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

# FORM 20-F

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

# OR;

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

# For the fiscal year ended December 31, 2007

# OR;

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

# OR;

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

# Date of event requiring
this shell company report _________________

Commission file No.
0-29742

RETALIX LTD.(Exact name of registrant as specified in its charter)

ISRAEL(Jurisdiction of incorporation or organization)

10 ZARHIN STREET,
RAANANA 43000, ISRAEL(Address of principal executive offices)

HUGO GOLDMAN, CFO,
+972-9-776-6696, HUGO.GOLDMAN@RETALIX.COM 10 ZARHIN STREET,
RAANANA 43000, ISRAEL (Name, Telephone, E-mail and /or Facsimile number and Address of Company Contact Person)

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

|                                                  |                                     
|------------------------------------------------- | ------------------------------------
|
|
|
|
|Title of each class                               | Name of Exchange on which registered
|Ordinary Shares, nominal value NIS 1.00 per share | Nasdaq Global Select Market         

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



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

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: 20,001,382 Ordinary Shares, nominal
value NIS 1.00 per share

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

# YES  oNO x

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

# YES  oNO x

Indicate by checkmark 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 twelve (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 ninety (90) days:

# YES  xNO o

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

Large Accelerated Filer  o                    Accelerated Filer  x                  Non-Accelerated Filer  o

Indicate by check mark which basis of
accounting the registrant has used to prepare the financial statements included in this
filing:

|             |                                                          |         
|------------ | -------------------------------------------------------- | --------
|
|
|
|
|U.S. GAAP  x | International Financial Reporting Standards as issued by | Other  o
|             | the International Accounting Standards Board  o          |         

If Other has been checked
in response to the previous question, indicate by check mark which financial statement
item the registrant has elected to follow.

Item 17 o Item 18 o

If this is an annual report, indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).

# YES  o NO x



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# TABLE OF CONTENTS

|       |                                                               | Page 
|------ | ------------------------------------------------------------- | -----
|
|
|
|
|PART I |                                                               |      
|       | Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS | 5    
|       | Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE               | 5    
|       | Item 3. KEY INFORMATION                                       | 6-16 
|       | A. Selected Financial Data                                    | 6-7  
|       | B. Capitalization and Indebtedness                            | 7    
|       | C. Reasons for the Offer and Use of Proceeds                  | 7    
|       | D. Risk Factors                                               | 7-16 
|       | Item 4. INFORMATION ON THE COMPANY                            | 17-37
|       | A. History and Development of the Company                     | 17   
|       | B. Business Overview                                          | 17-36
|       | C. Organizational Structure                                   | 36   
|       | D. Property, Plants and Equipment                             | 37   
|       | Item 4A. UNRESOLVED STAFF COMMENTS                            | 37   
|       | Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS          | 37-51
|       | A. Operating Results                                          | 37-47
|       | B. Liquidity and Capital Resources                            | 47-49
|       | C. Research and Development, Patents and Licenses, Etc.       | 50-51
|       | D. Trend Information                                          | 51   
|       | E. Off -Balance Sheet Arrangements                            | 51   
|       | F. Tabular Disclosure of Contractual Obligations              | 51   

2

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| |                                                           |      
| | --------------------------------------------------------- | -----
|
|
|
|
| | Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES        | 52-61
| | A. Directors and Senior Management                        | 52-53
| | B. Compensation                                           | 54   
| | C. Board Practices                                        | 55-57
| | D. Employees                                              | 57-58
| | E. Share Ownership                                        | 58-61
| | Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS | 61-62
| | A. Major Shareholders                                     | 61   
| | B. Related Party Transactions                             | 62   
| | C. Interests of Experts and Counsel                       | 62   
| | Item 8. FINANCIAL INFORMATION                             | 62-63
| | Item 9. THE OFFER AND LISTING                             | 63-66
| | A. Offer and Listing Details                              | 63-65
| | B. Plan of Distribution                                   | 66   
| | C. Markets                                                | 66   
| | D. Selling Shareholders                                   | 66   
| | E. Dilution                                               | 66   
| | F. Expenses of the Issue                                  | 66   
| | Item 10. ADDITIONAL INFORMATION                           | 66-79
| | A. Share Capital                                          | 66   
| | B. Memorandum and Articles of Association                 | 66-70
| | C. Material Contracts                                     | 71   
| | D. Exchange Controls                                      | 71   
| | E. Taxation                                               | 71-78
| | F. Dividends and Paying Agents                            | 78   
| | G. Statement by Experts                                   | 78   
| | H. Documents on Display                                   | 78   
| | I. Subsidiary Information                                 | 79   

3

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|         |                                                                                       |      
|-------- | ------------------------------------------------------------------------------------- | -----
|
|
|
|
|         | Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 79-80
|         | Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 80   
|PART II 
|         | Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 80   
|         | Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 80   
|         | Item 15. CONTROLS AND PROCEDURES                                                      | 81   
|         | Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                            | 81   
|         | Item 16B. CODE OF ETHICS                                                              | 81   
|         | Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                      | 82   
|         | Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                  | 82   
|         | Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      | 82   
|PART III
|         | Item 17. FINANCIAL STATEMENTS                                                         | 82   
|         | Item 18. FINANCIAL STATEMENTS                                                         | 82   
|         | Item 19. EXHIBITS                                                                     | 83   

4

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# PART I

Unless
the context otherwise requires, all references in this annual report to
Retalix, us, we, and our refer to Retalix
Ltd. and its consolidated subsidiaries.

Our
consolidated financial statements are prepared in United States dollars and in accordance
with generally accepted accounting principles in the United States. All references to
dollars or $ in this annual report are to United States dollars,
and all references to Shekels or NIS are to New Israeli Shekels.
On June 20, 2008, the exchange rate between the NIS and the dollar, as quoted by the Bank
of Israel, was NIS 3.354 to $1.00.

Statements
in this annual report concerning our business outlook or future economic performance;
anticipated revenues, expenses or other financial items; introductions and advancements in
development of products, and plans and objectives related thereto; and statements
concerning assumptions made or expectations as to any future events, conditions,
performance or other matters, are forward-looking statements as that term is
defined under the Private Securities Litigation Reform Act of 1995 and other U.S. Federal
securities laws. We urge you to consider that statements which use the terms
anticipate, believe, expect, plan,
intend, estimate, and similar expressions are intended to identify
forward-looking-statements. Forward-looking statements address matters that are subject to
risks, uncertainties and other factors which could cause actual results to differ
materially from those in these statements. Factors that could cause or contribute to these
differences include, but are not limited to, those set forth under Item 3.D. 
Key Information  Risk Factors, Item 4  Information on the
Company and Item 5  Operating and Financial Review and Prospects,
as well as elsewhere in this annual report and in our other filings with the Securities
and Exchange Commission, or SEC. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. Except as
required by applicable law, including the securities laws of the United States, we
undertake no obligation to publicly release any update or revision to any forward-looking
statements to reflect new information, future events or circumstances, or otherwise after
the date hereof.

# ITEM 1  IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

# ITEM 2  OFFER
STATISTICS AND EXPECTED TIMETABLE

Not applicable.

5

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# ITEM 3  KEY
INFORMATION

# A. Selected Financial
Data

The
selected consolidated statement of income (loss) data set forth below with respect to the
years ended December 31, 2003, 2004, 2006 and 2007 and the selected consolidated
balance sheet data set forth below as of December 31, 2003, 2004, 2006 and 2007 have
been derived from our consolidated financial statements that were audited by
Kesselman & Kesselman, a member of PricewaterhouseCoopers International Limited.
The selected consolidated statement of income data set forth below with respect to the
year ended December 31, 2005 and the selected consolidated balance sheet data set
forth below as of December 31, 2005 have been derived from our consolidated financial
statements that were audited by Kost, Forer, Gabbay & Kasierer, a member of Ernst
& Young Global. The selected consolidated financial data set forth below should be
read in conjunction with Item 5  Operating and Financial Review and
Prospects and our consolidated financial statements and notes to those statements
for the years 2005, 2006 and 2007 included elsewhere in this annual report. Historical
results are not necessarily indicative of the results to be expected in the future.

|                                                       | Year ended December 31,
|------------------------------------------------------ | -----------------------
|
|
|
|
|Consolidated statement of income data                  |                        
|Revenues:                                              |                        
|Product sales                                          |                        
|Services                                               |                        
|                                                       |                        
|Total revenues                                         |                        
|                                                       |                        
|Cost of revenues:                                      |                        
|Cost of product sales                                  |                        
|Cost of services                                       |                        
|                                                       |                        
|Total cost of revenues                                 |                        
|                                                       |                        
|Gross profit                                           |                        
|                                                       |                        
|Operating expenses:                                    |                        
|Research and development expenses-net                  |                        
|Selling and marketing expenses                         |                        
|General and administrative expenses                    |                        
|Other  income (expenses) - net                         |                        
|                                                       |                        
|Total operating expenses                               |                        
|                                                       |                        
|Income (loss) from operations                          |                        
|Financial income (expenses)-net                        |                        
|Gain arising from issuance of shares by  an associated |                        
|companies                                              |                        
|                                                       |                        
|Income (loss) before taxes on income                   |                        
|Tax benefit  (taxes on income)                         |                        
|Share in losses of an associated company               |                        
|Minority interests in losses (gains) of subsidiaries   |                        
|                                                       |                        
|Net income (loss)                                      |                        
|                                                       |                        
|                                                       |                        
|Earnings (losses) per share:                           |                        
|Basic                                                  |                        
|                                                       |                        
|                                                       |                        
|Diluted                                                |                        
|                                                       |                        
|                                                       |                        
|Weighted average number of shares used in computation: |                        
|Basic                                                  |                        
|Diluted                                                |                        

6

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|                                | Year ended December 31,
|------------------------------- | -----------------------
|
|
|
|
|Consolidated balance sheet data |                        
|Cash and cash equivalents       |                        
|Working capital                 |                        
|Total assets                    |                        
|Total debt                      |                        
|Shareholders' equity            |                        
|Capital stock                   |                        

# B. Capitalization and
Indebtedness

Not applicable.

# C. Reasons for Offer and
Use of Proceeds

Not applicable.

# D. Risk Factors

The
following risk factors, among others, could in the future affect our actual results of
operations and could cause our actual results to differ materially from those expressed in
forward-looking statements made by us. These forward-looking statements are based on
current expectations and we assume no obligation to update this information. You should
carefully consider the risks described below and elsewhere in this annual report before
making an investment decision. Our business, financial condition or results of operations
could be materially adversely affected by any of these risks. The trading price of our
ordinary shares could decline due to any of these risks, and you may lose all or part of
your investment. The following risk factors are not the only risk factors facing our
company. Additional risks and uncertainties not presently known to us or that we currently
deem immaterial may also affect our business.

# Risks Related To Our
Business

The current uncertainty in the
global economy worldwide could materially adversely affect the retail food industry, our
primary target market, which would have a material adverse effect on our results of
operations.

Our
future growth is critically dependent on increased sales to customers in the retail food
industry. We derive the substantial majority of our revenues from the sale of software
products and the provision of related services to the retail food industry worldwide,
including retailers such as supermarkets, convenience stores and restaurants as well as
wholesalers and suppliers in this industry. The success of our customers is directly
linked to economic conditions in the retail food industry, which in turn are subject to
intense competitive pressures and are affected by overall economic conditions. Recent
turmoil in the real estate securitization market has caused liquidity problems for many
financial institutions and adversely affected the global financial markets and investor
and consumer confidence generally. Any deterioration of the economy worldwide may result
in a curtailment of capital investment by our existing and potential customers. During the
downturn of the global economy in 2001-2002, for example, many companies, including some
of our existing and potential customers, decided to postpone or decrease capital
investments, which adversely affected our results of operations. In addition, if we
require additional funds to finance the growth of our business and are unable to raise it
due to the prevailing weakness in the global financial and credit markets, our results of
operations and financial condition may be adversely affected.

Our
business is subject to fluctuations in operating results, which could cause the price of
our ordinary shares to decline.

Our
quarterly operating results have varied in the past and may fluctuate in the future
because of a variety of factors, many of which are outside of our control. These factors
include, among others:

| |  | the
size, timing, terms and fluctuations of customer orders and rollout schedules;
| | - | ----------------------------------------------------------------------------------

| |  | the
long sales cycle associated with certain of our software products;
| | - | ----------------------------------------------------------------------

| |  | the
deferral of customer orders in  anticipation of new software  products or services from
us or               our competitors;
| | - | --------------------------------------------------------------------------------------------------------------------------------

| |  | changes
in pricing by us or our competitors;
| | - | --------------------------------------------

7

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| |  | fluctuations
 in currency  exchange  rates,  and especially the revaluation of the Israeli Shekel
              and the devaluation of the US Dollar,
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
uncertainty regarding the adoption of our current and future products, including such
products as our relatively new Store.Net and InSync applications;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | technical
 difficulties with respect to the use of software  solutions and services  developed by
              us;
| | - | -------------------------------------------------------------------------------------------------------------------

| |  | seasonality
in customer purchasing and deployment patterns; and
| | - | ---------------------------------------------------------------

| |  | the
profitability of our professional services business, and the percent of our total
business that this constitutes.
| | - | ---------------------------------------------------------------------------------------------------------------------

Based
upon these and other factors, our quarterly operating results could fluctuate
significantly in the future. This fluctuation might cause our quarterly operating results
in future periods to be below the expectations of securities analysts and investors. If
that occurs, the market price of our ordinary shares could decline.

The
markets in which we sell our products and services are competitive, and increased
competition and industry consolidation could cause us to lose market share, reduce our
revenues, and adversely affect our operating results.

The
market for retail and distribution food and fuel information systems is highly
competitive. A number of companies offer competitive products that address our target
markets. In addition, we believe that new market entrants may attempt to develop and
acquire retail and distribution food and fuel information systems, and we are likely to
compete with new companies in the future. With respect to our Software-as-a-Service, or
SaaS, initiatives, in particular, the barriers are relatively low and competition from
other established and emerging companies may develop in the future. Some of our existing
or potential competitors have greater financial, technical and marketing resources than we
have. As a result, these competitors are able to devote greater resources than we can to
the development, promotion, sale and support of their products. We also expect to
encounter potential customers that, because of existing relationships with our
competitors, are committed to the products offered by these competitors. As a result,
competitive pressures could cause us to lose market share and require us to reduce our
prices and profit margins. This could cause a decline in our revenues and adversely affect
our operating results.

Our
acquisition of existing businesses and our failure to successfully integrate these
businesses could disrupt our business, dilute your holdings in us and harm our financial
condition and operating results.

From
2004 through 2007, we acquired and increased our investment in several businesses. We
intend to make future strategic acquisitions of complementary companies, products or
technologies. Such acquisitions could disrupt our business. In addition, your holdings in
our company would be diluted if we issue equity securities in connection with any
acquisition, as we did in the transactions involving the acquisition of TCI Solutions
Inc., or TCI, and the acquisition of the assets of Integrated Distribution Solutions,
L.L.C., or IDS. Acquisitions involve numerous risks, including:

| |  | problems
combining the acquired operations, technologies or products;
| | - | ---------------------------------------------------------------------

| |  | unanticipated
costs or liabilities;
| | - | -----------------------------------

| |  | diversion
of management's attention;
| | - | ------------------------------------

| |  | adverse
 effects on existing  business  relationships  with suppliers and customers,  which could
              lead to bad debts;
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| |  | risks
associated with entering markets in which we have no or limited prior experience; and
| | - | -------------------------------------------------------------------------------------------

| |  | potential
loss of key employees, particularly those of the acquired organizations.
| | - | ----------------------------------------------------------------------------------

Further,
products that we acquire from third parties often require significant expenditures of time
and resources to upgrade and integrate with our existing product suite. We may not be able
to successfully integrate any business, technologies or personnel that we have acquired or
that we might acquire in the future, and this could harm our financial condition and
operating results.

If
we fail to manage our growth effectively, our business could be disrupted, which could
harm our operating results.

Our
rapid expansion has placed, and is likely to continue to place, a strain on our senior
management team and other resources, such as our management information systems and
operating, administrative, financial and accounting systems. We have undergone rapid
growth in the number of our employees, the size and locations of our physical facilities
and the scope of our operations, due, in part, to several acquisitions we have made. For
example, we had 668 employees on December 31, 2003, and 1,569 employees on December 31,
2007. Any failure to manage growth effectively could disrupt our business and harm
operating results.

If
we fail to successfully introduce new or enhanced products to the market, our business and
operating results may suffer.

If
we are unable to successfully identify and develop new products and new features for our
existing products that are acceptable to our existing and target customers, our business
and operating results will suffer. The application software market is characterized by:

| |  | rapid
technological advances in hardware and software development;
| | - | ------------------------------------------------------------------

| |  | evolving
standards in computer hardware, software technology and communications infrastructure;
| | - | -----------------------------------------------------------------------------------------------

| |  | changing
customer needs; and
| | - | ----------------------------

| |  | frequent
new product introductions and enhancements.
| | - | ----------------------------------------------------

8

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In
addition, new product introductions and enhancements require a high level of expenditures
for research and development, which adversely affects our operating results. Any products
or enhancements we develop may not be introduced in a timely manner and may not achieve
the broad market acceptance necessary to generate significant revenues. If we are unable
to successfully develop new products or enhance and improve our existing products or if we
fail to position and/or price our products to meet market demand, our business and
operating results will be adversely affected.

Sales
to large customers represent a significant portion of our revenues, and a significant
reduction in sales or services to these customers could significantly reduce our revenues.

During
2007 one customer accounted for 5% or more of our revenues. During 2006, two customers
accounted for 5% or more of our revenues. During 2005, one  customer accounted for
5% or more of our revenues. Sales to large supermarket, convenience store and fuel chains
as well as large distributors are typically large in size and represent a significant
portion of our revenues. A significant reduction in sales and services to these large
customers could significantly reduce our revenues. We anticipate that sales and services
to large customers in any given reporting period will continue to contribute materially to
our revenues in the foreseeable future

The
long sales cycle for certain of our products could cause revenues and operating results to
vary from quarter to quarter, which could cause volatility in our stock price.

We
could incur substantial sales and marketing and research and development expenses while
customers are evaluating our products and before they place an order with us, if they ever
make a purchase at all. Purchases of our solutions are often part of larger information
technology infrastructure initiatives on the part of our customers. As a result, these
customers typically expend significant effort in evaluating, testing and qualifying our
software products. This evaluation process is frequently lengthy and can range from two
months to one year or more. Even after this evaluation process, a potential customer may
not purchase our products. In addition, the time required to implement our products can
vary significantly with the needs of our customers and generally lasts for several months.
The implementation process is also subject to delay. We cannot control these delays. As a
result, we cannot predict the length of these sales cycles and we cannot control the
timing of our sales revenue. Long sales cycles also subject us to risks not usually
encountered by companies whose products have short sales cycles. These risks include:

| |  | the
potential cancellation of orders based on customers changing budgetary constraints
and changing economic conditions;
| | - | -------------------------------------------------------------------------------------------------------------------------

| |  | the
shift in orders expected in one quarter to another quarter because of the timing of
customers procurement decisions; and
| | - | -----------------------------------------------------------------------------------------------------------------------------

| |  | the
unpredictability of internal acceptance reviews.
| | - | ----------------------------------------------------

These
factors could cause our revenues and operating results to vary significantly and
unexpectedly from quarter to quarter, which could cause volatility in our stock price.

Our
gross margins may vary significantly or decline, adversely affecting our operating
results.

Because
the gross margins on product revenues from license sales are significantly greater than
the gross margins on product revenues from hardware sales and on services revenues, our
combined gross margin has fluctuated from quarter to quarter, and it may continue to
fluctuate significantly based on our revenue mix between product revenues and services
revenues. In addition, since our product revenues are typically comprised of both software
license and hardware elements and since the gross margins on license revenues are
significantly higher than the gross margins on hardware revenues, our combined gross
margin in any particular quarter will also depend on our revenue mix between license and
hardware revenues. Our operating results in any given quarter may be adversely affected to
the extent our gross margins decline due to our generating in that quarter a greater
percentage than average of services revenues or a greater percentage than average of
hardware revenues. In addition, fixed price contracts for services we provide may expose
us to additional risk if the actual costs in connection with such contracts are higher
than expected, and therefore reduce our gross margins.

Our
business will suffer to the extent that relatively new platforms such as the .NET platform
or the J2EE platform or our products based on these platforms do not achieve market
acceptance.

In
recent years, we have been developing new versions of our products based on new platforms
such as the Microsoft .NET platform and the J2EE platform. The risks of our commitment to
these relatively new platforms include the following:

| |  | the
possibility that prospective customers will refrain from purchasing the current versions
of our products because they are waiting for the new platform versions;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
possibility that our beta customers with products based on new platforms will not become
favorable reference sites;
| | - | -----------------------------------------------------------------------------------------------------------------------

| |  | the
possibility that the new platforms will not be able to support the multiple sites and
heavy data traffic of our largest customers;
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| |  | the
possibility that our development staff will not be able to learn how to efficiently and
effectively develop products using the new platforms;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------

9

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---

| |  | the
possibility that we will not be able to transition our customer base to the products
based on the new platforms when these are available;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
possibility that the new platforms will not be able to achieve market acceptance; and
| | - | -----------------------------------------------------------------------------------------

| |  | the
possibility that our suppliers will not continue to enhance and market the new platforms.
| | - | ---------------------------------------------------------------------------------------------

There
can be no assurances that our efforts to develop new products using the new platforms will
be successful. If the new platforms or the products we develop for the new platforms do
not achieve market acceptance, it likely will have a material adverse effect on our
business, operating results and financial condition.

Our
software products might not be compatible with all major hardware and software platforms,
which could inhibit sales and harm our business.

Any
changes to third-party hardware and software platforms and applications that our products
work with could require us to modify our products and could cause us to delay releasing a
product until the updated version of that hardware and software platform or application
has been released. As a result, customers could delay purchases until they determine how
our products will operate with these updated platforms or applications, which could
inhibit sales of our products and harm our business. In addition, developing and
maintaining consistent software product performance across various technology platforms
could place a significant strain on our resources and software product release schedules,
which could adversely affect our results of operations. We must continually evaluate new
technologies and implement into our products advanced technology. For example, in recent
years we have been developing new versions of our products based on the Microsoft .NET
platform and the J2EE platform. We cannot assure you that these new versions will be
successful. Moreover, if we fail in our product development efforts to accurately address
in a timely manner evolving industry standards, new technology advancements or important
third-party interfaces or product architectures, sales of our products and services will
suffer.

We
may have difficulty implementing our products, which could damage our reputation and our
ability to generate new business.

Implementation
of our software products can be a lengthy process, and commitment of resources by our
clients is subject to a number of significant risks over which we have little or no
control. In particular, we believe that the implementation of our enterprise management
application suite can be longer and more complicated than our other applications as this
suite typically:

| |  | appeals
to larger retailers who have multiple divisions requiring multiple implementation
projects;
| | - | ---------------------------------------------------------------------------------------------------

| |  | requires
the execution of implementation procedures in multiple layers of software;
| | - | -----------------------------------------------------------------------------------

| |  | offers
a retailer more deployment options and other configuration choices; and
| | - | ------------------------------------------------------------------------------

| |  | may
involve third party integrators to change business processes concurrent with the
implementation of the software.
| | - | --------------------------------------------------------------------------------------------------------------------

Delays
in the implementations of any of our software products, whether by our business partners
or us, may result in client dissatisfaction, disputes with our customers, or damage to our
reputation. Significant problems implementing our software therefore can cause delays or
prevent us from collecting fees for our software and can damage our ability to generate
new business.

Our
Software-as-a-Service, or SaaS, business model and our Retalix InSync products are in
varying stages of development and, if unsuccessful, our revenue growth could be adversely
affected.

We
are still in the early stages of rolling-out our SaaS application services to regional
chains and independent store retailers through our two StoreNext initiatives, StoreNext
Retail Technology LLC, which we refer to as StoreNext USA, and Store Alliance.com Ltd.,
which we refer to as StoreNext Israel. These applications have not been traditionally used
by smaller retailers and if they do not accept them, our SaaS initiatives may not succeed.
Our services include head-office and back-office applications delivered via the Internet
based on an SaaS subscription fee pricing model. We have recently begun charging users of
our SaaS services a subscription fee for reporting, analysis and merchandising services.
In the future, we plan to offer additional services for a fee. We cannot assure you that
these users will accept our pricing model. In addition, in September 2005, we announced
the introduction of Retalix InSync, our new enterprise and supply chain management
portfolio. We are in the process of developing new supply chain execution and warehouse
management systems on the new Retalix InSync platform, but cannot assure you that this
development will be successful or that customers will purchase these new products. If we
are unsuccessful in selling and marketing our SaaS services and/or Retalix InSync products
to retailers and distributors, our revenue growth could be adversely affected.

We
incorporate open source technology in our products which may expose us to liability and
have a material impact on our product development and sales

Some
of our products utilize open source technologies. These technologies are licensed to us
under varying license structures but may include the General Public License. This license
and others like it pose a potential risk to products that are integrated with these
technologies. For example, in the event we integrate into one of our products a technology
covered under the General Public License, we may be required to disclose our source code
for the integrated product. Disclosing our source code could enable our competitors to
eliminate any technological advantage our products may have over theirs, and therefore
materially adversely affect our competitive advantage and impact our business results of
operations and financial condition.

