------------- | 
| |        |           |                    |  |                   |  |                  | 
| |        |           |                    |  |                   |  |                  | 
| |        | 5,113,818 |                    |  | 2003              |  | (*)              | 
| |        | 860,000   |                    |  | 2003              |  | July 22, 2006    | 
| |        |           |                    |  |                   |  |                  | 
| |        |           |                    |  |                   |  |                  | 
| |        | 5,973,818 |                    |  |                   |  |                  | 
| |        |           |                    |  |                   |  |                  | 

|          |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | (*)                                                                                                                                                               | The earlier
  of M&A transaction or three years. (see Note 18b).
|--------- | ------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------
|          |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                  
|          |              | 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Dividends:                                                                                                                                                       
|          |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                  
|          |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Any dividend
  distributed by the Company will be declared in NIS and paid in U.S. dollars
  on the basis of the exchange rate prevailing at the date of payment.
|          |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                  
|NOTE 14:- | INCOME TAXES
|          |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                  
|          | a.           | Measurement
  of taxable income under the Income Tax Law (Inflationary Adjustments), 1985:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|          |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          |              | The Company
  is taxed under this law.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          |              | Results for
  tax purposes are measured in terms of earnings in New Israeli Shekels (NIS)
  after certain adjustments for increases in the Israeli CPI. As explained in
  Note 2b, the financial statements are measured in U.S. 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 Capital Investments, 1959:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          |              | According to
  the law, the Companys investment in its new premises has been granted an
  approved enterprise status in 1993. Pursuant to the law, the Company has
  elected to enjoy alternative benefits - waiver of grants in return for tax
  exemption, and accordingly the Companys income arising from the approved
  enterprise is tax-exempt for a period of two years commencing with the year
  it first earns taxable income and is subject to a reduced tax rate of 25% for
  an additional five years. The period of tax benefits, detailed above, is
  subject to the limits of 12 years from commencement of production or 14 years
  from date of the approval (1998), whichever is earlier.
|          |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          |              | A dividend
  distribution from tax-exempt income will subject the Company to income tax at
  the rate of 25% of the dividend amount. Distribution of cash dividend from
  tax- exempt income due to the approved enterprise status, is subject to 15%
  tax.                                                                                                                                                                                                                                                                                                                                                                                                                                                       

- 25 -

---

---

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

|NOTE 14:- | INCOME TAXES (Cont.)
|--------- | --------------------
|          |                     
|          |                     
|          |                     
|          |                     
|          |                     
|          |                     
|          |                     
|          |                     
|          |                     
|          | c.                  
|          |                     
|          |                     
|          |                     
|          | d.                  
|          |                     
|          |                     

| |                                                         |  | December
  31, |        
| | ------------------------------------------------------- |  | -------------- | -------
| |                                                         |  |                |        
| |                                                         |  | 2003           |        
| |                                                         |  |                |        
| |                                                         |  |                |        
| | Temporary
  differences regarding benefits to employees |  | $              | 115    
| | Carryforward
  tax losses                               |  |                | 13,548 
| | Impairment
  of an investment                           |  |                | 1,215  
| | Other
  temporary differences, net                      |  |                | (18    
| |                                                         |  |                |        
| |                                                         |  |                |        
| | Net deferred
  tax assets before valuation allowance    |  |                | 14,860 
| | Valuation
  allowance (*)                               |  |                | (14,860
| |                                                         |  |                |        
| |                                                         |  |                |        
| | Net deferred
  tax assets                               |  | $              | -      
| |                                                         |  |                |        

- 26 -

---

---

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

|NOTE 14:- | INCOME TAXES (Cont.)                          
|--------- | ----------------------------------------------
|          |                                               
|          |                                               
|          |                                               
|          | e.                                            
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          | f.                                            
|          |                                               
|          |                                               
|          |                                               
|NOTE 15:- | BALANCES AND TRANSACTIONS WITH RELATED PARTIES
|          |                                               
|          | a.                                            

| |                                                |  | December
  31, |    
| | ---------------------------------------------- |  | -------------- | ---
| |                                                |  |                |    
| |                                                |  | 2003           |    
| |                                                |  |                |    
| |                                                |  |                |    
| | Other
  accounts payable and accrued expenses: |  |                |    
| | DBSI                                           |  | $              | 142
| | AMS                                            |  | $              | 63 

| | b. | Income and
  expenses:
| | -- | ----------------------

| |                                                                            |  | Year ended
  December 31, |      
| | -------------------------------------------------------------------------- |  | ------------------------- | -----
| |                                                                            |  |                           |      
| |                                                                            |  | 2003                      |      
| |                                                                            |  |                           |      
| |                                                                            |  |                           |      
| | Purchases
  from AMS                                                       |  | $                         | 2,353
| | Management
  fees to B.V.R. Technologies Ltd.                              |  | $                         | -    
| | Interest on
  loans and debentures paid to B.V.R.
       Technologies Ltd. |  | $                         | -    
| | Management
  fees to DBSI Investments Ltd.                                 |  | $                         | 120  