10

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Insufficient
or slower than anticipated demand for our SaaS services could adversely affect our revenue
growth.

We
have continued to incur research and development expenses in connection with the
development of our SaaS initiatives. If significant demand fails to develop or develops
more slowly than we anticipate, we may be unable to recover the expenses we have incurred
and expect to incur in the further development of these initiatives. Any delay in or
failure of the development of significant demand for our SaaS services could cause our new
business initiatives to fail. Even if significant demand does develop for our SaaS
services, the growth of our SaaS services may erode parts of existing software sales
revenue. Any of these factors could adversely affect our revenue growth.

If
we are unsuccessful in establishing online Business-to-business (B2B) e-commerce
exchanges, our revenue growth could be adversely affected.

In
order for us to establish business-to-business (B2B) e-commerce exchanges for our SaaS
initiatives, we will need to generate a community of participating retailers sufficiently
large to support such a model. Even if we successfully establish such a community, we may
not be able to establish B2B exchanges without partnering with strategic participants in
the supply chain arena. We cannot assure you that we will be able to establish such
partnerships on terms that are commercially favorable to us, if at all. Even if we
establish successful strategic partnerships, we will need to attract wholesalers and
suppliers to our B2B initiatives. We cannot assure you that wholesalers and suppliers will
choose to participate in our B2B initiatives. In addition, this is a new and unproven
business model, and we cannot assure you that potential users of the B2B applications will
use them. If we are unsuccessful in establishing a B2B business model, our revenue growth
could be adversely affected.

Disruption
of our SaaS servers due to security breaches and system failures could harm our business
and result in the loss of customers.

Our
SaaS infrastructure is vulnerable to security breaches, computer viruses or similar
disruptive problems. Our SaaS servers provide access to and distribution of many of our
enterprise software solutions, products and services to our SaaS customers. Providing
unimpeded access to our SaaS servers is critical to servicing our SaaS customers and
providing superior customer service to them. These systems are also subject to
telecommunications failures, power loss and various other system failures. Any of these
occurrences, whether intentional or accidental, could lead to interruptions, delays or
cessation of operation of our SaaS servers. Our inability to provide continuous access to
our SaaS servers could cause some of our customers to discontinue subscribing to our SaaS
and e-market applications and harm our business reputation.

We
could be exposed to possible liability for supplying inaccurate information to our B2B and
SaaS customers, which could result in significant costs, damage our reputation and
decreased demand for our products.

The
information provided in our B2B and SaaS applications could contain inaccuracies.
Dissatisfaction of the providers of this information or our customers with inaccuracies
could materially adversely affect our ability to attract suppliers and new customers and
retain existing customers. In addition, we may face potential liability for inaccurate
information under a variety of legal theories, including defamation, negligence, copyright
or trademark infringement and other legal theories based upon the nature, publication or
distribution of this information. Claims of this kind could divert management time and
attention and could result in significant cost to investigate and defend, regardless of
the merits of any of these claims. The filing of any claims of this kind may also damage
our reputation and decrease demand for our products.

If
our SaaS products are unable to support multiple enterprises, our business could be
harmed.

We
might not succeed in adapting our software to support multiple enterprises as the number
of users of our SaaS services increase. As part of our strategy to sell our software
products and services to small chains and single store food retailers, we recently
rolled-out our SaaS initiatives and we are in the process of adapting our software
products to a browser-based environment in order to reduce the costs associated with our
enterprise software solutions. As we add customers to our SaaS initiatives, our software
will need to be robust enough to support, from a single data center, our growing customer
base. The failure of our SaaS service to support multiple enterprises could harm our
business and operating results.

Errors
or defects in our software products could diminish demand for our products, harm our
reputation and reduce our operating results.

Our
software products are complex and may contain errors that could be detected at any point
in the life of the product. We cannot assure you that errors will not be found in new
products or releases after shipment. This could result in diminished demand for our
products, delays in market acceptance and sales, diversion of development resources, harm
to our reputation or increased service and warranty costs. In addition, if software errors
or design defects in our products cause damage to our customers data, we could be
subject to liability based on product liability claims. Our agreements with customers that
attempt to limit our exposure to product liability claims may not be enforceable in
jurisdictions where we operate. Our insurance policies may not provide sufficient
protection should a claim be asserted against us. If any of these risks were to occur, our
operating results could be adversely affected.

Errors
or defects in other vendors products with which our products are integrated could
adversely affect the market acceptance of our products and expose us to product liability
claims from our customers.

Because
our products are generally used in systems with other vendors products, our products
must integrate successfully with these existing systems. As a result, when problems occur
in a system, it may be difficult to identify the product that caused the problem. System
errors, whether caused by our products or those of another vendor, could adversely affect
the market acceptance of our products, and any necessary revisions could cause us to incur
significant expenses. Regardless of the source of these errors or defects, we will need to
divert the attention of engineering personnel from our product development efforts to
address errors or defects detected. These errors or defects could cause us to incur
warranty or repair costs, liability claims or lags or delays. Moreover, the occurrence of
errors or defects, whether caused by our products or the products of another vendor, may
significantly harm our relations with customers, or result in the loss of customers, harm
our reputation and impair market acceptance of our products.

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We
are dependent on key personnel to manage our business, the loss of whom could negatively
affect our business.

Our
future success depends upon the continued services of our executive officers, and other
key sales, marketing, research and development and support personnel. In particular, we
are dependent on the services of Barry Shaked, currently our President, Chief Executive
Officer and Chairman of our Board of Directors. We do not have key person life
insurance policies covering any of our employees. Any loss of the services of Mr. Shaked,
our executive officers or other key personnel could adversely affect our business.

If
we are unable to attract, assimilate or retain qualified personnel, our ability to
develop, sell and market our products could be adversely impacted.

The
success of our business depends on our ability to attract and retain highly qualified
engineers and sales and marketing personnel. Competition for highly-skilled engineers and
sales and marketing personnel is intense in our industry, and we may not be successful in
attracting, assimilating or retaining qualified engineers and sales and marketing
personnel to fulfill our current or future needs. This could adversely impact our ability
to develop, sell and market our products.

Antitrust
scrutiny of B2B initiatives may adversely affect our business.

The
establishment and operation of B2B initiatives may raise issues under various
countries antitrust laws. To the extent that antitrust regulators take adverse
action with respect to business-to-business e-commerce exchanges or establish rules or
regulations governing these exchanges, or that there is a perception that regulators may
do any of the foregoing, the establishment and growth of our B2B initiatives may be
delayed, which may adversely affect our business.

Because
we operate in international markets, we are subject to additional risks.

We
currently sell our software products and SaaS services in a number of countries and we
intend to enter additional geographic markets. Our business is subject to risks that often
characterize international markets, including:

| |  | potentially
weak protection of intellectual property rights;
| | - | ------------------------------------------------------------

| |  | economic
and political instability;
| | - | -----------------------------------

| |  | import
or export licensing requirements;
| | - | ----------------------------------------

| |  | trade
restrictions;
| | - | -------------------

| |  | difficulties
in collecting accounts receivable;
| | - | -----------------------------------------------

| |  | longer
payment cycles;
| | - | ----------------------

| |  | unexpected
changes in regulatory requirements and tariffs;
| | - | ----------------------------------------------------------

| |  | seasonal
 reductions in business activities in some parts of the world, such as during the summer
              months in Europe;
| | - | ---------------------------------------------------------------------------------------------------------------------------------

| |  | fluctuations
in exchange rates; and
| | - | -----------------------------------

| |  | potentially
adverse tax consequences.
| | - | -------------------------------------

Our
business and operating results could be harmed if we fail to protect and enforce our
intellectual property rights.

The
laws of some countries in which our products are or may be developed, marketed or sold may
not protect our products or intellectual property rights, increasing the possibility of
piracy of our technology and products. We currently have no patents or patent applications
pending. We rely on a combination of trademarks, copyrights, trade secret laws,
confidentiality procedures and licensing arrangements to protect our intellectual property
rights. Our competitors could also independently develop technologies that are
substantially equivalent or superior to our technology.

It
may be necessary to litigate to enforce our copyrights and other intellectual property
rights, to protect our trade secrets or to determine the validity of and scope of the
proprietary rights of others. Such litigation can be time consuming, distracting to
management, expensive and difficult to predict. Our failure to protect or enforce our
intellectual property could have an adverse effect on our business and results of
operation.

Our
technology may infringe on the intellectual property rights of third parties and we may
lose our rights to it, which would harm our business.

We
may be subject to infringement claims as the number of products and competitors in our
industry segment grows and the functionality of products in different industry segments
overlap. It is possible that we will inadvertently violate the intellectual property
rights of other parties and that other parties will assert infringement claims against us.
If we violate the intellectual property rights of other parties, we may be required to
modify our products or intellectual property or obtain a license to permit their continued
use. Any future litigation to defend ourselves against allegations that we have infringed
the rights of others could result in substantial cost to us, even if we ultimately
prevail, and a determination against us in any such litigation could subject us to
significant liabilities to other parties and could prevent us from developing, selling or
using our products. If we lose any of our rights to our proprietary technology, we may not
be able to continue our business.

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We may fail to maintain
effective internal control in accordance with Section 404 of the Sarbanes-Oxley Act of
2002.

The Sarbanes-Oxley Act of 2002
imposes certain duties on us and our executives and directors. Our efforts to comply with
the requirements of the Sarbanes-Oxley Act of 2002, and in particular with Section 404
under it, have resulted in increased general and administrative expenses and a diversion
of management time and attention, and we expect these efforts to require the continued
commitment of resources. If we fail to maintain the adequacy of our internal controls, we
may not be able to ensure that we can conclude on an ongoing basis that we have effective
internal controls over financial reporting. Our management has determined that we had
ineffective internal control over financial reporting as of December 31, 2007, due to a
material weakness, and we may identify additional material weaknesses or significant
deficiencies in our future internal control over financial reporting. Failure to maintain
effective internal control over financial reporting could result in investigation or
sanctions by regulatory authorities, and could have a material adverse effect on our
operating results, investor confidence in our reported financial information, and the
market price of our ordinary shares.

Under
SFAS 123(R), we are required to record a compensation expense in connection with
share-based compensation, and, as a result, our profitability may be reduced
significantly.

On December 16, 2004, the Financial
Accounting Standards Board, or FASB, issued Statement No. 123 (revised 2004), Share-Based
Payment, or SFAS 123(R), which is a revision of SFAS 123. Generally, the approach in SFAS
123(R) is similar to the approach described in SFAS 123. However, SFAS 123 permitted, but
did not require, share-based payments to employees to be recognized based on their fair
values while SFAS 123(R) required, as of the first quarter of 2006, all share-based
payments to employees to be recognized as a compensation expense based on their fair
values. SFAS 123(R) also revised, clarified and expanded guidance in several areas,
including measuring fair value, classifying an award as equity or as a liability and
attributing compensation cost to reporting periods. During 2006 and 2007, SFAS 123(R) had
a material impact on our results, lowering our reported net income by approximately $3.9
million in each such year. Had we adopted this standard in prior periods, we also would
have recorded a material amount as compensation expense, which would have had a material
adverse effect on our results of operations. This standard may continue to have a
significant adverse impact on our results of operations, although we do not expect it will
have any impact on our overall financial position. In addition, if as a result of SFAS
123(R) we would stop or limit the use of stock options as an incentive and retention tool,
it could have an adverse effect on our ability to recruit and retain employees.

# Risks Related To Our
Location In Israel

Potential
political, economic and military instability in Israel may adversely affect our results of
operations.

Our
principal offices and headquarters are located in Israel. Accordingly, political, economic
and military conditions in Israel directly affect our operations. Since the establishment
of the State of Israel in 1948, a number of armed conflicts have taken place between
Israel and its Arab neighbors. Since September 2000, there has been a marked increase in
hostilities between Israel and the Palestinians, characterized by terrorist attacks on
civilian targets, suicide bombings and military incursions by the Israeli army into areas
under the control of the Palestinian Authority. Hamas, an Islamist movement responsible
for many attacks against Israeli targets, won the majority of the seats in the Parliament
of the Palestinian Authority in January 2006 and took control of the entire Gaza Strip by
force in June 2007. These developments have led to frequent missile attacks on Israeli
towns from the Gaza Strip, further straining relations between Israel and the Palestinian
Authority. Further, in the summer of 2006, Israel engaged in a war with Hezbollah, a
Lebanon-based Shiite militia group, which involved thousands of missile strikes and
disrupted most day-to-day civilian activity in northern Israel.

Ongoing
violence between Israel and the Palestinians, as well as tension between Israel and the
neighboring Syria and Lebanon, may have a material adverse effect on our business,
financial conditions and results of operations. In addition, in recent years Iran has been
stepping up its efforts to achieve nuclear capability. This move is seen by many as a
world wide threat to peace. This situation may potentially escalate in the future to
violent events which may affect Israel and us.

We
cannot predict the effect on us of any increase in the degree of violence by the
Palestinians or others against Israel or the effect of military action elsewhere in the
Middle East. The future of peace efforts between Israel and its Arab neighbors remains
uncertain. Any armed conflicts or political instability in the region would likely
negatively affect business conditions and adversely affect our results of operations.
Furthermore, several countries continue to restrict or ban business with Israel and
Israeli companies. These restrictive laws and policies may seriously limit our ability to
make sales in those countries.

Our
results of operations could be negatively affected by the obligations of our personnel to
perform military service.

Our
operations could be disrupted by the absence for significant periods of one or more of our
executive officers, key employees or a significant number of other employees because of
military service. Some of our executive officers and the majority of our male employees in
Israel are obligated to perform military reserve duty, which could accumulate annually
from several days to up to two months in special cases and circumstances. The length of
such reserve duty depends, among other factors, on an individuals age and prior
position in the army. In addition, if a military conflict or war occurs, these persons
could be required to serve in the military for extended periods of time. Any disruption in
our operations as the result of military service by key personnel could harm our business.

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Because
some of our financial assets and liabilities are denominated in non-dollar currencies such
as the New Israeli Shekel, the British Pound Sterling or the Euro, and because our
financial results are measured in dollars, our results of operations could be harmed, as a
result of a strengthening or weakening of the dollar compared to these other currencies.

We
generate a majority of our revenues in dollars or in dollar-linked currencies, but some of
our revenues are generated in other currencies such as the New Israeli Shekel, or NIS, the
British Pound Sterling and the Euro. As a result, some of our financial assets are
denominated in these currencies, and fluctuations in these currencies could adversely
affect our financial results. A considerable amount of our expenses are generated in
dollars or in dollar-linked currencies, but some of our expenses such as salaries or
hardware costs are generated in other currencies such as the NIS, the British Pound
Sterling or the Euro. In addition to our operations in Israel, we are expanding our
international operations. Accordingly, we incur and expect to continue to incur additional
expenses in non-dollar currencies. As a result, some of our financial liabilities are
denominated in these non-dollar currencies. In addition, some of our bank credit is linked
to these non-dollar currencies. Most of the time, our non-dollar assets are not totally
offset by non-dollar liabilities. Due to the foregoing and to the fact that our financial
results are measured in dollars, our results could be adversely affected as a result of a
strengthening or weakening of the dollar compared to these other currencies. During 2006,
2007 and the first half of 2008, the dollar depreciated sharply in relation to the NIS,
which raised the dollar cost of our Israeli based operations and adversely affected our
financial results. Our results could also be adversely affected if we are unable to guard
against currency fluctuations in the future. Accordingly, we may enter into currency
hedging transactions to decrease the risk of financial exposure from fluctuations in the
exchange rate of the dollar against the NIS or other currencies. These measures, however,
may not adequately protect us from future currency fluctuations.

The
dollar cost of our operations in Israel will increase to the extent increases in the rate
of inflation in Israel are not offset by a devaluation of the NIS in relation to the
dollar, which would harm our results of operations.

Since
a considerable portion of our expenses such as employees salaries are linked to an
extent to the rate of inflation in Israel, the dollar cost of our operations is influenced
by the extent to which any increase in the rate of inflation in Israel is or is not offset
by the devaluation of the NIS in relation to the dollar. As a result, we are exposed to
the risk that the NIS, after adjustment for inflation in Israel, will appreciate in
relation to the dollar. In that event, the dollar cost of our operations in Israel will
increase and our dollar-measured results of operations will be adversely affected. In
2007, the value of the dollar decreased in relation to the NIS by 9.0%, while inflation
increased by 3.4%. We cannot predict whether in the future the NIS will appreciate against
the dollar or vice versa. Any increase in the rate of inflation in Israel, unless the
increase is offset on a timely basis by a devaluation of the NIS in relation to the
dollar, will increase labor and other costs, which will increase the dollar cost of our
operations in Israel and harm our results of operations.

We
currently participate in or receive tax benefits from government programs. These programs
require us to meet certain conditions and these programs and benefits could be terminated
or reduced in the future, which could harm our results of operations.

We
receive tax benefits under the Israeli Law for Encouragement of Capital Investments, 1959,
or the Investments Law, with respect to our production facilities that are designated as
Approved Enterprises. We believe that we are currently in compliance with
these requirements. However, if we fail to meet these requirements, we would be subject to
corporate tax in Israel at the regular statutory rate. We could also be required to refund
tax benefits, with interest and adjustments for inflation based on the Israeli consumer
price index. Our tax benefits resulting from our Approved Enterprises for the years 2005,
2006 and 2007, net of other tax effects, were approximately $2,518,000, $346,000 and $0
respectively. In addition, an increase in our development activities outside of Israel may
be construed as a failure to comply with the Investments Law conditions. There can be no
assurance that new benefits will be available, or that existing benefits will be continued
in the future, at their current level or at any level.

Our
board of directors has determined that we will not distribute any amounts of our
undistributed tax exempt income as a dividend. We intend to reinvest our tax-exempt income
and not to distribute such income as a dividend. Accordingly, no deferred income taxes
have been provided on income attributable to our Approved Enterprise programs as the
undistributed tax exempt income is essentially permanent in duration

On
April 1, 2005, an amendment to the Investments Law came into effect, which revised the
criteria for investments qualified to receive tax benefits. An eligible investment program
under the amendment will qualify for benefits as a Benefited Enterprise (rather than the
previous terminology of Approved Enterprise). Among other things, the amendment provides
tax benefits to both local and foreign investors and simplifies the approval process. The
amendment does not apply to investment programs approved prior to December 31, 2004. As a
result of the amendment, tax-exempt income generated under the provisions of the new law
will subject us to taxes upon distribution or liquidation.

Because
we have received grants from the Office of the Chief Scientist, we are subject to ongoing
restrictions that limit the transferability of our technology and of our right to
manufacture outside of Israel, and certain of our large shareholders are required to
undertake to observe such restrictions.

We
have received royalty-bearing grants from the Office of the Chief Scientist, or OCS, of
the Ministry of Industry, Trade and Labor of the Government of Israel. We must pay
royalties to the OCS on the revenue derived from the sale of products and technologies,
and related services, which incorporate or are based on know-how developed with the grants
from the OCS. As of December 31, 2007, our total contingent liability to the OCS in this
respect amounted to $5,455,000. The OCS budget has been subject to reductions, which may
affect the availability of funds for grants in the future. As a result, we cannot be
certain that we will continue to receive grants at the same rate, or at all. In addition,
the terms of any future grant may be less favorable than our past grant. According to
Israeli law, any products which incorporate or are based on know-how developed with grants
from the OCS are usually required to be manufactured in Israel, unless we obtain prior
approval of a governmental committee. As a condition to obtaining this approval, we may be
required to pay the OCS up to 300% of the grants we received and to repay such grants at a
quicker rate. In addition, we are prohibited from transferring to third parties the
technology developed with these grants without the prior approval of a governmental
committee. Any non-Israeli who becomes a direct holder of 5% or more of our outstanding
ordinary shares will be required to notify the OCS and to undertake to observe the law
governing the grant programs of the OCS, the principal restrictions of which are the
transferability limits described above in this paragraph.

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In
order to meet specified conditions in connection with the grants and programs of the OCS,
we have made representations to the Government of Israel about our Israeli operations. If
we fail to meet the conditions related to the grants, including the maintenance of a
material presence in Israel, or if there is any material deviation from the
representations made by us to the Israeli government, we might be required to refund the
grants previously received (together with an adjustment based on the Israeli consumer
price index and an interest factor) and would likely be ineligible to receive OCS grants
in the future. The inability to receive these grants would result in an increase in our
research and development expenses.

Under
current Israeli law, we may not be able to enforce covenants not to compete and therefore
may be unable to prevent our competitors from benefiting from the expertise of some of our
former employees.

Israeli
courts have required employers seeking to enforce non-compete undertakings against former
employees to demonstrate that the former employee breached an obligation to the employer
and thereby caused harm to one of a limited number of legitimate interests of the employer
recognized by the courts, such as the confidentiality of certain commercial information or
a companys intellectual property. We currently have non-competition clauses in the
employment agreements of most of our employees. The provisions of such clauses prohibit
our employees, if they cease working for us, from directly competing with us or working
for our competitors. In the event that any of our employees chooses to work for one of our
competitors, we may be unable to prevent that competitor from benefiting from the
expertise such former employee obtained from us, if we cannot demonstrate to the court
that such former employee breached a legitimate interest of ours recognized by a court and
that we suffered damage thereby.

It
could be difficult to enforce a U.S. judgment against our officers, our directors and us.

Service
of process upon us, upon our directors and officers, a substantial number of whom reside
outside the United States, may be difficult to obtain within the United States.
Furthermore, because our principal assets and a substantial number of our directors and
officers are located outside the United States, any judgment obtained in the United States
against us or any of our directors and officers may not be collectible within the United
States.

Additionally,
it may be difficult for you to enforce civil liabilities under the Securities Act of 1933
and the Securities Exchange Act of 1934, or the Exchange Act, in original actions
instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of
U.S. securities laws because Israel is not the most appropriate forum to bring such a
claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that
Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be
applicable, the content of applicable U.S. law must be proved as a fact, which can be a
time-consuming and costly process. Certain matters of procedure will also be governed by
Israeli law. There is little binding case law in Israel addressing these matters.

However,
subject to specified time limitations and other conditions, Israeli courts may enforce a
U.S. final executory judgment in a civil matter, including a monetary or compensatory
judgment in a non-civil matter, obtained after due process before a court of competent
jurisdiction according to the laws of the state in which the judgment is given and the
rules of private international law currently prevailing in Israel.

Provisions
of Israeli law could delay, prevent or make difficult a change of control, and therefore
depress the price of our shares.

Provisions
of Israeli corporate law may have the effect of delaying, preventing or making more
difficult a merger with, or acquisition of, us. The Israeli Companies Law  1999, or
the Companies Law, generally provides that, other than in specified exceptions, a merger
be approved by the board of directors and a majority of the shares present and voting on
the proposed merger at a meeting of shareholders. Upon the request of any creditor of a
party to the proposed merger, a court may delay or prevent the merger if it concludes that
there is a reasonable concern that as a result of the merger, the surviving company will
be unable to satisfy the obligations of the surviving company. Furthermore, a merger may
generally not be completed unless at least (i) 50 days have passed since the filing of the
merger proposal with the Israeli Registrar of Companies and (ii) 30 days have passed since
the merger was approved by the shareholders of each of the parties. The Companies Law also
provides that an acquisition of shares in a public company must be made by means of a
tender offer if as a result of the acquisition the purchaser would become a 25% or greater
shareholder of the company, unless there is already another 25% or greater shareholder of
the company. Similarly, an acquisition of shares must be made by means of a tender offer
if as a result of the acquisition the purchaser would become a 45% or greater shareholder
of the company, unless there is already a 45% or greater shareholder of the company. In
any event, if as a result of an acquisition of shares the acquirer will hold more than 90%
of a companys shares, the acquisition must be made by means of a tender offer for
all of the shares. Finally, Israeli tax law treats some acquisitions, such as
stock-for-stock exchanges between an Israeli company and a foreign company, less favorably
than U.S. tax laws. For example, Israeli tax law may, under certain circumstances, subject
a shareholder who exchanges his ordinary shares for shares in another corporation to
taxation prior to the sale of the shares received in such stock-for-stock swap. These laws
may have the effect of delaying or deterring a change in control of us, thereby limiting
the opportunity for shareholders to receive a premium for their shares and possibly
affecting the price that some investors are willing to pay for our securities.

15

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The
rights and responsibilities of our shareholders are governed by Israeli law and differ in
some respects from the rights and responsibilities of shareholders under U.S. law.

We
are incorporated under Israeli law. The rights and responsibilities of holders of our
ordinary shares are governed by our memorandum of association, our articles of association
and by Israeli law. These rights and responsibilities differ in some respects from the
rights and responsibilities of shareholders in typical U.S. corporations. In particular, a
shareholder of an Israeli company has a duty to act in good faith toward the company and
other shareholders and to refrain from abusing his power in the company, including, among
other things, in voting at the general meeting of shareholders on certain matters. See
Duties of Shareholders under Item 10.B of this annual report for additional
information concerning this duty.

# Risks Related to Our
Ordinary Shares

Our
stock price has fluctuated and could continue to fluctuate significantly.

The
market price for our ordinary shares, as well as the price of shares of other technology
companies, has been volatile. Numerous factors, many of which are beyond our control, may
cause the market price of our ordinary shares to fluctuate significantly, such as:

| |  | fluctuations
in our quarterly revenues and earnings and those of our publicly held competitors;
| | - | -----------------------------------------------------------------------------------------------

| |  | shortfalls
in our operating results from levels forecast by securities analysts;
| | - | --------------------------------------------------------------------------------

| |  | announcements
concerning us or our competitors;
| | - | -----------------------------------------------

| |  | changes
in pricing policies by us or our competitors;
| | - | -----------------------------------------------------

| |  | general
market conditions, and changes in market conditions in our industry; and
| | - | --------------------------------------------------------------------------------

| |  | the
general state of the securities market.
| | - | -------------------------------------------

In
addition, trading in shares of companies listed on the Nasdaq Stock Market (including the
Nasdaq Global select Market) in general and trading in shares of technology companies in
particular have experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to operating performance. These broad market and industry
factors may depress our share price, regardless of our actual operating results. In
addition, if we issue additional shares in financings or acquisitions, our shareholders
will experience additional dilution and the existence of more shares could decrease the
amount that purchasers are willing to pay for our ordinary shares.

Substantial
future sales of our ordinary shares may depress our share price.

If
our shareholders sell substantial amounts of our ordinary shares, including shares issued
upon the exercise of outstanding employee options, or if the perception exists that we or
our shareholders may sell a substantial number of our ordinary shares, the market price of
our ordinary shares may fall. If we issue additional shares in financings or acquisitions,
our shareholders will experience additional dilution and the existence of more outstanding
shares could reduce the amount purchasers are willing to pay for our ordinary shares. Any
substantial sales of our ordinary shares in the public market also might make it more
difficult for us to sell equity securities.

Our
ordinary shares are traded on more than one market and this may result in price
variations.

Our
ordinary shares are traded on the Nasdaq Global Select Market and on the Tel Aviv Stock
Exchange. Trading in our ordinary shares on these markets is effected in different
currencies (dollars on the Nasdaq Global Select Market, and New Israeli Shekels on the Tel
Aviv Stock Exchange) and at different times (resulting from different time zones,
different trading days and different public holidays in the United States and Israel).
Consequently, the trading prices of our ordinary shares on these two markets often differ,
resulting from the factors described above as well as differences in exchange rates and
from political events and economic conditions in the United States and Israel. Any
decrease in the trading price of our ordinary shares on one of these markets could cause a
decrease in the trading price of our ordinary shares on the other market.

16

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# ITEM 4 
INFORMATION ON THE COMPANY

# A. History and
Development of the Company

We
were incorporated on March 5, 1982, under the laws of the State of Israel. Both our legal
and commercial name is Retalix Ltd. In 2000, we changed our name from Point of Sale Ltd.
to our current name. Our principal offices are located at 10 Zarhin Street, Raanana
43000, Israel, and our telephone number is +011-972-9-776-6677. Our U.S. agent is our
subsidiary, Retalix USA Inc., located at 6200 Tennyson Parkway, Suite 150, Plano, Texas
75024, and its telephone number is (469) 241-8400. Our website address is www.retalix.com.
The information contained on, or linked from, our website is not a part of this annual
report.

Our
ordinary shares began trading on the Tel Aviv Stock Exchange in October 1994 and on the
Nasdaq National Market (now the Nasdaq Global Select Market) in July 1998.

During
our initial years of operation in the 1980s and the early 1990s we focused on the
development and sales of store level software solutions to food retailers. During the
second half of the 1990s we widened our offerings to cover, in addition to solutions
designed for the grocery retail industry, also solutions for the fuel and convenience
retail industries as well as solutions covering the management of sales operations at the
chain level. During this period we also significantly increased our sales internationally
and in particular in the United States. During the period from 1999 through 2003, we
strengthened our presence internationally, formed our StoreNext initiatives in Israel and
the United States, which are designed to create collaborative communities of small
retailers, suppliers and manufacturers, and we enriched our offerings with the
introduction of web based and mobile solutions. During 2004 and 2005, with the
acquisitions of OMI International Inc., or OMI International, and IDS, we significantly
widened our offerings to include supply-chain management solutions for retailers as well
as for suppliers and manufacturers. For information relating to our recent significant
acquisitions, please see Item 4.B below under Recent Significant Acquisitions.
In 2005, we introduced new sophisticated solutions complementing recent industry focuses,
such as customer loyalty and optimization of ordering. During 2006 and 2007, we made a
significant effort in developing a Java-based, thin-client, next-generation supply chain
management application suite, which we refer to as Retalix InSync.

Principal
Capital Expenditures

We had capital expenditures of $4.7
million in 2007, $2.6 million in 2006 and $3.1 million in 2005. Our capital expenditures
in 2007 consisted primarily of the purchase for $2.5 million of the 3rd floor
of the building (in unfinished condition) in which our corporate headquarters are located
in Raanana, Israel, and the purchase of computers and peripheral equipment. In 2008
we expect the purchase of computers and peripheral equipment to amount to approximately $2
million, and that our capital expenditures related to the 3rd floor
construction, levies, improvements and furniture to amount to up to $5 million. We
have financed our capital expenditures with cash generated from operations.

# B. Business Overview

Overview

We
are an independent provider of integrated enterprise-wide software solutions to food and
fuel retailers and to grocery, convenience store and foodservice distributors. Spanning
the retail and distribution supply chain from the warehouse to the point of sale, our
suite of software solutions integrates the information flow across a retailers or
distributors entire operations, encompassing stores, headquarters and distribution
centers. Our comprehensive solution suite enables retailers and distributors to manage
their operations more efficiently, enhance customer service, reduce operating costs and
collaborate more closely with suppliers. Our software solutions also enable retailers to
capture and analyze consumer behavior data that can be used to devise and implement more
effective targeted promotions and loyalty programs in order to stimulate demand and
increase sales. At the same time, our software solutions enable retailers and distributors
to reduce shrinkage, inventory and cost of sale. We believe that our extensive knowledge
and accumulated experience in developing software solutions for the retail and
distribution food and fuel industries enables us to provide solutions that are better
integrated and more tailored for our target markets than competing solutions. Through
acquisitions over the past four years, we further extended the scope of our software suite
to incorporate supply chain, warehouse, distribution and transportation management solutions
and enhanced pricing and merchandising solutions for distributors and retailers. With this
enhanced suite of software solutions, we now provide retailers and distributors with the
ability to manage, track and report the movement of goods throughout the entire scope of
their operations, from the order through the initial receiving of goods at the warehouse,
and to the final sale at the checkout counter.

We
market our software solutions to large and mid-sized supermarket and convenience store
chains, major fuel retailers, and independent grocers, as well as to large and mid-size
foodservice, convenience stores and grocery distributors. In the supermarket and grocery
sector, we market our solutions to four tiers of food retailers that are generally
characterized by revenue levels:

| |  | Tier
1 - annual revenues of over $4 billion;
| | - | --------------------------------------------

| |  | Tier
2 - annual revenues of between $800 million and $4 billion;
| | - | ----------------------------------------------------------------

| |  | Tier
3 - annual revenues of between $50 million and $800 million; and
| | - | ---------------------------------------------------------------------

| |  | Tier
4  annual revenues of below $50 million.
| | - | ----------------------------------------------

17

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We
market our solutions to Tier 1 and Tier 2 food retailers, large convenience store chains
and major fuel retailers, and large and mid-size foodservice, convenience stores and
grocery distributors through a worldwide direct sales force. Our direct selling efforts
are augmented by a combination of channel partners and resellers. Sales to Tier 1 and Tier
2 food retailers, large convenience store chains, major fuel retailers and large and
mid-size foodservice, convenience stores and grocery distributors have historically
represented a substantial majority of our revenues. We target Tier 3 and Tier 4 food
retailers through our StoreNext initiatives in the United States and Israel. For larger
supermarket and convenience store chains, major fuel retailers, and large and mid-size
foodservice, convenience stores and grocery distributors, our professional services
personnel provide our customers with project management, implementation, application
training and technical services. We also provide development services to customize our
applications to meet specific requirements of our customers and ongoing support and
product maintenance services.

We
believe that we are unique within the food and fuel retail and distribution software
industries. We offer software solutions that can serve the needs of the entire range of
food and fuel retailers and grocery and convenience store distributors, from
multi-national supermarket chains, major food distributors and major fuel retailers to
local independent grocers. We are able to serve such a diverse customer base because we
have designed our applications to include multiple levels of functionality that can be
adapted to the various sizes and forms of retail operations of our customers. To date, our
software solutions have been installed at more than 40,000 sites in 51 countries. Our
customers include leading supermarket and grocery chains such as Publix, Food Lion,
Hannaford Bros., Hy-Vee and Save Mart in the United States, Carrefour, Tesco, Intermarche
and Sainsburys in Europe, and large convenience stores and major fuel retailers such
as BP in Australia, UK and North America, The Pantry, Loves, Caseys, Pilot
Travel Centers, Irving Oil and Husky in the United States and Canada. Our annual worldwide
sales have grown from $36.1 million in 2000 to $221.4 million in 2007.

In
March 2008, we acquired an additional 5% of StoreNext USA and increased our holdings in
this entity to 100%.

In
May 2007, we acquired several intellectual property assets of BGI International, which
provides a suite of software products for the food and consumer goods distributors. This
acquisition enabled us to extend the advantages that we achieve for retailers and
distributors with the OMI International and IDS acquisitions, by providing additional
critical functionality, such as transportation management and distribution center dock
scheduling.

In
March 2006, we acquired additional 45% of StoreNext USA and increased our holdings in this
entity to 95%. In February 2006, we acquired substantially all of the assets of Base
Products, Inc., d/b/a C&L Retail Solutions, which provides a suite of hardware and
software products and services for the food and consumer goods retailers. We believe that
these acquisitions strengthen our position, customer base, flexibility and exposure in the
sector of smaller and independent retailers in the United States.

In
April 2005, we acquired IDS, a provider of enterprise and distribution solutions for
foodservice, convenience stores and grocery distributors. This acquisition enabled us to
extend the advantages that we achieve for retailers with the OMI International acquisition
to the food distribution sector, by providing additional critical functionality to
distributors, such as customer and supplier relationship management as well as financial
accounting and business analytics. Furthermore, the combination of retailer and
distribution solutions offers our customers a much more complete and diversified set of
applications, as many of our retail customers are supplied by our distribution customers
and our software solutions will give them all better visibility into the supply chain and
a unique opportunity for collaboration.

Also
in April 2005, we acquired TCI Solutions, a software provider for grocery retailers in the
area of store and headquarters management and operations. TCI Solutions software
facilitates management of price policies, competitive price policies, direct store
delivery, or DSD, and receiving, ordering and inventory for hundreds of grocery retailers
located mainly in North America. TCI Solutions software also controls the connection
between the store operation software and the point of sale, or POS, software, downloading
price changes, managing shelf stock auditing and more. The acquisition of TCI Solutions
strengthened Retalixs advantages in the grocery store and at headquarters,
established our presence in hundreds of new grocery retailers of various sizes, and
enhanced our ability to support third party POS solutions as part of our total solution
set.

18

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Our
Market Opportunity

The customer retention
battle

The
retail food and fuel industries today are characterized by intense competition, resulting
in increased pricing pressure and narrowing operating margins. Retailers are losing
customers to their larger competitors that offer aggressive pricing as well as greater
shopping convenience and superior customer service. The largest retailers, such as
Wal-Mart, are increasingly using their size and scale to realize cost savings and
operating efficiencies from their supply chain, which they then pass on to the consumer in
the form of lower prices. This trend creates an industry dynamic whereby more and more
consumers are attracted to these price-cutting retailers, thus accelerating these
retailers revenue growth and allowing them to further increase their economies of
scale. The distributors that supply many of these retailers are facing the same market
trends, as they are asked to become more efficient, to offer better products at lower
costs, to consolidate services, to provide visibility into the supply chain and to
facilitate the competitive capabilities of their customers  the retailers.

At
the same time, large food retailers and distributors are expanding their operations beyond
their traditional focus on food supermarkets to encompass additional retail formats, such
as convenience stores, food service, fuel stations and quick service restaurants, or QSRs.
This has increased the competition in the convenience store market sector, which
historically has been served by smaller chains and independent retailers. These small and
independent operators are finding it increasingly difficult to compete effectively with
the aggressive pricing and associated lower margins resulting from increasing competition.
Similarly, competition has reduced margins at the fuel pump, causing large fuel retailers
to add convenience store and QSR formats in an effort to increase their overall margins.
This has further increased competition in the convenience store and fuel station market
sectors, which in turn favors the large retailers and distributors that can leverage their
size and scale to realize operating efficiencies, thereby lowering their cost base and
allowing them to deliver lower prices.

One
of the primary factors that allows such large retailers and distributors to realize
operating efficiencies is their use of sophisticated retail information systems, often
developed in-house, that provide them with comprehensive visibility into their extended
supply chain. Armed with such visibility, these retailers and distributors can more
efficiently execute and track all of their operational tasks, such as order optimization,
inventory management, merchandising and pricebook management. In addition, this visibility
also allows retailers to optimize their pricing and promotion decisions in order to
increase demand and sales.

The information system
needs of food and fuel retailers and distributors

In
order to compete more effectively, food and fuel retailers and distributors need
information systems comparable to those used by the largest food retailers, distributors
and major fuel chains in order to be able to realize additional operating efficiencies. In
particular, retailers and distributors require robust information systems that can:

| |  | increase
operating efficiencies through tighter integration of in-store, enterprise level and
warehouse management systems, enabling visibility across the entire scope of their retail
and distribution operations;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | capture
and analyze data and leverage consumers demand information to enable advanced
forecasting capability and thereby to optimize the ordering and inventory stocking
process in the store and in distribution centers; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | extend
supply chain visibility to include suppliers and customers, enabling retailers and
distributors to share data and collaborate between themselves and with suppliers in
supply chain decisions.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

However,
in order to deter customers from shifting their patronage to the largest chains, smaller
retailers and distributors require more than increased operating efficiencies and
competitive pricing. In order to compete effectively with these larger chains, smaller
retailers need to provide consumers with an enhanced shopping experience through diverse
retail formats and better customer service and to incentivize their customer base to
increase their patronage of their stores through customer loyalty and other promotion
strategies. As a result, in an effort to increase customer retention and influence
customer spending habits, retailers and distributors are increasingly seeking information
systems that can, in addition to achieving operating efficiencies, also:

| |  | effectively
manage customer  management  initiatives which are designed to foster customer loyalty
and          promotion strategies;
| | - | -------------------------------------------------------------------------------------------------------------------------------------

| |  | integrate
 enterprise  and in-store  systems to enable  rapid  implementation  of customer
 management          initiatives;
| | - | ----------------------------------------------------------------------------------------------------------------------------

| |  | efficiently
manage their supply chain to facilitate optimal inventory stocking at each location;
| | - | ------------------------------------------------------------------------------------------------

| |  | quickly
and efficiently implement pricing, product and marketing decisions; and
| | - | -------------------------------------------------------------------------------

| |  | support
a wide variety of retail formats and services to increase customer convenience and
satisfaction.
| | - | --------------------------------------------------------------------------------------------------------

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The food and fuel
software opportunity

Many
food and fuel retailers and distributors have historically relied upon a complex set of
fragmented and poorly integrated legacy information systems. Such systems are the
byproduct of years of delaying implementation of a coherent enterprise-wide IT strategy,
favoring patchwork upgrades over comprehensive system revitalization. As a result, most
food and fuel retailers and distributors operate information systems that are difficult to
adapt to todays intensely competitive retail and distribution industries. Typically,
these retailers and distributors existing information systems consist of
stand-alone Point-of-Sale, or POS, systems with little integration with their back-office
and with no enterprise-wide information system. These systems generally cannot be easily
modified to provide cross-enterprise visibility, collaboration and integration, nor can
they support the information capture and analysis necessary for reliable forecasting and
coordinated purchasing decisions. In addition, in continuing to rely on these legacy
systems, retailers and distributors face an increasing frequency of breakdowns and system
failures, exposing them to the ongoing cost of expensive maintenance.

In
order to remain competitive and avoid the ongoing costs associated with maintaining their
legacy systems, many retailers and distributors are seeking to replace their legacy
systems with modern, integrated retail information systems that can provide them with
visibility across the entire scope of their operations, support collaboration among
retailers, distributors and their suppliers, allow enterprise-wide information flow and
enable implementation of sophisticated customer loyalty and promotion strategies. We
believe that these replacement systems typically will be based upon a modular,
open-systems architecture, or non-proprietary software that can be easily integrated into
a retailers existing IT infrastructure. Systems meeting such criteria provide
retailers and distributors with the flexibility to modify their information systems to
respond to and manage their changing business environment.

Our Solutions

Our
software solutions provide a robust and comprehensive suite of applications for retailers
and distributors, addressing all three principal divisions of the retail and distribution
channel  retail stores, headquarters (also called the enterprise level), and
warehouses and distribution centers, and enhancing the close relationship and
collaboration between retailers and distributors. Our solutions are designed to deliver
synchronized retail where data and applications are communicating seamlessly
between the point-of-sale and supply chain to deliver the greatest cost advantages and
revenue generation capabilities to our customers. We believe that our solutions
differentiate us from other providers of software solutions to the retail and distribution
food and fuel industries because they combine the following attributes:

Our integrated solutions
span the retailers and distributors organization

We
believe that our integrated suite of software solutions is unique among retail and
distribution food software solutions, in that it combines the essential elements of an
enterprise-wide information system  stores, headquarters and warehouses. Such an
integrated solution permits retailers and distributors to generate substantial operating
efficiencies and cost savings through efficient management of sales, inventory, purchasing
and merchandising.

Our solutions provide for
both retail operations management and customer management

While
retail enterprise solutions have traditionally focused exclusively on operations
management  principally supply chain and merchandising processes  our
enterprise solutions also include sophisticated customer management tools. Our customer
management tool, Retalix Loyalty and Promotions, focuses on influencing consumer spending
habits through the use of personalized promotions and other loyalty card-based marketing
techniques. Our in-store systems provide full support for promotions and loyalty programs
at the checkout lane, and are integrated with our enterprise applications. This feature
enables retailers to devise a wide variety of loyalty programs and promotions on a
chain-wide level that can be easily implemented at the store level. Moreover, our
integrated data analysis capabilities enable retailers to explore and analyze customer
transactions in detail, allowing them to closely monitor customer spending patterns and to
target promotions to their loyalty program members.

Our demand science solutions
provide consistent demand data throughout the enterprise and the supply chain

Providing
consistent demand data for each item throughout the enterprise, from store replenishment
to distribution center forecasting and purchasing, is a key requirement for supply chain
efficiency, reduced goods shrinkage, reduced out-of-stock situations and increased sales.
We believe that our high investment in demand science and the implementation of this
science throughout the supply chain give us significant advantages compared to our
competitors, and give our customers significant advantages compared to their competitors.

Our in-store solutions
support multiple retail formats and customer service points

Our
in-store solutions offer retailers the ability to support multiple retail formats and
customer service points at a single retail site. This enables retailers to use a single
software solution to operate different retailing formats such as grocery, fuel,
convenience store, car wash and QSRs, and to support a variety of consumer service points,
such as kiosk, self-scanning, self-weigh and self-checkout. This assists retailers in
attracting new customers and in improving existing customer retention by enhancing the
overall in-store consumer experience.

20

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We provide independent and small
chain food retailers with access to sophisticated software solutions at an affordable
price

Independent
and small chain food retailers have many of the same needs and face many of the same
challenges as do larger retailers, but lack the managerial, financial and technological
capacity to implement the necessary systems to meet them. Our StoreNext initiatives in the
United States and Israel operate enterprise-level applications, such as pricebook,
promotions, loyalty, reporting and analysis services, on a software-as-a-service basis,
meaning that the application is remotely hosted on our centralized servers and accessed by
the independent retailer over the web or private data lines. Our Connected Services allow
independent retailers and small chains, in return for a subscription fee, to gain access
to applications that would otherwise be too expensive for them to procure and manage
in-house. With access to these applications, smaller retailers can derive operating
efficiencies that are similar to those enjoyed by their larger competitors and thereby
compete with them more effectively.

Our software solutions can support
the multi-national operations of leading Tier 1 food and fuel retailers

Our
software solutions provide extensive support for the international market, such as support
of multiple languages, currencies, taxes and local certifications etc., enabling
multi-national Tier 1 food and fuel retailers to standardize their operations by using one
Retalix product across their global operations. We believe that these capabilities provide
us with a competitive advantage with retailers that are located in multi-lingual countries
or that have stores near national borders, as well as multi-national retailers that prefer
licensing software from a single vendor for all their locations.

Our robust solutions
provide system resiliency and data redundancy

The
retail food industry is characterized by a very high volume of customer transactions that
retailers are required to process quickly and efficiently. We believe that retailers view
their POS systems as mission-critical to their operations, as these systems must be
continuously functioning to process customer transactions. The malfunction or failure of a
retailers POS system for even a few minutes could result in substantial loss of
sales, as well as significant customer dissatisfaction. Moreover, the data generated in
these transactions are equally mission-critical, and the loss of such data could
significantly impair a retailers internal reporting and accounting systems. As a
result, retailers require highly robust and resilient POS solutions that will allow them
to continue to operate despite system failures, as well as to avoid the risk of being
unable to process customer transactions and the risk of data loss. We have developed a
software architecture designed to support the high volume, multiple format environments of
the largest food retailers and distributors and major fuel retailers, capable of
supporting very high volumes of stores and checkout lanes without risk of significant
malfunction or failure. Equally important, our software architecture protects critical
data through its duplication at the server level. In case of system failures, each POS
terminal can continue to operate despite the interruption of communications with the
back-office or headquarters, storing all transactions locally, to be transferred to the
server level when communications are restored. We believe the adoption of our in-store
solutions in such large supermarket chains as Carrefour, Tesco, Publix, Sainsburys
and Woolworths is a strong testament to the robustness and resilience of our in-store
solutions.

Our next generation thin
client architecture reduces the cost and physical footprint of IT systems

In
response to retailers increasing demand for software solutions that are easier to
use and cheaper to maintain, we develop our next generation solutions based on a
thin client architecture, using service oriented architecture and software
technologies (J2EE and Microsoft .Net). Our thin client solutions allow our
applications to run on remote servers with the users accessing the applications through a
standard browser. These solutions reduce the need for expensive, bulky hardware and
software installations at each store location, lower an enterprises IT maintenance
costs and facilitate enterprise-wide integration. In addition, thin client
architecture makes it easier and more cost-effective to upgrade software as and when
required. This capability to provide for a thin POS and a thin
office solution allows a choice of additional flexibility and cost savings, as part
of our product suite.

Our enterprise solutions
can be easily integrated with existing IT infrastructures

The
modular nature of our architecture and our tools for building open interfaces to external
systems, including software protocol standards such as XML and web services, streamlines
the introduction of our enterprise and in-store solutions into existing IT environments.
Retailers and distributors can purchase systems that fit their current needs and budgets,
and then add additional modules as their business needs evolve over time. Our open
architecture means that our solutions are hardware neutral, capable of working with
systems from most major hardware vendors, including IBM, NCR, Fujitsu, Epson, Dell and
Wincor-Nixdorf. This modular and open architecture decreases the software integration
risks associated with migrating from a retailers existing systems to our enterprise
and in-store solutions, thereby ensuring quicker time to market. This feature also allows
the retailer and distributor to make separate purchasing decisions for the hardware, thus
realizing great savings in hardware costs by buying the hardware as a standard market
commodity.

Our enterprise solutions
can be easily customized, localized and personalized

Large
and mid-size retailers and distributors require that software products be tailored to fit
their operational needs. In many cases, such a requirement demands huge implementation
efforts. Our products were designed and built to facilitate customer customization with
reduced efforts. In addition, multinational retailers may operate in several locales or
countries, and require specific customization per locale, and in some cases
personalization capabilities. We offer to meet these needs as part of our customization
capabilities.

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Our Growth Strategy

The
principal elements of our strategy to achieve our growth objectives are as follows:

Leverage our integrated suite of
products to become the leading provider of retail software solutions to the retail and
distribution food and fuel industries

We
offer our customers enterprise-wide software solutions that allow them to collect, manage
and analyze information across their entire retail enterprise, from the warehouse to the
checkout counter. We extended our product offering from in-store solutions to include
integrated enterprise level and head office applications. We have added powerful pricing,
inventory and DSD capabilities to our offering and have expanded our product offering to
include distribution, supply chain execution and warehouse management systems. We believe
that with our integrated solutions, we are well positioned to leverage our large customer
base to become the leading provider of retail solutions to the retail and distribution
food and fuel industries.