- 27 -

---

---

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

|NOTE 16:- | SEGMENTS, CUSTOMERS AND GEOGRAPHIC INFORMATION
|--------- | ----------------------------------------------
|          |                                               
|          | a.                                            
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          | b.                                            

| |    |                 |  | Year ended
  December 31, |      
| | -- | --------------- |  | ------------------------- | -----
| |    |                 |  |                           |      
| |    |                 |  | 2003                      |      
| |    |                 |  |                           |      
| | 1. | Revenues *):    |  |                           |      
| |    | South
  America |  | $                         | 2,392
| |    | Israel          |  |                           | 2,543
| |    | USA             |  |                           | -    
| |    | Other           |  |                           | 215  
| |    |                 |  |                           |      
| |    |                 |  |                           |      
| |    |                 |  | $                         | 5,150
| |    |                 |  |                           |      

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

| |    |                      |  | Year ended
  December 31, |      
| | -- | -------------------- |  | ------------------------- | -----
| |    |                      |  |                           |      
| |    |                      |  | 2003                      |      
| |    |                      |  |                           |      
| | 2. | Long-lived
  assets: |  |                           |      
| |    | Israel               |  | $                         | 317  
| |    | Argentina            |  |                           | 1,598
| |    |                      |  |                           |      
| |    |                      |  |                           |      
| |    |                      |  | $                         | 1,915
| |    |                      |  |                           |      

| |  | 3. | Revenues
  classified by major customer:                     
| |  | -- | -------------------------------------------------------------
| |  |    |                                                              
| |  |    | Percentage
  of sales to customers exceeding 10% of revenues:

| |              |  | 2003 |    | 2002 |  | 2001 |   
| | ------------ |  | ---- | -- | ---- |  | ---- | --
| |              |  |      |    |      |  |      |   
| |              |  | %    |   
| |              |  |      |   
| |              |  |      |    |      |  |      |   
| | Customer
  A |  |      | -  |      |  |      | 42
| | Customer
  B |  |      | 49 |      |  |      | 25
| | Customer
  C |  |      | -  |      |  |      | 13
| | Customer
  D |  |      | 27 |      |  |      | - 
| | Customer
  E |  |      | 15 |      |  |      | - 
| |              |  |      |    |      |  |      |   
| |              |  |      |    |      |  |      |   
| |              |  |      | 91 |      |  |      | 80
| |              |  |      |    |      |  |      |   

- 28 -

---

---

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

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

| |    |                                                          |  | Year ended
  December 31, |      
| | -- | -------------------------------------------------------- |  | ------------------------- | -----
| |    |                                                          |  |                           |      
| |    |                                                          |  | 2003                      |      
| |    |                                                          |  |                           |      
| | a. | Research and
  development, net:                         |  |                           |      
| |    |                                                          |  |                           |      
| |    | Total
  expenses                                         |  | $                         | 1,140
| |    | Less -
  grants and participation                        |  |                           | 476  
| |    |                                                          |  |                           |      
| |    |                                                          |  |                           |      
| |    |                                                          |  | $                         | 664  
| |    |                                                          |  |                           |      
| | b. | Financial
  expenses, net:                               |  |                           |      
| |    |                                                          |  |                           |      
| |    | Income:                                                  |  |                           |      
| |    | Interest on
  short-term bank deposits                   |  | $                         | 27   
| |    |                                                          |  |                           |      
| |    | Expenses:                                                |  |                           |      
| |    | Induced
  conversion of convertible
       debenture     |  |                           | 1,011
| |    | Bank charges
  and interest on short-term
       credits |  |                           | 361  
| |    | Foreign
  currency translation adjustments               |  |                           | (266 
| |    | Interest on
  convertible debentures                     |  |                           | 3    
| |    | Other                                                    |  |                           | 23   
| |    |                                                          |  |                           |      
| |    |                                                          |  |                           |      
| |    |                                                          |  |                           | 1,132
| |    |                                                          |  |                           |      
| |    |                                                          |  |                           |      
| |    |                                                          |  | $                         | 1,105
| |    |                                                          |  |                           |      
| | c. | Other income
  (expenses):                               |  |                           |      
| |    |                                                          |  |                           |      
| |    | Impairment
  of investments (1), (2)                     |  | $                         | -    
| |    | Gain in
  respect to waiver                              |  |                           | -    
| |    | Capital gain
  (loss)                                    |  |                           | (32  
| |    | Other                                                    |  |                           | -    
| |    |                                                          |  |                           |      
| |    |                                                          |  |                           |      
| |    |                                                          |  | $                         | (32  
| |    |                                                          |  |                           |      