Continue to target Tier 1 and Tier
2 retail food chains, food distributors and major fuel chains operating legacy IT systems

The
majority of Tier 1 and Tier 2 retail food chains, food distributors and major fuel chains
continue to operate outdated legacy systems that do not provide the functionality required
to implement and support the new applications and workflow processes that are necessary to
compete effectively in todays retail food and fuel industries. We believe that our
solutions are well positioned to capitalize on this market opportunity because they are:

| |  | based
on open standards software architecture and are hardware neutral;
| | - | -----------------------------------------------------------------------

| |  | scalable,
meaning they can easily support a large number of users before a system upgrade or
replacement is needed;
| | - | -------------------------------------------------------------------------------------------------------------------

| |  | able
to support multiple retail formats such as grocery, fuel and QSRs with a single solution;
| | - | ----------------------------------------------------------------------------------------------

| |  | able
to support multi-national retailers that require a standardized solution that can be
easily deployed across their multiple regions and countries; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | able
to customize and localize our systems to fit the specific requirements of our customers
with reduced effort and cost.
| | - | --------------------------------------------------------------------------------------------------------------------------

Enable food and fuel retailers to
differentiate themselves from their competitors through sophisticated customer management
tools

We
believe that our ability to offer sophisticated customer management tools, often referred
to as customer loyalty programs, provides us with a significant advantage over our
competitors in an area that is becoming of increasing strategic importance to retailers.
Our customer management tools are tightly integrated with our in-store solutions. This
allows the establishment at the enterprise level and the implementation at the store level
of a wide variety of broad-based, personalized promotions and loyalty card-based marketing
programs. We believe that our integrated customer management tools differentiate our
solutions from competing retail solutions, which generally focus on customer management to
a lesser degree.

Continue to develop new products
and enhance existing products to address a broader set of food and fuel retailers
and distributors needs

We
strive to develop innovative products and solutions that meet the needs of our customers
based on our extensive knowledge and accumulated experience in the development of software
solutions for the food and fuel industries. In order to address a broader set of
retailers and distributors needs, we continue to expand the breadth and depth
of our product lines by developing and introducing new products and enhancing the
functionality of our existing products. Our continuous technological development
represents an important part of our value proposition to our customers, as it provides
them with access to advanced solutions that meet their changing needs, as well as with a
road map for the development of products designed to meet their anticipated future needs.
As part of this strategy, we introduced in 2003 a new thin client POS software
application, and announced the first installation of this new solution built on the
Microsoft .NET platform. In September 2005, we announced the introduction of Retalix
InSync, our new J2EE-based platform and solution portfolio for retail, supply chain
execution and warehouse management systems. The initial implementations of these new
solutions are already taking place.

Continue to penetrate the Tier 3
and Tier 4 retail food markets through the provision of Connected Services

In
the past, our sales to smaller chains and independent grocers were primarily limited to
POS applications. Leveraging our our ability to support multiple enterprises from a single
data center, we are now able to offer enterprise level applications, such as product and
price management, sales analysis, promotions, loyalty and information services, to Tier 3
and Tier 4 retailers on a SaaS basis. We provide these Connected Services through
StoreNext in return for a subscription fee. These Connected Services enable Tier 3 and
Tier 4 retailers to enjoy many of the benefits of enterprise and back-office applications
that were originally designed for Tier 1 and Tier 2 retailers, without the need to make a
significant upfront investment in the systems and personnel required to run these
applications in-house. To date, StoreNext USA has connected about 800 stores and StoreNext
Israel has connected over 1,380 stores. We intend to continue to market Connected Services
to this retail sector in an effort to increase the revenues we generate from our Tier 3
and Tier 4 customer base.

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Leverage our Connected Services
customer base to build collaborative retailer-supplier communities

Through
the collection of sales data obtained in providing Connected Services to Tier 3 and Tier 4
retailers, we are able to provide suppliers with aggregated Tier 3 and Tier 4 sales data,
including visibility into inventory movement and aggregated market share information. This
data enables suppliers to better understand market trends and changing consumer demands,
which previously had been difficult to gauge because of the large number of independent
retailers and the fragmented nature of the market, thereby enabling suppliers to optimize
their supply replenishment strategy. As we add more retailers to our Connected Services,
we are able to offer suppliers an increasingly valuable service as we are able to provide
them with access to data from a wider group of retailers and, as a result, a more
detailed, timely and accurate view of the marketplace. We first established a community
for suppliers in the retail food industry in Israel, where the number of retailer
subscribers to our Connected Services through our StoreNext Israel venture has reached a
critical mass. We intend to provide similar collaboration services through our StoreNext
USA venture as the number of subscribers to our Connected Services in the United States
grows. We intend to continue to leverage our Connected Services to increase the value of
the community to suppliers and to provide us with an additional source of revenue.

Continue broadening
market penetration through strategic acquisitions

Historically,
we have grown through a combination of internal expansion and strategic acquisitions of
companies with related businesses and technologies. Over the past few years, we have made
a number of strategic acquisitions to expand our product offerings and market position,
including the acquisitions of BGI, IDS, TCI Solutions, UNIT and OMI International. We
continue to evaluate opportunities to acquire complementary businesses and technologies in
the retail and distribution information systems market in order to improve service to our
customers, complement our product offerings, increase our market share, advance our
technology, expand our distribution capabilities and penetrate new targeted markets.

Continue to expand into new
geographic markets and additional retail and distribution market sectors

In
the past our primary geographic markets were North America, Israel and Europe. In 2004, we
announced significant sales in new markets, such as France and Italy in Europe, and China,
Japan and India in Asia, in 2005 we announced significant new business in Australia, and
in 2006 we strengthened our activities in Eastern Europe. In addition, we are beginning to
expand into other types of retail sectors, such as health and beauty and general
merchandise, which have retail characteristics that are similar to the food and fuel
retail and distribution market sectors, in an effort to broaden our addressable market.

Our Products

We
have a broad portfolio of software solutions that are designed to meet the retail
operations, supply chain management and execution, and customer management needs of the
entire range of food and fuel retailers and distributors, from multi-national supermarket
and major convenience store chains and major fuel retailers to local independent grocers.
We offer our customers a suite of software products to address the principal elements of
their retail operations:

In-Store
Solutions: Suite of software solutions that provides supermarkets, convenience stores,
fuel retailers and QSRs with applications supporting multiple types of customer service
points, such as regular checkout, self-service kiosk, self-scanning and self-checkout,
providing comprehensive in-store operational and management tools for POS, front-office
and back-office operations and allowing mobile applications that enable in-store personnel
to carry out back-office tasks using mobile computing devices. Our in-store solutions
consist of our POS systems  StoreLine for the grocery and health and beauty market
and StorePoint for the convenience store, fuel retail and QSR market  as well as
additional back-office modules, Retalix Pocket Office and Retalix Store. In terms of
contribution of our various software solutions to our historical revenues, we have derived
the substantial majority of our product sales from the sale of our in-store solutions,
specifically Retalix StoreLine and Retalix StorePoint solutions.

Enterprise
Headquarters Solutions: Suite of software tools that provides retailers and
distributors with a comprehensive, modular solution which centralizes operation and
management of their enterprise-wide and back-office activities such as product and price
planning and management, promotions, merchandising, inventory management, direct store
delivery management, receiving and ordering, and reporting and analysis. Our enterprise
solutions also provide customer relationship management tools, enabling a wide variety of
personalized and targeted promotions and loyalty card-based marketing techniques. For the
grocery retail market our main offerings are the integrated in-store and headquarters
software, now marketed as Retalix Store and Retalix HQ. For the fuel and convenience store
markets our main product is our Microsoft .Net-based headquarters solution for convenience
store, Retalix HQ-Convenience (HQC). For the food and convenience distributors, our main
offering is Retalix Power Enterprise.

23

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Supply
Chain Management and Warehouse Management Solutions: Suite of supply chain management
and warehouse management software solutions that provides retailers and distributors with
a range of applications designed to help them manage complex, multi-facility warehouses
and distribution centers. These applications include warehouse management, automated
procurement, merchandising, order management, order-optimization, invoice reconciliation,
transportation management, yard management, and dock scheduling. Our supply chain
execution and warehouse management systems consist of TRICEPS Warehouse Management (WMS),
BICEPS Purchasing Management, PROMPT Invoice Matching, Retalix Yard Management (formerly
marketed as MDS), ABS Billing and Order Management, and Retalix DemandAnalytX (DAX) for
demand forecasting and order optimization. Our new Retalix InSync Solution Portfolio will
consolidate most of these offerings into a single product portfolio.

Food
Distribution Enterprise Solutions: A suite of supply chain execution and warehouse
management software solutions that provides food retail and food service distributors with
a complete solution to run their business. This suite of products includes modules that
provide purchasing, ordering, billing, rebates, accounting, electronic data interchange,
or EDI, tradeshow management, and warehouse management (WMS) package for foodservice or
grocery distribution; a web based ordering portal for retailers ordering from a
foodservice, convenience store or grocery distributor; a web based supplier portal; a
portable sales force automation solution for the food service industry; and a handheld
solution for distributors. Our distribution solutions also include a suite of
transportation management applications for food retail and food service distributors,
including Retalix Dock Scheduling (formerly BGI SmartDock.net) and Retalix Traffic
Management (formerly BGI TMS). We added these solutions to our product suite in May 2007
through our acquisition of certain intellectual property assets of BGI International.

SaaS
and Supplier Solutions: Our StoreNext solutions, tailored to smaller chains and
independent grocers, enable smaller establishments with limited IT resources to enjoy the
benefits of our headquarters and back office applications through an SaaS model, which we
host and is accessible over the web or private data lines. We also offer collaborative
solutions that provide retailers and their suppliers with the ability to exchange data and
collaborate electronically in order to achieve greater efficiencies throughout the supply
chain. We anticipate that revenues relating to these solutions will account for a growing
portion of our overall revenues in future periods. Although the overall impact on us in
the near term will be modest, we believe that revenues from these solutions will be an
important source of revenues to us in the longer term.

Our
product suite is organized by the three principal parts of a food retailers
operations: the retail store, the headquarters or enterprise, and the warehouse and
distribution center, as well as the distributors solutions. The following table
briefly describes our main products and their respective features and functions and target
markets. A more detailed description is set forth below the table.

|Product            | Description / Features              | Technology Platform                        | Target Markets                                
|------------------ | ----------------------------------- | ------------------------------------------ | ----------------------------------------------
|
|
|
|
|In-Store Solutions |                                     |                                            |                                               
|Retalix StoreLine  |  POS and front office solution     |                                            |  Supermarkets and grocers - All Tiers        
|                   |  Keyboard or touch                 |  Client server, Windows operating system  |                                               
|                   |  Highly configurable               |                                            |                                               
|                   |  Multi-language, currency and tax  |                                            |                                               
|                   |  High availability and resilience  |                                            |                                               
|                   |  Hardware neutral                  |                                            |                                               
|                   |  Supports multiple types of POS    |                                            |                                               
|                   | formats - grocery, fuel, QSR        |                                            |                                               
|                  
|Retalix Store.net  |  POS solution                      |                                            |  Supermarkets and grocers - All Tiers        
|                   |  Allows retailers to run POS       |  Open architecture                        |                                               
|                   | applications remotely               |  Based on "thin client' architecture      |                                               
|                   |  Reduces total cost of ownership   |  Developed on the Microsoft. Net platform |                                               
|                   | of In-store IT infrastructure       |                                            |                                               
|                   |  Highly scalable                   |                                            |                                               
|Retalix StorePoint |  POS, front-office and back-office |                                            |  Convenience stores, QSRs, and fuel retailers
|                   | solution                            |  Client server, Windows operating system 
|                   |  Touch based, highly configurable 
|                   |  Multi-language, currency and tax 
|                   |  High availability and resilience 
|                   |  Hardware neutral                 
|                   |  Supports multiple types of POS   
|                   | formats - convenience store, fuel, 
|                   | QSR, kiosk                         
|Retalix Pocket     |  Mobile, hand-held suite of front- |                                            |  Supermarkets and grocers - All Tiers        
|Office             | office and back-office applications |  Microsoft Windows CE platform            |  Convenience stores                          
|                   |  Allows employees to perform      
|                   | front-office and back-office       
|                   | functions from their in-store      
|                   | location                           

24

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|                         |                                     |                                    |                               
|------------------------ | ----------------------------------- | ---------------------------------- | ------------------------------
|
|
|
|
|Retalix Back             |  Functionally rich                 |  Client server, Windows operating |  Supermarkets and grocers -  
|Office                   | Back-office applications            | system                             | Tier 2 - Tier 4               
|                         |  Interfaces to several types of   
|                         | POS formats                        
|                         |  Integrated with StoreLine        
|Retalix Store            |  Functionally rich store based     |  Client server, Windows operating |  Supermarkets and grocers -  
|                         | Back-office applications            | system, database independent       | Tier 1 - Tier 3               
|                         |  Powerful price generation and     |  Developed on Delphi             
|                         | competitive pricing capabilities   
|                         |  DSD, Inventory                   
|                         |  Interfaces to many types of POS  
|                         | formats and vendors                
|                         |  Integrated with Retalix HQ       
|Retalix ScanMaster       |  POS solution                      |                                    |  Supermarkets and grocers -  
|                         |  Highly configurable               |  Client server, Windows operating | Tier 3 & Tier 4               
|                         |  Multi-language and tax            | system                            
|                         |  Broad set of customer loyalty    
|                         | functionality support              
|                         |  Integrated with self-checkout    
|                         | systems                            
|                        
|Enterprise Solutions    
|Retalix HQ               |  Functionally rich head-           |  Client server, Windows operating |  Tier 1 - Tier 3 supermarkets
|                         | office applications                 | system, Database independent      
|                         |  Powerful price generation and     |  Developed on Delphi             
|                         | competitive pricing capabilities   
|                         |  DSD, Inventory                   
|                        
|                         |  Integrated with Retalix DAX and  
|                         | Retalix Loyalty                    
|Retalix InSync ThinStore |  DSD, Receiving, Shelf Price Audit |  J2EE, Websphere, operating       |  Tier 1 - Tier 3 supermarkets
|                         |                                     | system and database independent   
|                        
|Retalix                  |  Enterprise system for central     |                                    |  Large chain convenience     
|HQ for C-Stores          | management of head-office and       |  Web-based, open architecture     | stores and fuel retailers     
|                         | back-office applications            |  Based on web services and `thin 
|                         |  Broad functionality - product and | client' architecture              
|                         | pricing, ordering, receiving,       |  Developed on the Microsoft .NET 
|                         | analysis and reporting              | platform                          
|                        
|                         |  Single data repository           
|                         |  Integrated with Retalix          
|                         | StorePoint                         
|                         |  Reduces the technology footprint 
|                         | and maintenance in the retail store
|Retalix Loyalty and      |  Enterprise system for central     |                                    |  Tier 1 & Tier 2 supermarkets
|Central Promotions       | management of consumer loyalty      |  Web-based, open architecture     |  Large chain convenience     
|                         | programs and promotions             |  Based on web services and `thin  | stores and fuel retailers     
|                         |                                     | client' architecture              
|                         |  Integrated with Retalix           |  Developed on the Microsoft .NET 
|                         | StoreLine and StorePoint            | platform.                         
|                         |  Powerful customizable promotion  
|                         | Engine                             
|                         |  Supports a wide variety of       
|                         | loyalty programs, from simple      
|                         | loyalty cards to long term programs

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|                        |                                      |                                 |                                                        
|----------------------- | ------------------------------------ | ------------------------------- | -------------------------------------------------------
|
|
|
|
|Supply Chain Management |                                      |                                 |                                                        
|(SCM) and Warehouse    
|Management (WMS)       
|Solutions              
|TRICEPS Warehouse       |  Automated warehouse location       |                                 |  Tier 1 & Tier 2 supermarkets                         
|Management              | and task management system           |  Advanced Radio Frequency (RF)
|                        |  Optimizes distribution of          | and Voice technology           
|                        | warehouse resources                 
|                        |  Provides real time warehouse data 
|                        | To warehouse managers               
|BICEPS Purchasing       |  Automated procurement system       |                                 |  Tier 1 & Tier 2 supermarkets                         
|Management              |  "Just in time" and forward        
|                        | buying procurement                  
|                        |  Invoice and purchase order        
|                        | reconciliation                      
|                        |  Vendor profiling                  
|                        |  Item inventory management         
|PROMPT Invoice          |  Automated invoice reconciliation   |                                 |  Tier 1 & Tier 2 supermarkets                         
|Matching                | System                               |  EDI and EFT technology       
|                        |  Tracks invoices and interfaces    
|                        | with general ledger systems         
|                        |  Provides real time inventory      
|                        | levels                              
|                        |  Reduces time necessary to         
|                        | resolve cost discrepancies          
|Yard                    |  Automated yard and dock            |                                 |  Tier 1 & Tier 2 supermarkets                         
|Management (a.k.a.      | resource management system           |  Advanced RF, EDI and          |  Tier 1 & Tier 2 grocery and food service distributors
|MDS)                    |                                     
|                        |  Real time management of yard /     | Advanced Ship Notice (ASN)     
|                        | dock arrivals and departures         | technology                     
|                       
|                        |  Automatically directs arrivals to 
|                        | optimal storage location            
|                        |  Manages trailer usage and reduces 
|                        | bottlenecks                         
|ABS Billing and Order   |  Automated billing and pricing      |                                 |  Tier 1 & Tier 2 supermarkets                         
|Management              | system                              
|                        |  Enables billing that reflects pre-
|                        | determined margin objectives        
|                        |  Provides custom pricing according 
|                        | to item                             
|                        |  Allows multiple order types and   
|                        | calculation methods                 
|DemandAnalytX (DAX)     |  Interprets store-level POS data,   |  Demand forecasting and        |  Tier 1 - Tier 3 supermarkets                         
|                        | forecasts demand                     | replenishment optimization      |  Large and small chain convenience stores             
|                        |  Determines and places optimal      |                                
|                        | replenishment orders                 |                                 |  Tier 1 - Tier 3 distributors                         
|                        |  Manages order approval and stock  
|                        | taking in the store using handhelds 
|Retalix InSync Master   |  Master data management             |  J2EE, Websphere, operating    |  Tier 1 - Tier 3 supermarkets                         
|Data Management (MDM)  
|                        |  Data synchronization               | system and database independent |  Tier 1 - Tier 3 distributors                         
|                        |  Global data synchronization       
|                        | network & general staging           
|Retalix InSync          |  Distribution center purchasing     |  J2EE, Websphere, operating    |  Tier 1 - Tier 3 supermarkets                         
|Purchasing              |  Load building                      | system and database independent |  Tier 1 - Tier 3 distributors                         
|                        |  Cost management                   
|                        |  Deals management                  
|                        |  Supplier portal                   

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|                         |                                      |                            |                               
|------------------------ | ------------------------------------ | -------------------------- | ------------------------------
|
|
|
|
|Distributor Solutions    |                                      |                            |                               
|Retalix Power Enterprise |  ERP solution for food and          |  iSeries based            |  Tier 1 - Tier 3 distributors
|                         | foodservice distributors             |                            |  Tier 2 & Tier 3 supermarkets
|                         |  Master data - item, supplier,     
|                         | store, etc.                         
|                         |  Ordering, receiving, forecasting, 
|                         | deals and more                      
|                         |  Tradeshow management              
|                        
|Retalix Power Warehouse  |  Automated warehouse location and   |  iSeries based            |  Tier 1 - Tier 3 distributors
|                         | task management system              
|                         |  Advanced RF & Voice technology    
|Retalix Power BUY        |  Advanced procurement solution for  |  iSeries based            |  Tier 1 - Tier 3 distributors
|                         | food and foodservice distributors    |                            |  Tier 2 & Tier 3 supermarkets
|                         |  Forecasting                       
|                        
|                         |  Ordering, receiving               
|                         |  Load balancing                    
|Retalix Power NET        |  Web Customer Portal, manage        |  Java based               |  Tier 1 & Tier 3             
|                         | store orders                         |                            | distributors                  
|                         |  Web Supplier Portal               
|                         |                                      |                            |  Tier 2 - Tier 3 supermarkets
|Retalix PDA              |  Handheld applications for delivery |  Java based               |  Tier 1 - Tier 3 distributors
|                         |                                      |                            |  Tier 1 - Tier 3 distributors
|SaaS and Supplier       
|Solutions               
|Connected Services       |  Provides retailers access to SaaS  |  ASP.NET technology for   |  Tier 3 & Tier 4             
|                         | applications in return for a         | enterprise and back-office | independent grocers           
|                         | subscription fee                     | applications              
|                         |  Allows these retailers access to  
|                         | applications that would otherwise be
|                         | too expensive or difficult to manage
|                         | in-house                            
|Supplier Solutions       |  Aggregated retail food industry    |                            |  Suppliers to all Tiers of   
|                         | data                                 |                            | supermarkets and grocers      
|                         |  Collaborative supply chain        
|                         | functionality                       
|                        
|                         |  Enables supplier to better        
|                         | understand market trends and        
|                         | consumer demands                    

In-Store Solutions

Our in-store
solutions consist of a wide range of applications supporting:

| |  | robust
point of sale functionality, providing a highly resilient touch-screen enabled cash
register checkout system;
| | - | --------------------------------------------------------------------------------------------------------------------

| |  | multiple
types of customer service points, such as self-scanning, self-weigh and self-checkout,
and multiple retail formats, such as fuel and in-store QSRs;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | front-office
store management functions, such as cashier and cash office management and POS
maintenance;
| | - | --------------------------------------------------------------------------------------------------------

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| |  | back-office
store management functions, such as ordering, receiving, inventory management, labor
scheduling, promotions and reporting and analysis; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | mobile
applications that enable in-store personnel to carry out back-office tasks using mobile
computing devices at any location throughout the store.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

We
have two principal in-store solutions: StoreLine for the supermarket and grocery market
and StorePoint for the convenience store and retail fuel market.

Retalix StoreLine

Retalix
StoreLine is a fully integrated, modular, open architecture POS solution for multiple
format supermarket and grocery chains. Specifically designed to cater to the larger
supermarket chains that frequently add new formats and additional related services,
RetalixStoreLine provides retailers with a comprehensive set of supermarket
operational and management capabilities. RetalixStoreLine also offers interfaces
to enterprise level systems and to third-party applications as well as to payment service
providers. The RetalixStoreLine software suite supports multiple in-store retail
formats, such as fuel and QSRs, and a variety of customer service points, such as
self-scanning, self-weigh and self-checkout. In addition, RetalixStoreLine also
provides the option of back-office functionality, such as inventory, supplier and employee
management. Capable of running on either the Microsoft or Linux operating systems,
RetalixStoreLines client server architecture is hardware neutral, supporting
a variety of open and proprietary hardware devices, such as full-screen customer displays,
color touch screens, scanners and checkout and scales, as well as hardware supplied by
leading vendors, including Fujitsu, IBM, NCR, Epson, Dell and Wincor-Nixdorf.

In
addition to its core POS and front-office and back-office functionality, the RetalixStoreLine software suite supports additional integrated modules, such as:

Retalix
StoreLine QSR  touch-screen based POS application for in-store quick service
restaurants;

Retalix
Fuel  system that supports a variety of fuel payment modes including pre-pay,
pay-at-pump, pay-in-store and payment by automatic vehicle identification devices;

Retalix
Self Checkout  customer self-scanning checkout that requires little or no staff
assistance and, through integration with the back- office, ensures up-to-date pricing and
promotions;

Retalix
U-Weigh  easy to use, touch-screen customer-operated device for weighing fruit
and vegetables that saves customers time at the checkout and allows retailers to make
real-time price adjustments; and

Retalix
Kiosk  multimedia information and sales kiosk that, through integration with our
enterprise solution, provides real-time, in- store information on merchandise, pricing
and promotions.

Customized
versions of Retalix StoreLine software solutions include ISS45, which is
distributed by StoreNext USA, Retalix Next, which is distributed by Retalix Israel to
independent retailers in Israel, and POSition, a Wincor-Nixdorf branded offering, which
was adapted to meet the needs of customers in German-speaking countries and in Italy.

In
addition, our Retalix ScanMaster branded solutions are Windows-based open platform POS
software systems tailored to fit the needs of small chain and single store supermarkets.
ScanMaster, developed by Retalix Pittsburgh, previously RCS, is tailored for the
independent and small chain grocery market sector in the United States. Its configurable
functionality allows retailers to preselect only the subset of functionality that fits
their needs. Developed on the Microsoft platform, ScanMaster operates on multiple
Microsoft Windows operating systems.

Retalix Store.net

Retalix
Store.net is a thin client version of our POS product developed on the Microsoft .NET
platform. Retalix Store.net allows retailers to access POS applications on their in-store
POS systems located on back-office or centralized servers. This reduces the total cost of
ownership of retailers in-store IT infrastructure by enabling retailers to use their
existing POS hardware to access next-generation retail applications. Store.net was first
deployed in 2003 at all Partner Communications stores in Israel (the Israeli franchisee of
Orange plc, the international cellular communications operator). In 2007 Retalix Store.net
was deployed in supermarkets owned and operated by Supersol, Israels largest grocery
retailer. The rollout to Supersol stores is still continuing.

Retalix StorePoint

Retalix
StorePoint is a fully integrated, modular open architecture POS solution for the
multi-format convenience store and fuel sectors. StorePoint supports a variety of retail
formats, such as convenience stores, fuel forecourts, quick service restaurants and
self-service kiosks. By using StorePoint, convenience stores and fuel retailers can use
one integrated solution for item scanning, fuel sales and food service sales. In addition,
StorePoint also provides extensive front office and back-office functionality, such as
ordering and receiving, inventory management, petroleum inventory management, supplier and
employee management, as well as specialized functionality for the food service
environment, such as menu, recipe and waste management. StorePoint interfaces with various
head office systems, allowing central management and decision control for the entire
enterprise. Operating on a Windows platform, StorePoint is a pre-integrated, modular
solution that allows for easy and cost-effective on-site installation.

28

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In
addition to its core POS and front-office and back-office functionality, the StorePoint
software suite supports additional integrated modules such as:

Retalix
Fuel  system that supports a variety of fuel payment modes including pre-pay,
pay-at-pump, pay-in-store and payment by audio-video-interleave devices;

Retalix
Forecourt Server  software forecourt controller that can serve as a cheaper and
a functionally richer option than the traditional hardware-based forecourt controllers,
enabling control of fuel pumps, fuel tanks, price polls and other forecourt devices;

Retalix
QSR  touch-screen based, easy-to-use application for selling quick-service food
service to match any fast food, espresso bar, and food service type establishments.
Includes the necessary inventory functions defining product tree, waste control, etc. as
well as order preparation instructions and interactive kitchen order screens; and

Retalix
Self-Serve food service with self-order stations and drive-thru operations
support.

In
addition to StoreLine and StorePoint, we offer additional products for managing a
retailers in-store operations that can be purchased as separate solutions or as
add-on modules to our StoreLine and StorePoint solutions:

Retalix PocketOffice (RPO)

RPOis a mobile, hand-held suite of front-office and back-office applications that is
designed for use on mobile computing devices such as personal digital assistants, or PDAs.
RPO is designed to allow in-store employees to perform a broad array of back-office
functions, such as ordering, receiving and price management, without leaving the store
floor. The RPO suite of applications includes product and price management, ordering,
stock receiving and counting, item maintenance and shelf audit. Operating on the Windows
CE platform, RPO is integrated with our HQ, StoreLine and StorePoint solutions and with
our Power Enterprise solution. We market RPO to both the grocery and the convenience store
sectors.

Retalix BackOffice (RBO)

RBO
is an integrated in-store solution that provides item maintenance, inventory and pricebook
management, reporting and analysis and store receiving. RBO uses an open architecture
approach and is available as a suite of modular components. In addition to providing item
maintenance and reporting, RBO interfaces with hand-held terminals for verification and
receiving. RBO is sold primarily to Tier 3 and Tier 4 food retailers through our StoreNext
initiative.

Retalix Store

Retalix
Store, a store back-office application, is used in North America by Tier 2 and Tier 3
retailers. It has powerful price generation and competitive pricing features, DSD
management and reconciliation, inventory management and POS connectivity to most existing
POS systems. Retalix Store is a Delphi based client-server solution, and is database
independent.

Enterprise Solutions

Retalix HQ

Retalix
HQ, a headquarters application, is a retail headquarters system used in North America
by Tier 1 through Tier 3 retailers. It has powerful price generation and competitive
pricing features, DSD management and reconciliation and POS connectivity to most existing
POS systems. Retalix HQ is a Delphi based client-server solution, and is database
independent.

Retalix InSync ThinStore

Retalix
InSync ThinStore is our next generation, browser-based centralized back office and
head office application developed on the Retalix InSync Platform. Expanding on the
Retalix HQ and Retalix Storefunctionalities, will be offered to Tier 1 through
Tier 3 retailers.

Retalix HQ for C-Stores (HQC)
 HQ Solutions for Convenience Stores and Fuel Retailers (HQC)

HQC
is a Microsoft .NET web-based application that provides large and mid-size convenience
store chains with a comprehensive, modular solution addressing their retail headquarters
needs, including product management, store sales audit and alert capabilities and
reporting and analysis. Combining both head-office and back-office applications, HQC is
integrated with our convenience store in-store solutions, allowing for synchronized
information flow between the head-office and back-office.

29

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HQC
is an integrated set of modules addressing a convenience store retailers operations,
including:

| |  | Product
and Price Management  allows retailers to centrally manage their product pricing
according to specific criteria;
| | - | -------------------------------------------------------------------------------------------------------------------------

| |  | Store
Sales Audit and Alerts  allows retailers to mine store sales and operation data for
exceptions based on business rules and facilitates management by analysis of exceptions;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Document
Management - assists with invoices, POS, returns and other features;
| | - | -----------------------------------------------------------------------------

| |  | POS
Hosting  assists retailers with POS parameters, keyboards, modifiers, price
changes, and other features;
| | - | -------------------------------------------------------------------------------------------------------------

| |  | Sales
Analysis facilitates multiple views of sales, product and store data and provides
for customized views of such data according to different users needs;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Electronic
Journal  acts as a central data repository that tracks and records all checkout
transactions throughout the enterprise and provides for easy retrieval of transactions;
and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Promotions
 provides retailers with the ability to deliver a wide assortment of promotions
that can be configured according to various criteria, such as types of purchase
thresholds, duration, reward types and type of POS system. In addition, the Promotions
module provides a synchronized, two-way flow of data between the enterprise and the POS
that enables promotions to be transmitted and implemented at the store level and their
results to be analyzed at the headquarters level.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Retalix Loyalty and
Central Promotions

Retalix
Loyalty and Central Promotions is a set of consumer-oriented electronic marketing
tools that enables retailers, at the enterprise level and the store level, to implement a
wide variety of broad-based, promotions and loyalty card-based marketing programs. Retalix
Loyalty allows retailers, through the use of targeted promotions and advanced marketing
techniques, to increase customer retention and spending by influencing customer shopping
patterns. The solution also allows retailers to continually measure the effectiveness of
promotion campaigns and to draw upon their results when setting up future campaigns. The
main advantages of Retalix Loyalty include providing retailers the ability to:

| |  | create
and sustain customer interest;
| | - | -------------------------------------

| |  | focus
on household spending over time;
| | - | --------------------------------------

| |  | optimize
value through customer segmentation;
| | - | ---------------------------------------------

| |  | simplify
campaign management;
| | - | -----------------------------

| |  | manage
supplier funding;
| | - | ------------------------

| |  | develop
built-in cost controls; and
| | - | -----------------------------------

| |  | develop
personalized marketing programs.
| | - | ----------------------------------------

Supply Chain Management
and Warehouse Management Solutions

Retalix TRICEPS Warehouse
Management

Retalix
TRICEPS Warehouse Management is a warehouse management system that utilizes
sophisticated wireless radio frequency, or RF, and voice activated technology to automate
location and task management. Through the use of distribution control features and labor
management tools, TRICEPS enables retailers to manage complex warehouse facility
operations efficiently, increase warehouse service levels and reduce operating expenses.
TRICEPS functionality includes optimal storage management, order fulfillment, product
replenishment notification, labor forecasting, task management and advanced real-time
inventory control.

Retalix BICEPS Purchasing
Management

Retalix
BICEPS Purchasing Management is an automated procurement system that handles
just-in-time turn, promotion, forward buy and invoice/purchase order
reconciliations. BICEPS enables retailers purchasing departments to identify and
purchase products according to item and category criteria, and thereby to identify
opportunities to improve inventory quality and profit margins. In addition, BICEPS allows
retailers to view and manage transactions, costing, movement and forecasting data and to
make immediate decisions for margin improvement. BICEPS functionality includes online
continuous replenishment, inventory tracking and evaluation, recommended ordering,
multiple product sourcing, forecasting and online accounts payable reconciliation.

30

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Retalix PROMPT Invoice
Matching

Retalix
PROMPT Invoice Matching is a fully automated invoice reconciliation system that
integrates a retailers accounts payable function with purchasing and receiving,
allowing confirmation of invoices in advance of payments to suppliers. Through the use of
electronic data interchange, or EDI, technology and electronic funds transfer, or EFT,
technology, PROMPT enables the immediate reconciliation of invoices and allows the value
of any missing items to be deducted from a vendors invoice. In this way, PROMPT
allows retailers to manage invoice reconciliation electronically, thus saving the time and
effort required to reconcile invoices manually and improving gross margins.

Retalix Yard Management
(formerly MDS)

Through
the use of RF identification tags, Retalix Yard Management allows retailers to
monitor all yard arrivals and departures and track each trailer or container by location,
movement, status and availability. This visibility into the movement of goods through
their yards allows retailers to manage yard resources more efficiently, eliminate trailer
wait time, improve resource and product scheduling and direct incoming goods to optimal
storage locations.

Retalix ABS Billing and
Order Management

Retalix
ABS Billing and Order Management is an automated product ordering solution that
enables retailers to process and fulfill customer orders. ABS provides retailers with the
flexibility to determine the most efficient way to source products through the support of
multiple shipping options.

Retalix DemandAnalytX

Our
DemandAnalytX software suite interprets store-level POS data, forecasts consumer demand
and determines optimized replenishment orders, enabling retailers and distributors to
improve supply chain management. Through the use of sophisticated optimization algorithms,
this solution allows retailers and suppliers to increase on-shelf availability and sales
while reducing inventory levels and out-of-stock situations.

Distribution Solutions

Retalix Power Enterprise

Retalix
Power Enterprise provides a complete solution for foodservice, convenience store or
grocery distributors. Includes enterprise master data management, purchasing, ordering,
billing, light warehouse management, rebates, accounting, EDI, tradeshow management, and
other features; based on the IBM iSeries technology and the DB400 database; has Java based
graphical user interface, or GUI;

Retalix Power Warehouse

Retalix
Power Warehouseisa full featured WMS application for foodservice, convenience
store and grocery distribution. Main modules include: receiving, inventory management,
shipping, labor management, voice and RF directed movements and others; based on the IBM
iSeries technology and the DB400 database; has Java based GUI;

Retalix Power Buy

Retalix
Power Buyisan advanced buying application for foodservice, convenience store
and grocery distribution that supports seasonality trends, buyers workflow, and other
areas; based on the IBM iSeries technology and the DB400 database; has Java based GUI;

Retalix Power Sell

Retalix
Power Sellisa PC based sales-force automation software tool to assist sales
agents of foodservice, convenience store and grocery distributors in their work while
visiting customers (retail chains, food service locations, etc.);

Retalix Power Net

Retalix
Power Net is a web based Portal that includes 2 main modules: Customer Portal for
retailers ordering from a foodservice, convenience store or grocery distributor; and
Supplier Portal for suppliers relation management and collaboration with a
foodservice, convenience store or grocery distributor.

31

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Retalix Dock Scheduling(formerly BGI SmartDock.net)

Retalix
Dock Scheduling is used by operators of distribution centers to manage all planned
shipments, allowing for quick carrier assignment and scheduling. Loading/unloading
duration calculations are done by the planning module or defined by the scheduler. Retalix
Dock Scheduling automatically displays available appointments by load due date and
recommends the appropriate dock and door group. Retalix Dock Schedulings Carrier
Web-Scheduling module allows user approved carriers to schedule their own appointments via
the internet. The systems drop yard module provides visibility and detailed tracking
of drop trailers and containers throughout the shipping and receiving process and enables
products to be easily located at the facility by trailer and location. This helps to
eliminate expensive detention and demurrage charges by identifying and prioritizing
trailer and container loading and unloading.

Retalix Traffic
Management (formerly BGI TMS)

Retalix
Traffic Management is a complete traffic management system for food and consumer goods
distributors. Designed to seamlessly interface with existing procurement and warehouse
management applications, the system eliminates manual activities including fleet costing,
carrier rate selection, vendor allowance calculations, pallet control, performance
monitoring and reporting and management income reports. Retalix Traffic Management
supports fleet costing by calculating mileage charges, driver labor costs, straight and
overtime, unloading costs and miscellaneous costs such as layover charges. It also
calculates cost based on the incremental mileage incurred in making a backhaul pickup. A
variety of customizable reports enables users to track new revenue generating
opportunities and provide real-time measurement and control.

Retalix InSync

In
September 2005, we announced our new next-generation portfolio of synchronized
applications  the only complete suite designed and developed specifically to meet
the requirements of retailers, distributors and operators in the grocery and foodservice
industries. Retalix InSync brings together more than 20 years of accumulated industry and
software development expertise and experience from us, OMI International, IDS and TCI
Solutions.

Retalix
InSync is based on state-of-the-art technology and architecture, including such technical
features as:

| |  | service
oriented architecture (SOA);
| | - | ------------------------------------

| |  | web
services;
| | - | -------------

| |  | Java/J2EE
development standard;
| | - | -------------------------------

| |  | database
independence (DB2, MS-SQL, Oracle);
| | - | --------------------------------------------

| |  | interoperability
(Unix, Linux, Windows, iSeries, Mainframes); and
| | - | -----------------------------------------------------------------

| |  | application
server independence (IBM WebSphere, Jboss).
| | - | -------------------------------------------------------

The
Retalix InSync solution portfolio currently includes the following:

| |  | Retalix
InSync MDM (Master Data Management)  a module that facilitates maintenance of
business entities and catalog data, integration with external data sources, data staging
and workflow based data integration processes;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Retalix
InSync Purchasing  a purchasing solution for the retail and distribution markets.
Includes demand forecasting, purchase order triggering, generation and review, load
building, price brackets and perpetual inventory;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Order
Management & Billing allows retail and distribution organizations to improve
the operations of distribution centers by attempting to optimize the handling process of
store and customer orders. The product supports product substitutions, short product
allocation, and short date product forced distribution, while integrating demand signals
and inventory positions;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | ThinStore
 a thin-client, browser-based centralized store back-office application that runs
at the headquarters as if it were installed at each store, reduces the amount of hardware
and software in the store and requires less maintenance. Includes ordering and receiving,
inventory management, download and upload functions between the headquarters and store
equipment, such as POS and scales; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Retalix
InSync Analyzer a set of analytic applications that use the advanced Qlik-View
business intelligence tool. Each Retalix InSync Analyzer application provides a
sophisticated set of integrated online and graphical reports.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SaaS Solutions

Independent
and small chain food retailers have many of the same needs and face many of the same
challenges as do larger retailers, but lack the managerial, financial and technological
capacity to implement the systems necessary to meet them. Through our StoreNext
initiatives, we have leveraged our ability to support multiple enterprises from a single
platform to offer our applications to these independent and small chain food retailers on
a Software-as-a-Service (SaaS) basis. These SaaS solutions, or Connected Services, allow
independent retailers and small chains, in return for a subscription fee, to gain access
to applications that would otherwise be too expensive for them to procure and manage
in-house. With access to these applications, smaller retailers can enjoy greater operating
efficiencies, and thereby become more competitive with the larger food retailers.

32

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Supplier Solutions

Through
the collection of sales data obtained in providing Connected Services to Tier 3 and Tier 4
food retailers, we provide suppliers with aggregated Tier 3 and Tier 4 retailer data, as
well as aggregated market share information. We first established a community for
suppliers in the retail food industry in Israel, where the number of retailer subscribers
to our Connected Services through our StoreNext Israel initiative has reached a critical
mass. We intend to provide similar services through our StoreNext USA venture as the
number of subscribers to our Connected Services in the United States grows. In addition,
we also offer EDI messaging services that enable the exchange of data between retailers
and suppliers electronically using standard data format and protocols.

Professional Services

Our
professional services personnel provide customers with expertise and assistance in
planning, designing and implementing our software solutions. Professional services
personnel assist retailers with initial system planning, business process definition, gap
analysis, configuration, implementation, historical data conversion, training, education
and project management. Our personnel build interfaces for our in-store, enterprise and
warehouse management systems.

Our
professional services personnel also help to customize our products to our customers
needs, enhancing retailers current information systems and managing upgrades and
conversions. We provide custom application development work for customers billed on a
project or per diem basis. We monitor our customization projects on a regular basis to
determine whether any customized requirements should become part of our product offerings.
For example, we have incorporated many changes requested by our Tier 1 retail food
customers into our POS product offerings.

We
believe that our professional services personnel facilitate a retailers early
success with our products, strengthen our relationships with the retailer and enhance our
industry-specific knowledge for use in future implementation and software development
projects.

Customers

Our
software has been deployed worldwide in supermarket and grocery stores, convenience
stores, fuel retailers and quick service restaurants. Our software is also used in North
America and Australia by foodservice, convenience and grocery distributors. The following
list is a representative sample of companies that purchased an aggregate of at least
$200,000 of our products and services in 2006 and 2007 combined.

|Grocery                          | Convenience Stores and Fuel Retailers | Distributors                 
|-------------------------------- | ------------------------------------- | -----------------------------
|
|
|
|
|A.S. Watson (Europe, Asia)       | 7-Eleven Oklahoma (US)                | Dunkin Donuts (US)           
|Big Y (US)                       | Alon Oil (US)                         | Food Services of America (US)
|Brookshire Brothers (US)         | BP (UK)                               | Metcash (Australia)          
|Carrefour (Europe)               | Casey's (US)                          | National Meats (Jamaica)     
|Costco (US)                      | Husky Oil (Canada)                    | Odom Corp. (US)              
|Delhaize (Europe)                | Irving Oil (Canada)                   | Sysco (US)                   
|Food Lion (US)                   | Love's (US)                           | Thomas & Howard (US)         
|Hannaford Bros. (US)             | Pilot Corporation (US)               
|Hy-Vee (US)                      | Reiten Group (Norway)                
|Intermarche (Europe)             | Tesoro (US)                          
|Overwaitea (Canada)              | The Pantry (US)                      
|Publix (US)                     
|Reliance Retail (India)         
|Sainsbury's (UK)                
|SaveMart (US)                   
|Shoprite Checkers (South Africa)
|Stater Brothers (US)            
|SuperValu (US)                  
|Tesco (Global)                  
|Woolworth's (Australia)         

33

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Recent Significant
Acquisitions

In
March 2008, we acquired additional 5% of StoreNext USA for an aggregate amount of $625,000
and increased our holdings in this entity to 100%.

In May 2007, we acquired the assets
of BGI International, which provides a suite of software products for food and consumer
goods distributors. Retalix acquired the assets of BGI International (and certain
identified liabilities) for an initial upfront payment of $1.35 million and an additional
$150,000 amount to be paid on the two year anniversary date of the acquisition, to be
netted with any compensation paid for any damages as provided for under the contract and
any amounts requiring additional reserves for unresolved claims. In addition, up to an
additional $1.4 million will be payable by us over the next three years based on the
excess of revenues derived from the BGI acquired assets over certain defined
thresholds. This acquisition enabled us to extend the advantages that we achieve for
retailers and distributors with the OMI International and IDS acquisitions, by providing
additional critical functionality, such as transportation management and distribution
center dock scheduling.

In
March 2006, we acquired an additional 45% of StoreNext USA and increased our holdings in
this entity to 95%. In February 2006, we acquired substantially all of the assets of Base
Products, Inc., d/b/a C&L Retail Solutions, which provides a suite of hardware and
software products and services for food and consumer goods retailers. We believe that
these acquisitions strengthen our position, customer base, flexibility and exposure in the
sector of smaller and independent retailers in the United States.

On
April 1, 2005, we acquired approximately 73.4% of the issued and outstanding shares (on an
as-converted-to-common-stock basis) of TCI Solutions, a provider of retail store and
headquarters solutions, including pricing, promotions, inventory, management and DSD
solutions for the grocery industry, for approximately $14.5 million in cash and 715,730 of
our ordinary shares. The solutions of TCI Solutions enable grocers to automate complex
pricing strategies, streamline inventory management processes, and execute consistently
across the retail enterprise, from headquarters to the store. TCI Solutions flagship
offering, TCI Retail, consists of headquarters and in-store applications that provide
supermarket operators with the control, automation and execution capabilities necessary to
increase revenue, lower costs and improve margins in todays complex retail
environment. The solutions of TCI Solutions enable grocers to accelerate and improve
decision-making through enterprise-wide merchandising and store operations solutions. We
believe that the acquisition of TCI Solutions will strengthen our position as a provider
of headquarters and in-store systems for retailers, improve the quality of our offerings,
broaden our customer base and expand our suite of products.

Also
in April 2005, we executed an agreement and plan of merger with TCI Solutions, pursuant to
which TCI Solutions merged with and into one of our subsidiaries in November 2005, and all
outstanding common stock and preferred stock of TCI Solutions (other than shares held by
us) were exchanged for an aggregate of approximately $2.6 million in cash.

On
April 1, 2005, we also acquired substantially all of the assets of IDS, a provider of ERP
and distribution solutions for the food service, convenience store and grocery industries,
for approximately $37.4 million in cash and 290,128 of our ordinary shares. In addition,
207,236 of our ordinary shares, which were held in escrow, were released to the sellers
after certain customer retention milestones were met as of April 1, 2007. 69,481 shares
and approximately $1.1 million in cash are still being held in escrow pending third party
claim that has not yet been resolved. IDSs solutions enable distributors in the
grocery, convenience store and food service markets to achieve increased productivity,
improved customer service and operational cost savings. We believe the acquisition of IDS
has enabled us to strengthen our position as a provider of supply chain execution and
warehouse management systems, improve the quality of our offerings and in particular those
which collaborate between retail and supply organizations, broaden our customer base and
expand our suite of products.

The StoreNext Initiatives

StoreNext USA

Established
in 2002 with Fujitsu Transaction Solutions, StoreNext Retail Technology LLC, which we
refer to as StoreNext USA, provides POS hardware and software and Connected Services to
the independent and small chain grocery market sectors (Tier 3 and Tier 4 retailers). This
initiative manages the regional dealer channels for the Tier 3 and Tier 4 grocery market
sectors. . Retalix receives revenues from the sale of its software solutions to StoreNext
USA. StoreNext USA has recently begun to offer Connected Services to these Tier 3 and Tier
4 food retailers. As of December 31, 2007, we estimate that StoreNext USA had more then
800 stores that have signed up to Connected Services. In March 2006, Retalix increased its
ownership of StoreNext USA from 50.01% to 95% for consideration of approximately $4.9
million. In March 2008, Retalix increased its ownership of StoreNext USA from 95% to 100%
for consideration of approximately $625,000.

StoreNext Israel

Established
in 1999, StoreAlliance.com Ltd., which we refer to as StoreNext Israel, provides Connected
Services to food retailers and suppliers in Israel. The aim of this initiative is to
provide its members supply chain efficiencies by providing up-to-date aggregated
data. To date, StoreNext Israel subscribers include over 1,380 stores and approximately
1,000 suppliers.

StoreNext
Israel is a business initiative controlled by us. In addition there are three other
Israeli shareholders in this initiative: Discount Investment Corporation Ltd.; Isracard, a
subsidiary of Bank Hapoalim, Israels largest bank; and the Central Bottling Company
Ltd. (Coca Cola Israel). As of December 31, 2007, we owned directly and through one of our
wholly owned subsidiaries, approximately 51.5% of the issued share capital of StoreNext
Israel. In addition, approximately 270,000 ordinary shares of StoreNext Israel, or
approximately 7.7% of StoreNext Israels issued and outstanding share capital, are
reserved for issuance upon the exercise of options granted to our and StoreNext
Israels employees. An additional 90,000 ordinary shares of StoreNext Israel, or
approximately 2.6% of StoreNext Israels issued and outstanding share capital, are
reserved for issuance upon the exercise of options granted to employees of Coca Cola
Israel. An additional 305,973 ordinary shares of StoreNext Israel, or approximately 8.75%
of StoreNext Israels issued and outstanding share capital, are reserved for issuance
upon the exercise of an option granted to Isracard.

34

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Certain
distributions by StoreNext Israel to its shareholders require the consent of certain
shareholders. Our shares in StoreNext Israel are subject to certain put and call options
held by other shareholders of StoreNext Israel.

Sales and Marketing

We
distribute our products through direct sales, distributors and local business systems
dealers. We market our products to Tier 1 and Tier 2 supermarket and convenience store
chains and major fuel retailers through a direct sales force in the United States, Europe,
Asia, Australia and Israel, augmented by a combination of channel partners and
integrators. Sales to Tier 1 and Tier 2 supermarket and convenience store chains and major
fuel retailers have historically represented the substantial majority of our revenues. We
target Tier 3 and Tier 4 food retailers indirectly through our channel partners,
subsidiaries and through our StoreNext initiatives in the United States and Israel. For
larger supermarket and convenience store chains, fuel retailers and distributors, we also
provide professional services including project management, implementation, application
training and technical and documentation services. We also provide development services to
customize our applications to meet specific requirements of our customers, as well as
ongoing support and maintenance services.

In
addition, we participate in marketing programs with several companies, including IBM. Our
marketing efforts are focused on increasing our brand recognition, as well as increasing
awareness of the competitive advantages of our software solutions. We participate in major
trade show events and conferences and advertise in trade publications.

Direct Sales

Our
direct sales force, consisting of experienced account managers, technical pre-sales
engineers and sales personnel in the field, are located in the United States, United
Kingdom, South Africa, Italy, France, Australia, Japan and Israel. Our sales force sells
our products directly to supermarkets, convenience stores and fuel retailers and
distributors within these countries and also relies on trade shows, promotions and
referrals to obtain new customers.

Marketing Alliances

In
2001, we joined IBM Corporations independent software vendor, or ISV, business
partner program designed to promote marketing partnerships between independent software
vendors and IBM. We work with IBM on several large accounts, primarily in the convenience
store market. We are included on IBMs ISV partner list.

Dealer Sales

We
have direct distribution agreements for the sale of some of our products with partners in
Australia, China, Finland, Greece, Japan, Korea, New Zealand, Norway, the Philippines,
South Africa, Switzerland, Russia, Ukraine, the United Kingdom and the United States. Some
of these partners operate regionally in countries in addition to the country in which they
are headquartered.