| |  | (1) | The
  impairment of investments included in the Company consolidated results of
  operations for the year ended December 31, 2002 is 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. As for the second impaired investment, Tri Angle
  LLC., had ceased its operations during 2002. Accordingly, Companys
  management determined that these fact patterns indicated that the carrying
  amounts of these two investments would not be recoverable, and impaired the
  entire amount of the investment in MAGA of $ 500 and the entire amount of the
  investment in Tri Angle LLC of $ 180.
| |  | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 29 -

---

---

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

|NOTE 17:- | SELECTED STATEMENTS OF OPERATIONS DATA (Cont.)
|--------- | ----------------------------------------------
|          |                                               
|          |                                               
|          |                                               
|NOTE 18:- | DISCONTINUED OPERATIONS                       
|          |                                               
|          | a.                                            
|          |                                               
|          |                                               
|          |                                               
|          |                                               

| |                                                      |  | December
  31,2002 |  
| | ---------------------------------------------------- |  | ------------------ | -
| |                                                      |  |                    |  
| | Assets
  attributed to discontinued operations:      |  |                    |  
| |                                                      |  |                    |  
| | Cash
  and cash equivalents                          |  |                    | $
| | Short-term
  deposit                                 |  |                    |  
| | Trade
  receivables                                  |  |                    |  
| | Other
  accounts receivable                          |  |                    |  
| | Inventory                                            |  |                    |  
| | Severance
  pay fund                                 |  |                    |  
| | Property
  and equipment, net                        |  |                    |  
| | Other
  assets, net                                  |  |                    |  
| |                                                      |  |                    |  
| |                                                      |  |                    |  
| |                                                      |  |                    | $
| |                                                      |  |                    |  
| | Liabilities
  attributed to discontinued operations: |  |                    |  
| |                                                      |  |                    |  
| | Short-term
  loans and bank credit, net              |  |                    | $
| | Trade
  payables                                     |  |                    |  
| | Other
  accounts payable                             |  |                    |  
| | Long-term
  loan                                     |  |                    |  
| | Accrued
  severance pay                              |  |                    |  
| | Receipts
  on account of options                     |  |                    |  
| |                                                      |  |                    |  
| |                                                      |  |                    |  
| |                                                      |  |                    | $
| |                                                      |  |                    |  

- 30 -

---

---

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

|NOTE 18:- | DISCONTINUED OPERATIONS (Cont.)
|--------- | -------------------------------
|          |                                
|          | b.                             

| |                                    |  | Year ended
  December 31, |       
| | ---------------------------------- |  | ------------------------- | ------
| |                                    |  |                           |       
| |                                    |  | 2002                      |       
| |                                    |  |                           |       
| |                                    |  |                           |       
| | Revenues                           |  | $                         | 680   
| | Cost of
  revenues                 |  |                           | 1,552 
| |                                    |  |                           |       
| |                                    |  |                           |       
| | Excess of
  cost over revenues     |  |                           | 872   
| |                                    |  |                           |       
| |                                    |  |                           |       
| | Operating
  expenses:              |  |                           |       
| | Research
  and development, net    |  |                           | 1,202 
| | Sales
  and marketing              |  |                           | 631   
| | General
  and administrative       |  |                           | 1,151 
| |                                    |  |                           |       
| |                                    |  |                           |       
| |                                    |  |                           | 2,984 
| |                                    |  |                           |       
| |                                    |  |                           |       
| | Operating
  loss                   |  |                           | (3,856
| | Financial
  income (expenses), net |  |                           | (144  
| | Other
  expenses                   |  |                           | -     
| |                                    |  |                           |       
| |                                    |  |                           |       
| | Net loss                           |  | $                         | (4,000
| |                                    |  |                           |       

|NOTE 19:- | EVENTS SUBSEQUENT TO DATE OF AUDITORS REPORT (Unaudited)
|--------- | ---------------------------------------------------------
|          |                                                          
|          | a.                                                       

- 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 19:- | EVENTS SUBSEQUENT TO DATE OF AUDITORS REPORT (Unaudited) (Cont.)
|--------- | -----------------------------------------------------------------
|          |                                                                  
|          |                                                                  
|          |                                                                  
|          |                                                                  
|          |                                                                  
|          | b.                                                               
|          |                                                                  
|          | c.                                                               

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