We
believe that qualified partners can be an effective sales channel for our products in
their respective markets and can help us to overcome language and cultural barriers in
countries where English is not the native language. We intend to continue to recruit
partners and distributors in countries where we have identified sufficient sales potential
and a suitable market profile.

Competition

Our
principal competition in the supermarket and grocery market for in-store solutions has
traditionally come from integrated IT vendors such as IBM, NCR and Wincor-Nixdorf (which
usually provide their software integrated with their hardware), as well as local or
regional software providers such as PCMS and Torex. On the enterprise level, our principal
competitors in the supermarket and grocery market are SoftTechniques and BRData, as well
as in-house developed solutions. We also experience competition from both independent
retail industry focused software vendors such as JDA and Aldata, and from larger ERP
software companies such as Oracle (which acquired Retek and Profitlogic) and SAP (which
acquired Triversity and Khimetrics). In addition, we anticipate future competition from
new market entrants that develop retail food software solutions. In the convenience store
and fuel market, our competition includes Radiant Systems, Pinnacle Systems, Gilbarco,
VeriFone and Wincor-Nixdorf. In the supply chain execution and warehouse management
markets, our competition includes Manhattan Associates and Red Prairie. Some competitors,
such as Wincor-Nixdorf and IBM, are also our marketing partners in several market sectors
or locations.

The
market for retail software systems is highly competitive and subject to rapidly changing
technology. We believe that the primary competitive factors impacting our business are as
follows:

| |  | breadth
of product offerings;
| | - | -----------------------------

35

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| |  | interoperability
of solutions and solution components;
| | - | ------------------------------------------------------

| |  | suitability
for multi-national, multi-concept retailers;
| | - | --------------------------------------------------------

| |  | quality
track record;
| | - | ---------------------

| |  | established
reputation with key customers;
| | - | ------------------------------------------

| |  | products
that balance feature/performance requirements with cost effectiveness;
| | - | -------------------------------------------------------------------------------

| |  | scope
and responsiveness of professional services and technical support;
| | - | ------------------------------------------------------------------------

| |  | retail
and business know-how and expertise;
| | - | -------------------------------------------

| |  | compatibility
with emerging industry standards;
| | - | -----------------------------------------------

| |  | ease
of upgrading and ease of use; and
| | - | --------------------------------------

| |  | timeliness
of new product introductions.
| | - | ----------------------------------------

# C. Organizational
Structure

We have the following subsidiaries
and related companies:

|Subsidiary                                        | Country ofResidence | Proportion of voting
power held (%) | Proportion of ownershipinterest held (%)
|------------------------------------------------- | ------------------- | ----------------------------------- | ----------------------------------------
|
|
|
|Retalix Holdings Inc.                             | United States       | 100                                 | 100                                     
|Retalix USA Inc.(1)                               | United States       | 100                                 | 100                                     
|Retail Control Systems Inc. (1)                   | United States       | 100                                 | 100                                     
|StoreNext Retail Technology LLC (1)               | United States       | 100                                 | 100                                     
|C-StoreMatrix.com Inc. (2)                        | United States       | 25                                  | 25                                      
|PalmPoint Ltd.                                    | Israel              | 100                                 | 100                                     
|Tamar Industries M. R. Electronic (1985) Ltd. (3) | Israel              | 100                                 | 100                                     
|StoreAlliance.com Ltd. (4)                        | Israel              | 51.5                                | 51.5                                    
|StoreNext Ltd. (5)                                | Israel              | 51.5                                | 51.5                                    
|TradaNet Electronic Commerce Services Ltd. (5)    | Israel              | 51.5                                | 51.5                                    
|IREX - Israel Retail Exchange Ltd. (5)            | Israel              | 51.5                                | 51.5                                    
|Cell-Time Ltd. (6)                                | Israel              | 17.1                                | 33                                      
|DemandX Ltd. (5)                                  | Israel              | 51.5                                | 51.5                                    
|Retail College StoreNext Ltd. (7)                 | Israel              | 45.1                                | 90                                      
|P.O.S. (Restaurant Solutions) Ltd.                | Israel              | 100                                 | 100                                     
|Net Point Ltd.                                    | Israel              | 95                                  | 95                                      
|Kohav Orion Advertising and Information Ltd.      | Israel              | 100                                 | 100                                     
|Orlan Orion Systems Ltd. (2)                      | Israel              | 100                                 | 100                                     
|Retalix (UK) Limited                              | United.Kingdom      | 100                                 | 100                                     
|Retalix Italia S.p.A                              | Italy               | 100                                 | 100                                     
|M.P.S. Millennium Pos Solutions S.r.l             | Italy               | 100                                 | 100                                     
|Retalix France SARL                               | France              | 100                                 | 100                                     
|Retalix SA PTY Ltd.                               | South.Africa        | 100                                 | 100                                     
|Retalix Australia PTY Ltd.                        | Australia           | 100                                 | 100                                     
|Retalix Japan Ltd.                                | Japan               | 100                                 | 100                                     

|(1) | Held
through our wholly-owned subsidiary, Retalix Holdings Inc.
|--- | ---------------------------------------------------------------

|(2) | Ceased
operations.
|--- | ------------------

|(3) | Holds
26.8% of the issued share capital of StoreAlliance.Com, Ltd.
|--- | ------------------------------------------------------------------

|(4) | Including
 holdings through our  wholly-owned  subsidiary,  Tamar  Industries M. R. Electronic
 (1985) Ltd.
|--- | -----------------------------------------------------------------------------------------------------------

|(5) | Wholly
owned by our subsidiary, StoreAlliance.com Ltd.
|--- | ------------------------------------------------------

|(6) | 33%
owned by our subsidiary, StoreAlliance.com Ltd.
|--- | ---------------------------------------------------

|(7) | 90%
owned by our subsidiary, StoreAlliance.com Ltd. Ceased operations in December, 2006.
|--- | ----------------------------------------------------------------------------------------

36

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# D. Property, Plants and
Equipment

Our Israeli corporate headquarters
are located in Raanana, Israel, where we occupy approximately 7,300 square meters of
office space, of which approximately 3,500 square meters represent ownership rights under
a long-term lease from the Israel Lands Administration and approximately 3,800 square
meters are leased from other third parties for shorter terms. In 2007, we purchased the
3rd floor (in unfinished condition) of the building in which our corporate headquarters
are located in Raanana, Israel.

In
addition to our corporate headquarters in Raanana, Israel, we currently lease
approximately 50,400 square feet of office space in Plano, Texas that serves as our U.S.
headquarters. We also lease offices in Arizona, California, Michigan, Nebraska, Ohio,
Oklahoma, Pennsylvania, Florida and Texas, as well as in London, England, Paris, France,
Ivrea and Rome in Italy, Sydney, Australia, Tokyo, Japan and Petah-Tikva, Israel. We
believe our facilities are adequate for our current and planned operations.

# ITEM 4A 
UNRESOLVED STAFF COMMENTS

None.

# ITEM 5  OPERATING
AND FINANCIAL REVIEW AND PROSPECTS

The
following discussion and analysis should be read in conjunction with our audited
consolidated financial statements and the related notes to those financial statements
included elsewhere in this annual report.

# A. Operating Results

Overview

General

We
are an independent provider of integrated enterprise-wide software solutions to global
food and fuel retailers and distributors. Spanning the retail and distribution supply
chain from the warehouse to the point of sale, our suite of software solutions integrates
the retail information flow across a retailers or distributors entire
operations, encompassing stores, headquarters and warehouses. Our comprehensive integrated
solution suite enables retailers and distributors to manage their operations more
efficiently, reduce costs and collaborate more closely with suppliers. Our software
solutions also enable retailers to capture and analyze consumer behavior data that can be
used to devise and implement more effective targeted promotions and loyalty programs in
order to stimulate demand and increase sales. At the same time our software solutions
enable retailers and distributors to reduce shrinkage, inventory and cost of sale.

Since
inception, we have significantly increased our revenues through a combination of factors,
including obtaining new customers, expanding existing customer relationships, introducing
new products, expanding the features and functionality of our existing products and
acquiring complementary businesses, including most recently, certain intellectual property
assets from BGI International in 2007, and Base Products in February 2006, TCI Solutions
and IDS in April 2005.

We
generate revenues from the sale of licenses for our software solutions, maintenance and
related services, principally software modifications requested by customers. We have
derived the substantial majority of our historical revenues from the sale of licenses and
related services for our software solutions to large (Tier 1 and Tier 2) supermarkets and
convenience store chains and major fuel retailers, and we anticipate that revenues from
such customers will continue to represent the substantial majority of our revenues over
the near term. Measured by contribution of our software solutions by product line, we have
historically derived the substantial majority of our product sales from the sale of our
in-store solutions product line, specifically our StoreLine and StorePoint solutions.

We
also generate revenues from sales of licenses for our software solutions, maintenance and
related services to Tier 3 and Tier 4 grocers in the United States and to a lesser extent
in Israel. To some extent, we also sell to such customers hardware manufactured by third
parties such as point of sale and other store-level computer hardware, mobile computer
terminals, scanning equipment, printers, equipment used in warehouses, etc. In addition,
leveraging on our ability to support multiple enterprises from a single data center, we
offer Tier 3 and Tier 4 grocers in the United States and Israel a variety of hosted
applications, such as pricebook, promotions, loyalty and information services, which we
refer to as Connected Services. We receive subscription fees for these Connected Services.
We anticipate that revenues relating to these Connected Services will account for a
growing portion of our overall revenues in future periods.

37

---

---

During
2007, we continued our strategy of focusing on Tier 1 and Tier 2 supermarkets, large
convenience store chains and major fuel retailers. In addition, we began to derive
benefits from the companies and businesses we acquired in recent years, and in particular
the IDS acquisition which strengthened and widened our offering in the supply chain and
warehouse management areas.

Highlights
since the beginning of 2005 include:

| |  | In
March 2008, we acquired additional 5% of StoreNext USA and increased our holdings in this
entity to 100%. We paid approximately $0.6 million for this additional interest. In March
2006, we had increased our holdings in StoreNext USA to 95%, with the acquisition of
additional 45% in StoreNext USA from Fujitsu Transaction Solutions. The consideration we
paid for this acquisition was approximately $4.9 million. The purpose of this acquisition
was to decrease the StoreNext USA dependency on a single hardware vendor and thus improve
its acceptance in the relevant markets.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In May 2007, we acquired the assets
of BGI International, which provides a suite of software products for the food and
consumer goods distributors. Retalix acquired the assets of BGI International (and certain
identified liabilities) for an initial upfront payment of $1.35 million and an additional
$150,000 amount to be paid on the two year anniversary date of the acquisition, to be
netted with any compensation paid for any damages as provided for under the contract and
any amounts requiring additional reserves for unresolved claims. In addition, up to an
additional $1.4 million will be payable by us over the next three years based on the
excess of revenues derived from the BGI acquired assets over certain defined
thresholds. This acquisition enabled us to extend the advantages that we achieve for
retailers and distributors with the OMI International and IDS acquisitions, by providing
additional critical functionality, such as transportation management and distribution
center dock scheduling.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
August 2006, we acquired an additional 31% of the equity of P.O.S. (Restaurant Solutions)
Ltd. for $0.7 million, and increased our holdings in this entity to 100%.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
February 2006, we acquired substantially all of the assets of Base Products, Inc. d/b/a/ C&L
Retail Solutions, a provider of a suite of hardware and software products and services
for food and consumer goods retailer, for $2.6 million in cash. The purpose of this
acquisition was to strengthen our customer base and position in the small and independent
retail sector in the United States.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
April 2005, we acquired approximately 73.4% of the issued and outstanding shares (on an
as-converted-to-common-stock basis) of TCI Solutions, a provider of retail store and
headquarters solutions, including pricing, promotions, inventory management and DSD
solutions for the grocery industry, for approximately $14.5 million in cash and 715,730
of our ordinary shares. The purpose of the acquisition of TCI Solutions was to strengthen
our position as a provider of headquarters and in-store systems for retailers, improve
the quality of our offerings, broaden our customer base and expand our suite of products.
In November 2005, we completed the acquisition of TCI Solutions as we acquired the
remaining outstanding common stock and preferred stock of TCI Solutions in a merger, for
an aggregate of approximately $2.6 million in cash.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In April 2005, we also acquired
through our wholly owned subsidiary, Retalix SCM, Inc., substantially all of the assets of
IDS, a provider of ERP and distribution solutions for the foodservice, convenience store
and grocery industries, for approximately $37.4 million in cash, and 290,128 of our
ordinary shares. In addition, 207,236 of our ordinary shares were released from escrow to
the sellers in April 2007, when certain customer retention milestones were met. The
purpose of the acquisition of IDS was to enable us to strengthen our position as a
provider of supply chain execution and warehouse management systems, improve the quality
of our offerings, and in particular, those which facilitate coordination between retail
and supply organizations, broaden our customer base and expand our suite of products.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Application of Critical
Accounting Policies and Use of Estimates

Our discussion and analysis of our
financial condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The consolidated financial statements include our accounts
and the accounts of our subsidiaries.

The
preparation of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We base our estimates on historical
experience and on various other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions.

In
many cases, the accounting treatment of a particular transaction is specifically dictated
by accounting principles and does not require managements judgment in its
application, while in other cases, managements judgment is required in selecting
among available alternative accounting standards that allow different accounting treatment
for similar transactions. We believe that the accounting policies discussed below are
critical to our financial results and to understanding our historical and future
performance, as these policies relate to the more significant areas involving
managements judgments and estimates.

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Revenue recognition

Our revenue recognition policy is
critical because our revenue is a key component of our results of operations. We derive
our revenues from the licensing of integrated software products. To some extent we also
derive revenues from the sale of complementary computer and other hardware equipment. We
also derive revenues from maintenance and other professional services which are
principally software changes and enhancements requested by customers, as well as on-line
application, information and messaging services, mostly associated with products sold by
us and which we classify as revenues from services.

Determining
whether and when some of the criteria required to recognize revenue have been satisfied
often involves assumptions and judgments that can have a significant impact on the timing
and amount of revenue we report. For example, for multiple element arrangements we must
make assumptions and judgments in order to allocate the total price among the various
elements we must deliver, to determine whether undelivered services are essential to the
functionality of the delivered products and services, to determine whether vendor-specific
objective evidence of fair value exists for each undelivered element and to determine
whether and when each element has been delivered. If we were to change any of these
assumptions or judgments, it could cause a material increase or decrease in the amount of
revenue that we report in a particular period.

Revenues
from sales of product and software license agreements are recognized when all of the
criteria in Statement of Position, or SOP, 97-2, Software Revenue Recognition
as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition With
Respect to Certain Transactions, herein referred to as SOP 97-2, are met. Revenues
from products and license fees are recognized when persuasive evidence of an agreement
exists, delivery of the product has occurred, the fee is fixed or determinable, no further
obligations exist and collectibility is probable.

Revenues from software licenses
and/or sale of products that require significant customization, integration and
installation are recognized based on SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts, according to which revenues
are recognized on a percentage of completion basis. Percentage of completion is determined
based on the Input Method, , and when collectability is probable. After
delivery of milestones, if uncertainty exists about customer acceptance, revenue is not
recognized until acceptance. Provisions for estimated losses on uncompleted contracts are
recognized in the period in which the likelihood of the losses is identified. As of
December 31, 2007, no such estimated losses were identified.

Where
software license arrangements involve multiple elements, the arrangement consideration is
allocated using the residual method. Under the residual method, revenue is recognized for
the delivered elements when (1) VSOE of the fair values of all the undelivered elements
exists, and (2) all revenue recognition criteria of SOP 97-2, as amended, are satisfied.
Under the residual method, any discount in the arrangement is allocated to the delivered
element. Our VSOE of fair value for maintenance is based on a consistent renewal
percentage. Revenues from maintenance services are recognized ratably over the contractual
period or as services are performed.

Revenues
from professional services that are not bundled or linked to a software sale are
recognized as services are performed in accordance with the provisions of Staff Accounting
Bulletin No. 104 of the Securities and Exchange Commission.

Hardware
sales are recognized on a gross price basis, in accordance with Emerging Issues Task
Force, or EITF, 99-19, Reporting Gross Revenue as a Principal versus Net as an
Agent.

In cases where the products are sold
to smaller retailers, through resellers, revenues are recognized as the products are
supplied to the resellers in accordance with the provisions of Statement of FASB Statement
No. 48  Revenue Recognition When Right of Return Exists. In specific
cases where resellers have right of return or the Company is required to repurchase the
products or in case the Company guarantees the resale value of the products, revenues are
recognized as the products are delivered by the resellers.

In
specific cases where resellers have right of return or we are required to repurchase the
products or in case we guarantee the resale value of the products, revenues are recognized
as the products are delivered by the resellers.

Revenues
from on-line application, information and messaging services, are recognized as rendered
in accordance with the provisions of Staff Accounting Bulletin No. 104 of the Securities
and Exchange Commission.

Deferred
revenues include advances and payments received from customers, for which revenue has not
yet been recognized.

Revenue
results are difficult to predict, and any shortfall in revenue or delay in recognizing
revenue could cause our operating results to vary significantly from quarter to quarter
and could result in future operating losses. Should changes in conditions cause management
to determine that these guidelines are not met for certain future transactions, revenue
recognized for any reporting period could be adversely affected (see Note 1.l to
our consolidated financial statements included elsewhere in this annual report).

39

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Goodwill and Intangible
Assets

Statement
of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible
Assets, requires that goodwill and intangible assets with an indefinite life be
tested for impairment on adoption and at least annually thereafter. Goodwill and
intangible assets with an indefinite life are required to be written down when impaired,
rather than amortized as previous accounting standards required. Goodwill and intangible
assets with an indefinite life are tested for impairment by comparing the fair value of
the reporting unit with its carrying value. Fair value is generally determined using
discounted cash flows, market multiples and market capitalization. Significant estimates
used in the fair value methodologies include estimates of future cash flows, future
short-term and long-term growth rates, weighted average cost of capital and estimates of
market multiples of the reportable unit. If these estimates or their related assumptions
change in the future, we may be required to record impairment charges for our goodwill and
intangible assets with an indefinite life.

The
process of evaluating the potential impairment of goodwill is subjective and requires
significant judgment. In estimating the fair value of a reporting unit for the purposes of
our annual or periodic analyses, we make estimates and judgments about the future cash
flows of that reporting unit. Although our cash flow forecasts are based on assumptions
that are consistent with our plans and estimates we are using to manage the underlying
businesses, there is significant exercise of judgment involved in determining the future
cash flows attributable to each reporting unit. In addition, we make certain judgments
about allocating shared balance sheet assets and liabilities to our reporting units.
Within this context, we use judgment in considering our market capitalization, using among
other factors, common rates within the industry as well as attributable to competitors.
Changes in judgment on these assumptions and estimates could result in a goodwill
impairment charge.

We
allocate the purchase price of acquired companies to the tangible and intangible assets
acquired and liabilities assumed, based on their estimated fair values. Such valuations
require management to make significant estimations and assumptions, especially with
respect to intangible assets.

Critical
estimates in valuing certain intangible assets include, but are not limited to, future
expected cash flows from customer relations, acquired developed technologies and trade
names, and values of open contracts. In addition, other factors considered are the brand
awareness and the market position of the acquired products and assumptions about the
period of time the brand will continue to be used in the combined companys product
portfolio. Managements estimates of fair value are based upon assumptions believed
to be reasonable, but which are inherently uncertain and unpredictable.

If
we do not appropriately allocate these components or we incorrectly estimate the useful
lives of these components, our computation of depreciation and amortization expense may
not appropriately reflect the actual impact of these costs over future periods, which will
affect our net income.

Should
future results or economic events cause a change in projected cash flows or other
assumptions, or should our business or operational strategies change, future
determinations of fair value may not support the carrying amount of a reporting unit, and
the related goodwill would need to be written down to an amount considered recoverable.

Stock based compensation

Effective
January 1, 2006, we adopted FASB Statement No. 123 (Revised 2004), Share-Based
Payment, a revision of SFAS No. 123, or SFAS 123(R). SFAS 123(R) supersedes
Accounting Principles Board,or APB, Opinion No. 25, Accounting for Stock
Issued to Employees,or APB No. 25 and related interpretations, and amends FASB
Statement No. 95, Statement of Cash Flows. Generally, the approach in SFAS
123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all
equity-based payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma disclosure is no
longer an alternative. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, or
SAB 107, which provides supplemental implementation guidance on SFAS 123(R). We applied
the provisions of SAB 107 in our adoption of SFAS 123(R).

Prior
to January 1, 2006, we accounted for employee stock-based compensation in accordance with
APB No. 25, Accounting for Stock Issued to Employees and related
interpretations. In accordance with FASB Statement No. 123, Accounting for
Stock-Based Compensation or FAS 123, we disclosed pro- forma information on
the net income and earnings per share assuming we had accounted for employee stock option
grants using the fair value-based method defined in FAS 123. We accounted for equity
awards issued to non-employees in accordance with the provision of FAS 123, and EITF
96-18, Accounting for Equity Instruments that are Issued to other than Employee for
Acquiring or in Conjunction with Selling Goods or Services and related
interpretations.

We
adopted SFAS 123(R) using the modified prospective method. Under this transition method,
compensation costs recognized in fiscal 2006 and 2007 include (a) compensation costs for
all equity-based payments granted prior to, but that had not yet vested as of, January 1,
2006, based on the grant date fair value estimated in accordance with the pro forma
provisions of SFAS 123, and (b) compensation costs for the equity-based payments granted
subsequent to January 1, 2006 based on the grant date fair value estimated in accordance
with SFAS 123(R). Our consolidated financial statements for prior periods have not been
restated to reflect, and do not include, the impact of SFAS 123(R). We selected the
Black-Scholes option pricing model as the appropriate fair value method for our
stock-options awards based on the market value of the underlying shares at the date of
grant. We recognize compensation costs using the accelerated vesting attribution method
that results in an accelerated recognition of compensation costs in comparison to the
straight line method.

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In
addition, we use historical stock price volatility as the expected volatility assumption
required in the Black-Scholes option valuation model. As equity-based compensation expense
recognized in our consolidated statement of income for fiscal 2006 and 2007 is based on
awards ultimately expected to vest, such expense has been reduced for estimated
forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates. In our pro forma information required under SFAS 123 for the periods prior to
fiscal 2006, we accounted for forfeitures as they occurred.

Accounting
for stock based compensation requires significant subjective judgment. Such judgment is
implemented in this context in choosing the appropriate pricing model upon which the fair
value of stock based compensation is measured as well as a variety of factors involved in
the fair value computation, such as volatility, rate of forfeiture, etc.

Should
economic events or our business or operational characteristics change, or should the
habits of our employees change, future determinations as to fair value may significantly
change the value attributed to stock based compensation and significantly impact our
results of operations.

Tax provision

We
operate in a number of countries and, as such, fall under the jurisdiction of a number of
tax authorities. We are subject to income taxes in these jurisdictions and we use
estimates in determining our provision for income taxes. Deferred tax assets, related
valuation allowances and deferred tax liabilities are determined separately by tax
jurisdiction. This process involves estimating actual current tax liabilities together
with assessing temporary differences resulting from differing treatment of items for tax
and accounting purposes. These differences result in deferred tax assets and liabilities,
which are recorded on our balance sheet. We assess the likelihood that deferred tax assets
will be recovered from future taxable income, and a valuation allowance is provided for if
it is more likely than not that some portion of the deferred tax assets will not be
recognized. Although we believe that our tax estimates are reasonable, the ultimate tax
determination involves significant judgment that could become subject to audit by tax
authorities in the ordinary course of business. In our opinion, sufficient tax provisions
have been included in our consolidated financial statements in respect of the years that
have not yet been assessed by tax authorities. On a quarterly basis, we also reassess the
amounts recorded for deferred taxes and examine whether any amounts need to be added or
released.

Other non critical
accounting policies and additional discussion of accounting characteristics

Our functional currency

Our
consolidated financial statements are prepared in U.S. dollars in accordance with U.S.
generally accepted accounting principles. The currency of the primary environment in which
we operate is the U.S. dollar. We mainly generate revenues in dollars or in NIS linked to
the dollar. As a result, the dollar is our functional currency. Transactions and balances
originally denominated in dollars are presented at their original amounts. Balances in
non-dollar currencies are translated into dollars using historical and current exchange
rates for non-monetary and monetary balances, respectively. For non-dollar transactions
and other items (stated below) reflected in the statements of income (loss), the following
exchange rates are used: (1) for transactions  exchange rates at transaction dates
or average rates of the period reported and (2) for other items (derived from non-monetary
balance sheet items such as depreciation and amortization, changes in inventories, etc.)
 historical exchange rates. Currency transaction gains or losses are carried to
financial income or expenses, as appropriate.

The
functional currency of Retalix Italia and Cell-Time Ltd., or Cell-Time, is their local
currency (Euro and New Israeli Shekel, respectively). The financial statements of Retalix
Italia are included in our consolidated financial statements translated into dollars in
accordance with SFAS 52 Foreign Currency Translation of the FASB, or SFAS 52.
Accordingly, assets and liabilities are translated at year end exchange rates, while
operating results items are translated at average exchange rates during the year.
Differences resulting from translation are presented in shareholders equity under
accumulated other comprehensive income (loss). The financial statements of
Cell-Time are included in our financial statements under the equity method, based on
translation into dollars in accordance with SFAS 52; the resulting translation adjustments
are presented under shareholders equity, in the line item Accumulated other
comprehensive income.

Bad debt and allowance
for doubtful accounts

We
maintain an allowance for doubtful accounts to reflect estimated losses resulting from the
inability of certain of our customers to make required payments. We regularly evaluate the
adequacy of our allowance for doubtful accounts by taking into account variables such as
past experience, age of the receivable balance and current economic conditions of the
party owing the receivable balance. If the financial conditions of certain of our
customers were to deteriorate, resulting in an impairment in their ability to make
payments, additional allowance for doubtful accounts may be required.

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Effects of Prior Year
Misstatements

In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, Financial
Statements  Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements, or SAB 108. SAB 108 requires
companies to quantify the impact of all correcting misstatements, including both the
carryover and reversing effects of prior year misstatements, on the current year financial
statements. SAB 108 was effective for fiscal years ending after November 15, 2006. We
initially applied the provisions of SAB 108 using the cumulative effect transition method
in our annual financial statements for the year ended December 31, 2006 in connection with
our accounting treatment for various misstatements the cumulative effect of which on our
retained earnings as at December 31, 2005 totaled $1,621,000 (net of an immaterial tax
effect).

Sources of Revenue

We
derive our revenues from the licensing of integrated software products, and to some extent
also from the sale of complementary computer and other hardware equipment, all which we
classify as revenues from product sales. We also derive revenues from maintenance and
other services which are principally software changes and enhancements requested by
customers, all associated with our software products, which we classify as revenues from
services. In addition, we provide business flow communication services between retailers
and suppliers, data analysis and supply chain information services to suppliers as well as
manufacturers and on-line application services primarily to small independent retailers.
We do business through subsidiaries in the United States, Israel, the United Kingdom,
Italy, France, Japan and Australia.

Our
relationships primarily with our large customers, are long-term in nature, as they involve
the supply of products that require considerable customer commitment, attention and
investment of financial and human resources.

During 2007, one customer
accounted for 5% or more of our revenues. During 2006, two customers accounted  each
for 5% or more of our revenues. During 2005, one single customer accounted for 5% or moreof
our revenues.

Product Sales

Product
sales consist of the sale of software through perpetual license agreements with direct
customers, integrators, distributors and dealers. In addition, sales to Tier 3 and Tier 4
retailers and to distributors also include hardware manufactured by third parties. Such
hardware could typically be point of sale and other store level computer hardware, mobile
computer terminals, scanning equipment, printers, optical equipment used in warehouses,
etc.

Services

Revenues
from services consist of:

| |  | Maintenance consists
primarily of technical support and use of help-desk services, dealing primarily with
difficulties or failures occurring from erroneous use of software products bugs, etc. In
some cases the maintenance includes unspecified upgrades, which are mainly bug fixes. We
provide maintenance services primarily based on annual arrangements or, alternatively,
through dedicated-team arrangements based on professional personnel fully dedicated to
the customer and directed by him primarily in the context of performance of change
requests and for relatively long periods of time. In some cases, we provide maintenance
services on a per-call basis.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Development/Enhancement
services in the form of short-term projects   primarily fixed price
or hourly/daily fee arrangements for the enhancement of our products to accommodate the
request of a specific customer. Such short-term tasks take up to twelve weeks to
complete. Examples to this type of revenue could be the development of a new report, a
simple type of a promotion or a simple interface to an external system based on the needs
specified by the customer. These projects are small in volume and in most cases take only
days to complete. Such services can also be provided in the context of dedicated-team
arrangements, where specified amounts of personnel are dedicated to customers, charged to
the customer and paid for, on the basis of daily rates.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Development/Enhancement
services in the form of long-term projects  consists of relatively
significant customizations which are of a longer-term in nature. Such tasks are most
commonly performed for existing customers who request relatively complicated enhancements
such as complicated promotion programs or complicated customizations required due to new
fiscal regulations. Such services can also be provided in the context of dedicated-team
arrangements.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On-line
information services, messaging and application services  including
communication and business messaging services between retailers and suppliers, provision
of market data analysis and operational supply chain information services to suppliers
and manufacturers and a variety of remote on-line retail and operational applications
sold to retailers through monthly subscription fee arrangements, also referred to as
Connected Services. These revenues have not been significant during 2007 and prior years.
Most of these services are based on periodic subscription fees and thus are recognized
over the service period. Some of these services such as EDI messaging services are
charged to customers on the basis of volumes of usage.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Multiple element
agreements

Our
sales also consist of multiple element arrangements that in most cases involve the sale of
licenses as well as maintenance services in regard to the products sold.

Sales to integrators

In
some cases, we sell our products and provide our services to integrators to which typical
customers outsource their IT activities. In these cases, the integrators are the actual
customers in all material respects.

Sales through resellers

We
also sell our products, primarily to smaller retailers, through resellers.

Cost of Revenues

Cost
of revenues is comprised of the cost of product sales and the cost of services.
Furthermore, since our adoption of SFAS No. 142, and SFAS No. 141 Business
Combinations, or SFAS No. 141, in their entirety, as of January 1, 2002, intangible
assets created through purchase price allocations such as customer base and technology are
amortized to cost of revenues over their expected periods of life. In addition, generally
we are obligated to pay the Israeli government royalties at a rate of 3% to 5% on revenues
from specific products resulting from grants, up to a total of 150% of the grants
received. These royalties are presented as part of our cost of revenues.

Cost of Product Sales
  consists of costs mostly related to cost of hardware and
amortization of intangible assets. Historically, our revenues from hardware sales
represented a relatively small portion of our overall revenues. As hardware sales
constitute a significant portion of StoreNext USA revenues, our cost of product sales has
increased, reflecting the higher costs of hardware. The amortization of intangible assets
acquired from OMI International, IDS and TCI Solutions was another factor that contributed
to the increase in cost of product sales during recent years.

Cost of Services  consists of costs directly attributable to service sales,
including compensation, travel and overhead costs for personnel providing software
support, maintenance services, market information services, messaging, Connected Services
and other services. Because the cost of services is substantially higher, as a percentage
of related revenues, than the cost of licenses, our overall gross margins may vary from
period to period as a function of the mix of services versus license revenues in such
periods. As compared to our historical results, IDS and OMI International have higher
percentages of revenues from services than product license sales, as well as lower gross
margins for their service related revenues. As a result, our cost of services has risen
since we have merged their activities into ours.

Operating Expenses

Operating expenses consist of
research and development expenses, net, selling and marketing expenses, and general and
administrative expenses. In 2006 and 2007, expenses under SFAS 123(R) resulted in annual
compensation expenses of $3.9 million before taxes.

Research and Development
Expenses,Net consist primarily of salaries, related benefits,
depreciation of equipment for software developers and amortization of intangible assets
such as technology and customer base acquired as part of acquisitions of companies or
business activities. These expenses are net of the amount of grants received from the
Israeli government for research and development activities. Under Israeli law, research
and development programs that meet specified criteria and are approved by the Office of
the Chief Scientist are eligible for grants of up to 50% of certain approved expenditures
of such programs.

Selling and Marketing
Expenses consist primarily of salaries,
related benefits, travel, trade shows, public relations and promotional expenses. We
compensate our sales force through salaries and incentives. As we continue to focus our
efforts on selling our products directly, we also pay commissions to some of our sales
personnel.

General and Administrative
Expensesconsist primarily of salaries, related benefits, professional fees, bad
debt allowances and other administrative expenses. These expenses have increased in recent
years due to the increase in our facilities requirements, expenses incurred as a result of
the growth of our business, recent acquisitions of companies and new joint ventures.

Other Income (Expenses),
Netconsists primarily of gains or losses with respect to ordinary course
dispositions of fixed assets. In addition, during 2007, we wrote off $0.7 million in
accounting, tax and legal due diligence fees in connection with the termination of a
proposed acquisition. We determined that such acquisition will not take place. Such
charges were written off and recorded as Other expenses in our statement of
operations during the year ended December 31, 2007.

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Financial Income (Expenses),
Net consists primarily of interest earned on bank deposits and securities,
interest paid on loans, credit from banks, expenses resulting from sale of receivables and
losses or gains from the conversion into dollars of monetary balance sheet items
denominated in non-dollar currencies.

Gain Arising from
Issuance of Shares by a Subsidiary and an Associated Company

In
March 2003, we established Cell-Time, through our subsidiary StoreNext Israel, together
with Lipman Electronic Engineering Ltd. and Dai Telecom Ltd. Cell-Time is a provider of
on-line services that enables retailers and cellular communication providers in Israel to
sell on-line pre-paid cellular air-time at retail points of sale. Each of the three
parties holds an equal share in Cell-Time. According to the agreement between the parties,
Dai committed to invest $1.25 million in consideration for its share in Cell-Time and the
other parties have committed to grant Cell-Time rights to use certain of their
technologies. As of December 31, 2005, Dai fulfilled its above commitment. As a result of
Dais investments, we recorded in 2005 a gain of $83,000, representing StoreNext
Israels portion in Cell-Time, which is shown as a gain arising from issuance of
shares by an associated company.

Share in Losses of an
Associated Company

Share
in losses of an associated company represents our share in the losses of Cell-Time. Store
Next Israel, our subsidiary, holds 33.3% of Cell-Times shares.

Minority Interests in
Losses (Gains) of Subsidiary

Minority
interests in losses (gains) of subsidiaries reflect the pro rata minority share
attributable to the minority shareholders in losses or gains of our subsidiary, StoreNext
Israel.

Operating Results

The
following table sets forth the percentage relationship of certain statement of operations
items to total revenues for the periods indicated:

| |                                                      | Year ended December 31,
| | ---------------------------------------------------- | -----------------------
|
|
|
|
| | Revenues:                                            |                        
| | Product sales                                        |                        
| | Services                                             |                        
| |                                                      |                        
| | Total revenues                                       |                        
| | Cost of revenues:                                    |                        
| | Cost of product sales                                |                        
| | Cost of services                                     |                        
| |                                                      |                        
| | Total cost of revenues                               |                        
| |                                                      |                        
| | Gross profit                                         |                        
| | Operating expenses:                                  |                        
| | Research and development expenses, net               |                        
| | Selling and marketing expenses                       |                        
| | General and administrative expenses                  |                        
| | Other general expenses, net                          |                        
| |                                                      |                        
| | Total operating expenses                             |                        
| |                                                      |                        
| | Income (loss) from operations                        |                        
| | Financial income (expense), net                      |                        
| |                                                      |                        
| | Income (loss) before taxes on income                 |                        
| | Tax benefit (taxes on income)                        |                        
| | Minority interests in losses (gains) of subsidiaries |                        
| |                                                      |                        
| | Net income (loss)                                    |                        
| |                                                      |                        

44

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Comparison of 2005, 2006
and 2007

Revenues

|               | Year ended December 31, | % Change | % Change
|-------------- | ----------------------- | -------- | --------
|
|
|
|
|Product sales  |                         |          | $       
|Services       |                         |          |         
|               |                         |          |         
|Total revenues |                         |          | $       
|               |                         |          |         

During
2007, our revenue increase resulted from growth in both products and services. The product
revenues in 2007 consisted of 54% license sales and 46% hardware sales, compared to 53%
and 47%, respectively, in 2006. During 2007, our revenues from license sales rose 12% to
$43.3 million, compared to $38.5 million in 2006. The 12% growth in license sales was
higher than the 10% growth of product sales and the 9% growth of total revenues. In 2007,
hardware sales grew 7% to $37.2 million, compared to $34.7 million in 2006.

Revenues from services increased 8%
to $140.9 million in 2007, compared to $130.5 million in 2006, and remained consistent at
64% of total revenue. We have several large customers, with which we have relatively
significant dedicated team arrangements, which are based on professional personnel
exclusively dedicated to and controlled by these customers and which provide maintenance
as well as project-oriented services. As a result, service revenues from these large
customers cover both maintenance and project-oriented services, and we do not
differentiate between the two. Our total revenues from services in 2007 consisted of 35%
from maintenance and 65% from professional services, including all services provided
through customer-dedicated personnel arrangements.

We
conduct business globally and generate revenues from customers located in
three geographical areas:  the U.S. region (which includes the United
States, Canada and Latin America), International (which includes Europe, Africa, Asia
and the Pacific) and Israel. During 2007, our U.S. revenues consisted of 56% of total
revenues, our international revenues consisted of 36% of total revenues, and our Israeli
revenues consisted of 8% of total revenues, compared to 59%, 33% and 8% in 2006,
respectively.

During
2007,our U.S. region revenues increased by 3% to $123 million, as compared to $120
million in 2006. The increase is mainly due to license contracts with tier 1 and tier 2
grocery and convenience stores customers.

During
2007,ourInternational revenues increased by 18% to $79 million, as
compared to $67 million in 2006, primarily due to higher service revenues in that region.
Our international revenues could fluctuate from period to period in the near term, as
these sales are still affected to a great extent by a small number of relatively large
customers.

During
2007,ourIsraeli revenues increased by 10% to $18.7 million, as compared to
$17 million in 2006. The increase was primarily due to growth in service revenues of a
subsidiary in 2007.

During
2006, our revenue increase resulted primarily from an increase in sales to U.S. customers
in both the grocery and convenience store sectors, where revenues increased from $98
million in 2005 to $120 million in 2006, an increase of approximately 22%. In addition,
during 2006, our revenues from services increased as a percentage of total revenues to 64%
compared to 51% in 2005, primarily due to the significant portion of such revenues derived
from some large international and U.S. customers as well as in IDS, the activities of
which we acquired in April 2005. The impact of the IDS activity, which we acquired in
2005, on project-oriented revenues in 2006 amounted to approximately $18.6 million, or 9%
of the total revenues, and in 2005 it amounted $14.6 million, or 8% of total revenues. In
2006, our revenues from licenses decreased by $17.7 million in comparison to 2005,
primarily due to delays in execution, which also contributed to the increase in services
as a percentage of total revenues.

Cost of Revenues

|                       | Year ended December 31, | % Change | % Change
|---------------------- | ----------------------- | -------- | --------
|
|
|
|
|
|Cost of product sales  |                         |          | $       
|Cost of services       |                         |          |         
|                       |                         |          |         
|Total cost of revenues |                         |          | $       
|                       |                         |          |         

During
2007, the cost of product sales increased by 6.5% to $39.1 million, compared to $36.7
million in 2006, primarily due to the increase in the cost of sale of hardware, which was
derived from the 7% increase in hardware sales. The cost of product sales as a percentage
of product sales in 2007 was 49%, similar to 50% in 2006.

During
2007, the cost of services increased by 46% to $65.3 million, compared to $44.6 million in
2006. 76% of the increase in cost of services in 2007 is attributable to an increase in
headcount, compensation and subcontractors costs. As new products matured in the
development cycle, we reduced the number of employees dedicated to their generic
development and reassigned employees from R&D to professional services. In addition,
16% of the increase in cost of services is attributed to the strengthening of the NIS
currency versus the USD, since most of our professional services resources are located in
Israel.

In
2006, the cost of product sales as a percentage of product sales increased to 50% from
34%, primarily due to the increase in the weight of hardware sales in product sales and
the decrease in sales of licenses which is the cause of the decrease in product sales in
2006 in comparison to 2005. In 2006, the cost of services as a percentage of service sales
in 2006 was 34%, similar to 36% in 2006. We do not differentiate between the cost of
maintenance services and the cost of project-oriented services because we have large
customers with which we have relatively significant dedicated team arrangements, which are
based on professional personnel exclusively dedicated to and controlled by these customers
and which provide maintenance as well as project-oriented services.

45

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Operating Expenses

|                              | Year ended December 31, | % Change | % Change
|----------------------------- | ----------------------- | -------- | --------
|
|
|
|
|
|Research and development, net |                         |          | $       
|Selling and marketing         |                         |          |         
|General and administrative    |                         |          |         
|                              |                         |          |         
|Total operating expenses      |                         |          | $       
|                              |                         |          |         

Research and Development
Expenses, Net.These expenses are presented net of
grants under programs of the Office of the Chief Scientist of the Ministry of Industry,
Trade and Labor of the Government of Israel. For more information, please see the
discussion in Item 5.C below under Grants from the Office of the Chief
Scientist. Our considerable research and development expenses reflect our
investments in developing our next-generation applications and our recently introduced
products, adapting these products to large chain environments as well as integrating our
acquired supply chain and warehouse management systems into our suite of products. During
2007, as new products matured in the development cycle, we reassigned resources that were
dedicated to research and development to professional services. In addition, we reduced
expenses related to sub-contractors in Israel. These reductions were partially offset by
the strengthening of the NIS versus the U.S. Dollar. As a result, the research and
development expenses for 2007 were lower compared to 2006. Although we believe that in
2005, in 2006 and in 2007 our research and development expenses were relatively high in
comparison to what we expect in the long run as a percentage of revenues, we intend to
continue to invest considerable resources in research and development as we believe that
this is essential to enable us to establish ourselves as a market leader in our fields of
operation. We view our research and development efforts as essential to our ability to
successfully develop innovative products that address the needs of our customers as the
market for enterprise-wide retail software solutions evolves. Approximately 71% or $1.2
million of the decrease in research and development expenses in 2007, compared to 2006 is
attributable to the expense effect of stock-based compensation. Approximately 15% or $2.2
million of the increase in research and development expenses in 2006, compared to 2005 is
attributable to the expense effect of stock-based compensation and our adoption of SFAS
123(R) as of January 1, 2006, discussed above under Application of Critical
Accounting Policies and Use of Estimates.

Selling and Marketing Expenses.During 2007, we reduced some sales and marketing positions. During 2005, we
invested significant marketing efforts in increasing awareness of our new offerings in the
supply chain management area, in maintaining and strengthening relationships with new
customers added to our customer base as part of our recent acquisitions and in
establishing a presence in new markets in Europe and Asia. During 2006, we continued to
focus in these areas, but we did not significantly widen our marketing staff or efforts.
However, approximately $0.2 million of expenses in 2007 and $0.5 million of expenses in
2006 were attributable to SFAS 123(R). We anticipate that selling and marketing expenses
will begin to increase again in absolute dollars as we expand our operations.

General and Administrative
Expenses. In 2007 and 2006, our general and
administrative expenses were consistent as percentage of sales in comparison to 2005,
despite approximately $1.3 million of expenses in 2007 and approximately $0.4 million of
expenses in 2006 attributable to SFAS 123(R). The increase in the general and
administrative expenses in 2007 compare to 2006 is primarily due to increase in headcount,
compensation costs, professional fees and bad debt expenses mainly in the US.

Financial Income, Net

Financial
income, net, totaled $1,032,000 in 2007, compared to $79,000 in 2006, and $202,000 in
2005. During 2007 we recorded higher non-dollar currency gains compared to 2006 in spite
of lower interest income and higher interest and bank commission expense. During 2005 we
enjoyed higher average financial reserves, which contributed to higher interest income
compared to 2006, in spite of higher non-dollar currency losses and higher costs related
to sales of receivables in 2005.

46

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Corporate Tax Rate

The general corporate tax rate in
Israel is 31% for the 2006 tax year, 29% for the 2007 tax year and 27% for the 2008 tax
year and is scheduled to be reduced to 26% for the 2009 tax year and 25% for the 2010 tax
year and thereafter. Our effective consolidated tax rate, however, was 103% in 2007
(primarily due to the differences between the basis of the measurement of income reported
for tax purposes and the basis of measurement of income for financial reporting purposes),
minus 40% (plus 30% excluding the effect of a release of a valuation allowance
attributable to an acquisition, in one of our subsidiaries) in 2006 and 29% in 2005. We
enjoy these lower effective tax rates primarily because of tax reductions to which we are
entitled under Israels Law for Encouragement of Capital Investments, 1959, or the
Investments Law, with respect to our investment programs that were granted the status of
Approved Enterprise under this law. Under our Approved Enterprise investment programs, we
are entitled to certain tax exemptions and reductions in the tax rate normally applicable
to Israeli companies with respect to income generated from our Approved Enterprise
investment programs. We expect to continue to derive a portion of our income from our
Approved Enterprise investment programs as well as Benefited Enterprises  see
further discussion below. The tax benefits for our existing and operating Approved
Enterprise programs are scheduled to expire by 2009. The period of tax benefits for each
capital investment plan expires upon the earlier of: (1) twelve years from completion of
the investment under the approved plan, or (2) fourteen years from receipt of approval. We
cannot assure you that such tax benefits will be available to us in the future at their
current levels or at all.

Part
of the income of our taxable income has been tax exempt in recent years due to the
approved enterprise status granted to most of our production facilities. The Company has
decided to permanently reinvest the amount of such tax exempt income and not to distribute
it as dividends. Accordingly, no deferred taxes have been provided in respect of such
income in the financial statements attached herein to this annual report.

The
amount of income taxes that would have been payable had such tax exempt income, earned
through December 31, 2007, been distributed as dividends is approximately $4.340
million.

Out
of our retained earnings as of December 31, 2007, approximately $17.4 million are
tax-exempt. If we were to distribute this tax-exempt income before our complete
liquidation, it would be taxed at the reduced corporate tax rate applicable to these
profits (10%-25%, depending on the extent of foreign investment in the company), and an
income tax liability of up to approximately $4.340 million would be incurred. Our board of
directors has determined that we will not distribute any amounts of our undistributed tax-
exempt income as a dividend. We intend to reinvest our tax-exempt income and not to
distribute such income as a dividend. Accordingly, no deferred income taxes have been
provided on income attributable to our Approved Enterprise program as the undistributed
tax exempt income is essentially permanent in duration. On April 1, 2005, an amendment to
the Investments Law came into effect, which revised the criteria for investments qualified
to receive tax benefits. An eligible investment program under the amendment will qualify
for benefits as a Benefited Enterprise (rather than the previous terminology of Approved
Enterprise) if it is an industrial facility (as defined in the Investments Law) that will
contribute to the economic independence of the Israeli economy and is a competitive
facility that contributes to the Israeli gross domestic product. Among other things, the
amendment provides tax benefits to both local and foreign investors and simplifies the
approval process  the benefited Enterprise routes do not require pre-approval by the
Investment Center of the Israeli Ministry of Industry, Trade and Labor, or the Investment
Center. The amendment does not apply to investment programs approved prior to December 31,
2004.

As
a result of the amendment, tax-exempt income generated under the provisions of the new law
will subject us to taxes upon distribution or liquidation.

Minority Interests in (Gains)
Losses of Subsidiaries.These amounts consisted in 2006 and 2007 of the minority
interests in the gains of StoreNext Israel. In 2005, the minority interest had shared
losses primarily attributable to StoreNext Israel and StoreNext USA.

# B. Liquidity and Capital
Resources

We
had cash and cash equivalents of approximately $22.5 million, $55.2 million and $55.7
million, as of December 31, 2007, 2006 and 2005, respectively. Our total cash and
cash equivalents, short-term bank deposits and short-term and long-term investment in
marketable securities, net of short-term bank credit amounted to approximately $27.6
million as of December 31, 2007, compared to $56.2 million as of December 31, 2006,
and $64.7 million as of December 31, 2005. During 2007, our financial resources
decreased primarily due to the result of our decision to discontinue the factoring of
receivables. We believe our current cash position provides enough liquidity, and
discontinuing factoring will save financing expenses.

As of December 31, 2007, we held
an auction rate security totaling $1 million at par value which is currently
associated with failed auctions. Historically, the carrying value of auction rate
securities approximated fair value due to the frequent resetting of the interest rates.
While we continue to earn interest on this investment at the contractual rates, the
estimated market value of this auction rate security no longer approximates par value. We
estimated the fair value of this auction rate security based, among other things, on the
following: (i) the underlying structure of the security; (ii) the present value
of future principal and interest payments discounted at rates considered to reflect
current market conditions; (iii) consideration of the probabilities of default,
auction failure, or repurchase at par for each period; and (iv) estimates of the
recovery rates in the event of default for the security. The fair market value of the
failed auction rate security at December 31, 2007 was $0.8 million, a decline of
$0.2 million from par value. We continue to monitor the market for auction rate
securities and consider its impact (if any) on the fair market value of our investment. If
the current market conditions deteriorate further, or the anticipated recovery in market
values does not occur, we may be required to record additional unrealized losses in other
comprehensive income or impairment charges in 2008.

47

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Net
cash used in operating activities in 2007 was $23.7 million primarily due to the result of
our decision to discontinue the factoring of receivables and a net loss of $0.5 million,
compared to net cash provided by operating activities of $3 million and $12.5 million in
2006 and 2005, respectively.

Net cash used in investing activities
in 2007, 2006 and 2005 of approximately $6.4 million, $6.9 million and $47.7 million,
respectively, was primarily attributable to cash spent on acquisitions of subsidiaries
which amounted to approximately $ 1.4 million in 2007, $8.4 million in 2006, $54.1 and
million in 2005. In addition, we spent $ 1.4 million, $ 2.7 million and $ 50.3 million, to
purchase other assets in 2007, 2006 and 2005, respectively.

Our
capital expenditures (consisting of the purchase of fixed assets) were $4.7 million, $2.6
million and $3.1 million in 2007, 2006 and 2005, respectively, mostly attributable to
purchasing of the 3rdfloor of our headquarters building in 2007 and purchasing
computer and peripheral equipment including software systems and licenses in all three
years.

Net
cash used in financing activities in 2007 amounted to approximately
$2.7 million, primarily due to a decrease in short term bank credit, offset by cash
provided by issuance of share capital to employees resulting from exercise of options. Net
cash provided by financing activities in 2006 amounted to approximately $3.3 million,
primarily attributable to proceeds from issuance of share capital to employees resulting
from the exercise of options. Net cash used in financing activities in 2005 amounted to
$0.3 million, primarily from repayment of bank loans and decrease in short term bank
credit offset by cash provided by issuance of share capital to employees resulting from
the exercise of options.

Bank Debt

As
of December 31, 2007, we had an outstanding bank loans in the principal amount of $1.0
million. These loans are primarily in EUROs and accrue interest at the rate of 2.0% per
year and mature through July 2011.

Pledges

A
certain bank account containing $1.2 million in marketable securities as of December 31,
2007, is pledged to secure any bank credit, including but not limited to loans, given by
the bank that holds such securities. Additional bank accounts and deposits totaling as of
December 31, 2007 $473,000 are held as collateral for a credit guarantee and a letter of
credit issued on behalf of a subsidiary.

Credit Risk

Other
than the foreign currency forward contracts described below, we have no significant
off-balance-sheet concentration of credit risk, such as foreign exchange contracts, option
contracts or other foreign hedging arrangements. We may be subject to concentrations of
credit risk from financial balances, consisting principally of cash and cash equivalents,
short-term bank deposits, trade and unbilled receivables and investments in marketable
securities. We invest our cash and cash equivalents and marketable securities in U.S.
dollar deposits with major Israeli and U.S. banks. We believe that the financial
institutions that hold our investments are financially sound, and, accordingly, minimal
credit risk exists with respect to these investments. Most of our revenue has historically
been generated from a large number of customers. Consequently, the exposure to credit
risks relating to trade receivables is limited. We generally do not require collateral. An
appropriate allowance for doubtful accounts is included in our accounts receivable.

The
fair value of the financial instruments included in our working capital is usually
identical or close to their carrying value. The fair value of long-term receivables and
long-term loans and other long-term liabilities also approximates the carrying value,
since they bear interest at rates close to the prevailing market rates.

We
take various measures to compensate for the effects of fluctuations in both exchange rates
and interest rates. These measures include traditional currency hedging transactions as
well as attempts to maintain a balance between monetary assets and liabilities in each of
our principal operating currencies, mainly the U.S. dollar, the NIS, the
Euro and the British pound, and securing the Companys future cash flows from foreign
exchange fluctuations

We
have only limited involvement with derivative financial instruments. We carry out
transactions involving foreign exchange derivative financial instruments (forward exchange
contracts). These transactions do not qualify for hedge accounting under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities.
For information relating to our market risks, please see Item 11 Quantitative
and Qualitative Disclosures About Market Risk below.

As
of December 31, 2007, we held an auction rate security totaling $1 million at
par value which is currently associated with failed auctions. As explained in note 1d to
our audited consolidated financial statements included elsewhere in this annual report, we
have determined fair value of these securities based on a valuation model. The revaluation
of these securities resulted in a net unrealized loss of $0.2 million, which has been
recorded in other comprehensive income, as it is not considered other-than
temporary.

48

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Our
management believes that our financial reserves will be sufficient to fund our anticipated
cash needs for working capital and capital expenditures for at least the next
12 months. Our future capital requirements will depend on many factors, including our
rate of revenue growth, the timing and extent of spending to support product development
efforts, the expansion of sales and marketing activities, the timing of introductions of
new products and enhancements to existing products, and the continuing market acceptance
of our products. To the extent that our existing financial reserves and cash generated
from operations are insufficient to fund our future activities, including investments in,
or acquisitions of, complementary businesses, products or technologies, we may need to
raise additional funds through public or private equity or debt financing.

Impact of Inflation,
Devaluation and Fluctuation in Currencies on Results of Operations, Liabilities and Assets

Most
of our sales are denominated in U.S. dollars or are dollar linked. However, some
portions of our expenses, primarily expenses associated with employee compensation, are
denominated in NIS unlinked to the dollar. A devaluation of the NIS in relation to the
dollar has the effect of decreasing the dollar value of any asset of ours that consists of
NIS or receivables payable in NIS, unless such receivables are linked to the dollar. Such
devaluation also has the effect of reducing the dollar amount of any of our expenses or
liabilities which are payable in NIS, unless such expenses or payables are linked to the
dollar. Conversely, any increase in the value of the NIS in relation to the dollar has the
effect of increasing the dollar value of any of our unlinked NIS assets and the dollar
amounts of any of our unlinked NIS liabilities and expenses. In addition, some of our
expenses, such as salaries for our Israeli based employees, are linked to some extent to
the rate of inflation in Israel. An increase in the rate of inflation in Israel that is
not offset by a devaluation of the NIS relative to the U.S. dollar can cause the dollar
amount of our expenses to increase.

The
following table presents information about the rate of inflation in Israel, the rate of
devaluation of the NIS against the U.S. dollar, and the rate of inflation in Israel
adjusted for the devaluation:

| | Year Ended
December 31, | Israeli Inflation
Rate
% | NIS Devaluation
(Revaluation)
Rate against the
U.S. dollar
% | Israel Inflation
Adjusted for the
Devaluation of the
NIS against the U.S.
dollar
%
| | ----------------------- | ------------------------ | ------------------------------------------------------------ | ----------------------------------------------------------------------------------
|
|
|
|
| | 2003                    |                          |                                                              |                                                                                   
| | 2004                    |                          |                                                              |                                                                                   
| | 2005                    |                          |                                                              |                                                                                   
| | 2006                    |                          |                                                              |                                                                                   
| | 2007                    |                          |                                                              |                                                                                   

Because
exchange rates between the NIS and the dollar fluctuate continuously, exchange rate
fluctuations and, in particular, larger periodic devaluations or revaluations may have an
impact on our profitability and period-to-period comparisons of our results. We believe
that inflation in Israel has not had a material effect on our results of operations but
that the recent devaluation of the dollar against the NIS has a material effect on our
results of operations.

49

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# C. Research and
Development, Patents and Licenses, Etc.

# Research and Development

We
believe that our research and development efforts are essential to our ability to
successfully develop innovative products that address the needs of our customers as the
market for enterprise-wide software solutions evolves. As of December 31, 2007, our
research and development staff consisted of 432 employees, of whom 209 were located in
Israel, 17 in Italy and the remaining 206 were located primarily in the United States.

# Proprietary Rights

We
have no patents or patent applications pending. Our success and ability to compete are
dependent in part on our proprietary technology. We rely on a combination of copyright,
trademark and trade secret laws and non-disclosure agreements to establish and protect our
proprietary rights. To date, we have relied primarily on proprietary processes and
know-how to protect our intellectual property. Some of our products utilize open source
technologies. These technologies are licensed to us on varying license structures but may
include the General Public License. This license and others like it pose a potential risk
to products that are integrated with these technologies. See further discussion under
Risk Factors.

# Grants from the Office
of the Chief Scientist

From
time to time we receive grants under programs of the Office of the Chief Scientist, or the
OCS, of the Ministry of Industry, Trade and Labor of the Government of Israel. In the
years 2007, 2006 and 2005 we received grants from the OCS in amount of $453,000, $195,000
and $489,000, respectively. This governmental support is conditioned upon our ability to
comply with certain applicable requirements and conditions specified in the OCSs
programs, in the OCS rules and in the provisions of the Law for the Encouragement of
Research and Development in the Industry, 1984, and the regulations promulgated
thereunder, or the Research and Development Law.

Under
the Research and Development Law, research and development programs that meet specified
criteria and are approved by the research committee of the OCS are eligible for grants of
up to 50% of certain approved expenditures of such programs, as determined by said
committee.

In
exchange, the recipient of such grants is required to pay the OCS royalties from the
revenues derived from products incorporating know-how developed within the framework of
each such program or derived therefrom (including ancillary services in connection
therewith), up to an aggregate of 100% of the dollar-linked value of the total grants
received in respect of such program, plus interest, or up to 150% thereof in the case of
some of our earliest programs. The royalty rates applicable to our programs range from 3%
to 3.5%.

The
Israeli government is in the process of formulating a proposed amendment to the royalty
regulations promulgated under the Research and Development Law. The amendment proposes to
include changes to the royalty rates, which would vary from company to company based on
the amount of its revenues and approval date of its program, up to a rate of 6%, and
proposes to increase the rate of interest accruing on grants by 1% per year. The amendment
proposes to have retroactive effect, although there is no assurance as to whether and when
it will be adopted.

The
Research and Development Law generally requires that the product developed under a program
be manufactured in Israel. However, some of the manufacturing volume may be performed
outside of Israel, subject to notification to the Chief Scientist in the case of the
transfer of up to 10% of a grant recipients approved Israeli manufacturing volume
outside of Israel, or subject to the approval of the Chief Scientist in the case of the
transfer of additional manufacturing volume outside of Israel. In case of an approval of
the Chief Scientist for the transfer of manufacturing outside of Israel, the grant
recipient is required to pay royalties at an increased rate, which may be substantial, and
the aggregate repayment amount is increased up to 300% of the grant, depending on the
portion of the total manufacturing volume that is performed outside of Israel. The
Research and Development Law further permits the OCS, among other things, to approve the
transfer of manufacturing rights outside Israel in exchange for an import of different
manufacturing into Israel as a substitute, in lieu of the increased royalties. The
Research and Development Law also allows for the approval of grants in cases in which the
applicant declares that part of the manufacturing will be performed outside of Israel or
by non-Israeli residents and the research committee is convinced that doing so is
essential for the execution of the program. This declaration will be a significant factor
in the determination of the OCS whether to approve a program and the amount and other
terms of benefits to be granted. For example, the increased royalty rate and repayment
amount might be required in such cases.

The
Research and Development Law also provides that know-how developed under an approved
research and development program may not be transferred to third parties in Israel without
the approval of the research committee. Such approval is not required for the sale or
export of any products resulting from such research or development. The Research and
Development Law further provides that the know-how developed under an approved research
and development program may not be transferred to any third parties outside Israel, except
in certain special circumstances and subject to prior approval. The OCS may approve the
transfer of government-funded know-how outside Israel in the following cases: (a) the
grant recipient pays a portion of the sale price paid in consideration for such know-how
(according to certain formulas); or (b) the grant recipient receives know-how from a third
party in exchange for its government-funded know-how; or (c) such transfer of know-how
arises in connection with certain types of cooperation in research and development
activities.

50

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The
Research and Development Law imposes reporting requirements with respect to certain
changes in the ownership of a grant recipient. The law requires the grant recipient and
its controlling shareholders and non-Israeli interested parties to notify the OCS of any
change in control of the recipient or a change in the holdings of the means of control of
the recipient that results in a non-Israeli becoming an interested party directly in the
recipient and requires the new interested party to undertake to the OCS to comply with the
Research and Development Law. For this purpose, control is defined as the
ability to direct the activities of a company other than any ability arising solely from
serving as an officer or director of the company. A person is presumed to have control if
such person holds 50% or more of the means of control of a company. Means of
control refers to voting rights or the right to appoint directors or the chief
executive officer. An interested party of a company includes a holder of 5% or
more of its outstanding share capital or voting rights, its chief executive officer and
directors, someone who has the right to appoint its chief executive officer or at least
one director, and a company with respect to which any of the foregoing interested parties
owns 25% or more of the outstanding share capital or voting rights or has the right to
appoint 25% or more of the directors. Accordingly, any non-Israeli who acquires 5% or more
of our ordinary shares will be required to notify the OCS that it has become an interested
party and to sign an undertaking to comply with the Research and Development Law.

The
funds available for OCS grants out of the annual budget of the State of Israel were
reduced in 1998, and the Israeli authorities have indicated in the past that the
government may further reduce or abolish OCS grants in the future. Even if these grants
are maintained, we cannot presently predict what would be the amounts of future grants, if
any, that we might receive.

D. Trend Information

As
retail sales have softened with the recent slowdown in the broader economy, better use of
information technology can help retailers and distributors improve their operational
performance and increase customer retention. Despite the current retail environment,
retailers generally appear to remain committed to making technology investments, which can
deliver a return on investment, or ROI, over the long run and help them manage through
this unpredictable environment. At the same time, it is possible that some existing and
potential customers will decide to postpone or decrease capital investments during the
current slowdown. Trends we identify within the retail industry that could influence
demand are increasing focus on areas such as customer loyalty, purchasing and inventory
optimization, synchronization of data and use of shared databases, operation of
multi-format and multi-channel retail operations and the increasing tendency of large
retailers to grow and operate internationally.

Competition
in the market for software solutions supporting the operations of retailers and
manufacturers is also increasing, which is resulting in significant pressure on prices and
subsequent lower gross margins. During the last three years there have also been some
significant acquisition transactions within the industry in which large corporations which
have not been directly involved in the industry have acquired competitors of ours.

E.
          Off Balance Sheet Arrangements

None.

F.
          Tabular Disclosure of Contractual Obligations

The following table presents further
information relating to our liquidity as of December 31,2007:

|Contractual Obligations (U.S. $ in millions)*                      | Total | Less
than 1
year | 1-3
years | 4-5 years | More than 5
years
|------------------------------------------------------------------ | ----- | ---------------- | --------- | --------- | -----------------
|
|
|
|
|Long-Term Debt Obligations (including current maturities)          |       |                  | $         | 1.1       |                  
|Operating Lease Obligations (with regard to offices and facilities |       |                 
|and vehicles)                                                      |       |                  |           | 10.4      |                  
|Severance pay                                                      |       |                  |           | 5.6       |                  
|                                                                   |       |                  |           |           |                  
|Total                                                              |       |                  |           | 17.1      |                  
|                                                                   |       |                  |           |           |                  

|* | See
also the notes to our audited consolidated financial statements for the year ended
December 31, 2007 included elsewhere in this annual report, and in particular, Note 7
thereto.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

51

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# ITEM 6  DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES

# A. Directors and Senior
Management

Set forth below is information
concerning our executive officers and directors as of June 20, 2008.

|Name                | Year of Birth | Year Joined | Retalix Position                                            
|------------------- | ------------- | ----------- | ------------------------------------------------------------
|
|
|
|
|Barry Shaked        | 1957          | 1982        | President, Chief Executive Officer and Chairman of the Board
|Hugo Goldman        | 1954          | 2007        | Executive Vice President and Chief Financial Officer        
|Danny Moshaioff     | 1947          | 1999        | Executive Vice President, Corporate Development             
|Yoni Stutzen        | 1951          | 1994        | Executive Vice President, International Business Unit       
|Reuben Halevi       | 1957          | 2004        | Executive Vice President, Chief Operating Officer - USA     
|Isaac Shefer        | 1957          | 2008        | Executive Vice President, Product Development               
|Gillon Beck         | 1962          | 2008        | Director                                                    
|Louis Berman        | 1957          | 2006        | External Director                                           
|David Bresler       | 1956          | 2006        | External Director                                           
|Brian Cooper        | 1956          | 1984        | Director                                                    
|Ishay Davidi        | 1962          | 2008        | Director                                                    
|Amnon Lipkin-Shahak | 1944          | 2002        | Director                                                    
|Ian O'Reilly        | 1948          | 2000        | Director                                                    
|Itschak Shrem       | 1947          | 2008        | Director                                                    

Barry
Shaked is one of our founders and has served as our President, Chief Executive Officer
and Chairman of the Board since our inception in April 1982. From August 1975 to
February 1979, Mr. Shaked served as an officer in the Israeli Defense Forces. He
attended the Computer Science School of Bar-Ilan University from 1980 to 1983.

Hugo Goldman has served as our
Executive Vice President and Chief Financial Officer since November 2007. From 2006 to
2007, Mr. Goldman served as Chief Financial Officer of AxisMobile. From 2001 to 2005, he
served as Chief Financial Officer of VocalTec Communications. From 1983 to 1999, Mr.
Goldman spent 16 years at Motorola Semiconductor Products Sector (now Freescale), where he
served in a number of roles, including Chief Financial Officer of the Israeli operations. Mr.
Goldman is a Certified Public Accountant and began his career at Kesselman & Kesselman
(now a member of PricewaterhouseCoopers). He holds a B.A. in Accounting and Economics from
the Tel Aviv University and an M.B.A. from the University of Bradford, UK.

Danny
Moshaioff has served as an Executive Vice President of Corporate Development since
November 2007. From December 1999 until November 2007, Mr. Moshaioff served as our
Executive Vice President and Chief Financial Officer. From July 1997 to
December 1999, Mr. Moshaioff served as Chief Financial Officer of Blue Square
Israel and from September 1995 to June 1997, he served as General Manager of
Mashbir Mazon. Mr. Moshaioff served as a director in Neviot Ltd. from
January 2004 to September 2005. Mr. Moshaioff received a B.A. in Economics and
Statistics from the Hebrew University in 1970 and an M.B.A. from New York University in
1972.

Yoni
Stutzen has served as our Executive Vice President, International Business Unit, since
January 2008, and served as our Vice President, International Sales since
December 1998. He served as our Vice President, Marketing from August 1994
through December 1998. Mr. Stutzen served as a Marketing Manager for Manof
Communications from January 1985 to July 1994 and as international SWIFT systems
manager for Bank Hapoalim from January 1980 until December 1984.
Mr. Stutzen received a B.Sc. in Industrial and Management Engineering from the
Technion, Israel Institute of Technology in 1974.

52

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Reuben
Halevihas served as our Chief Operating Officer for U.S. operations since August
2006. He also served as our Executive Vice President, Product Development from June 2005
until December 2007. Previously, Mr. Halevi has served as a Vice President for Development
from January 2005. From January to December 2004, Mr. Halevi served as a senior manager in
our development group. During 2000 to 2003, Mr. Halevi served as a senior IT consultant
for Supersol, the largest grocery chain in Israel. Mr. Halevi holds a B.Sc. in Industrial
and Management Engineering from the Technion, Israel Institute of Technology.

Isaac
Shefer has served as Executive Vice President, Product Development since January 2008.
From 1999 to 2006, Mr. Shefer served as the Chief Information Officer of Supersol,
Israels largest grocery chain. Prior thereto, Mr. Shefer held software development
management and project management positions in various organizations in the fields of
telecom, manufacturing, distribution, logistics and military.  He holds an M.Sc.
degree in Computer Science from the Johns Hopkins University in Baltimore, Maryland, and
is a graduate of Economics and Computer Science from Bar-Ilan University.

Gillon Beckhas served as a
director since March 2008. Mr. Beck has been a Senior Partner and director at FIMI
Opportunity Funds since 2003. He also serves as a Director of Inrom Industries Ltd., Ytong
Industries Ltd (Chairman)-(TASE), Nirlat Paints Ltd (TASE), MDT Micro Diamond Technologies
Ltd, Metro Motor Marketing Ltd, TANA Industries (1991) Ltd., Orian S.M. Ltd. (TASE),
Gamatronic Electronic Industries Ltd.(TASE), Merhave-Ceramic and Building Materials Center
Ltd (TASE), and Concept Fashion Ltd. Previously he was director at TAT Technologies LTD
(NASDAQ) and Chairman of Medtechnica Ltd (TASE). He holds a BSc in Industrial Engineering
from the Technion, Israel Institute of Technology, and an MBA in Finance from Bar Ilan
University.

Louis
Bermanhas served as an external director since June 2006. Since August 1999, Mr.
Berman has served in a senior ranking management position in the Israeli civil service. He
received a B.A. in Political Sciences from the Haifa University in 2003.

David
Breslerhas served as a director since June 2006. Since April 2006, Mr. Bresler has
served as Chairman and Chief Executive Officer of the Happening retail chain. From 2002 to
2004, Mr. Bresler served as Chief Executive Officer of Golf & Co. retail chain. From
1999 to 2002, Mr Bresler served as Chief Executive Officer of Tango Ltd. From 1997 to
1998, he served as Chief Executive Officer of Finish IL Ltd. From 1991 to1996, he served
as Chief Executive Officer of Shilav Ltd., and from 1985 to 1991 as Chief Financial
Officer of Shilav Ltd. Mr. Bresler served as an officer in the Israeli Defense Forces, and
received a B.A. in Economics and Management from the Hebrew University in 1982.

Brian
Cooperhas served as a director since August 1984. From December 1999 to
June 2001, Mr. Cooper served as our Vice President, Israeli operations.
Mr. Cooper also served as our Chief Financial Officer from August 1984 until
December 1999. From 1979 to 1984, Mr. Cooper served as an officer in the Israeli
Defense Forces as an economist and programmer. Mr. Cooper has been a director of YCD
Multimedia Ltd. since June 2003 and a director of Redmatch International Ltd.
since October 2007. Mr. Cooper holds a B.A. in Economics from Haifa University.

Ishay
Davidihas served as a director since March 2008. Mr. Davidi is the Founder and CEO of
each of FIMI IV 2007 Ltd., FIMI Opportunity 2005 Ltd, FIMI 2001 Ltd and First Israel
Mezzanine Investors Ltd., the managing general partners of the partnerships constituting
the FIMI Private Equity Funds. Mr. Davidi also serves as a director at Tefron Ltd., Scope
Metals Group Ltd., Orlite Industries (1959) Ltd., MDT Micro Diamond Technologies Ltd,
Orian S.M. Ltd., Merhav-Ceramic and Building Materials Center Ltd., Gamatronic Electronic
Industries, Ltd. and Bagir Group Ltd. Mr. Davidi holds a B.Sc. in Industrial and
Management Engineering from Tel Aviv University and an M.B.A. from Bar Ilan University.

Amnon
Lipkin-Shahakhas served as a director since April 2002. Since May 2001,
Mr. Lipkin-Shahak has served as the Chairman of the Board in the TAHAL Group and as a
director in the Kardan Group. Mr. Lipkin-Shahak also serves as a director in El-Al
Airlines, Visual Defence and Nilit and as the Chairman of the Executive Committee of the
Peres Center for Peace. Between May 1999 and March 2001, Mr. Lipkin-Shahak
served as a member of the Israeli parliament (the Knesset). During this period,
Mr. Lipkin-Shahak served as a cabinet minister between July 1999 and
March 2001. In December 1998, Mr. Lipkin-Shahak retired from his position
as the Chief of Staff of the Israeli Defense Forces after thirty-six years of service.

Ian
OReillyhas served as a director since November 2000.
Mr. OReilly serves as the Chairman of the Cambridge Building Society and as a
director of Atlas Cedar Ltd. From 1991 to 2000, Mr. OReilly served as a Group IT
Manager at Tesco Stores Ltd. He received a British Computer Society Qualification
from the Cambridge College of Arts and Technology.

Itschak
Shremhas served as a director since January 2008. Mr. Shrem is Chairman and founder
of Shrem Fudim Group, a private banking house publicly traded on the Tel-Aviv Stock
Exchange. He also serves as the Chairman of Leader Holdings and Investments Ltd., Polar
Communications Ltd. and various affiliated companies. In 1993, Mr. Shrem founded Polaris
(now Pitango) venture capital fund. Prior to that, Mr. Shrem spent 15 years at Clal Israel
Ltd. in various capacities, including Chief Operating Officer responsible for the
groups capital markets and insurance businesses. Mr. Shrem holds a B.A. in Economics
from Bar-Ilan University and an M.B.A. from Tel-Aviv University.

53

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# B. Compensation

The aggregate accrued compensation of
all the persons as a group who served in the capacity of a director or an executive
officer during the year ended December 31, 2007, was approximately $1.4 million. This
amount includes pension, retirement and similar benefits accrued in the aggregate amount
of $120,000. This does not include stock based compensation effects under SFAS 123(R),
amounts expended by us for business travel, professional and business associated dues and
business expense reimbursements.

Under
our articles of association, no director may be paid any remuneration by us for his
services as director except as may be approved pursuant to the provisions of the Companies
Law, which generally require the approval of our audit committee, followed by the approval
of our board of directors and then the approval of our shareholders.

In our 2007 annual meeting of
shareholders, a resolution was approved allowing the payment of fees to our independent
directors who serve from time to time (other than our statutory external directors) of up
to $25,000 per year. Our external directors receive annual compensation pursuant to
applicable regulations under the Israeli Companies Law of approximately $10,200 each and
in addition $380 per board meeting or per board committee meeting in which they
participate, and $230 per such meeting by telephone in which they participate.

In
addition, Mr. Barry Shaked, our Chairman and Chief Executive Officer, is entitled to
receive an annual bonus based on our attainment of certain performance milestones. For the
first million dollars of our net income earned, he is entitled to receive a bonus of
$65,000. For each subsequent million dollars of our net income, he is entitled to receive
an additional bonus, which is to be $5,000 less than the prior bonus level, down to
$35,000 for seven million dollars of net income and for each million dollars earned
thereafter.

As
compensation for his services to us, Mr. Shaked is entitled to receive, at the
beginning of each calendar year, options to purchase a number of our ordinary shares equal
to 1.0% of our then outstanding ordinary shares. These options are vested at the grant
date, but are blocked, in thirds for one year, two years and three years. According to
this arrangement, in January of 2005, January 2006, January 2007 and January 2008,
Mr. Shaked was granted options to purchase a total of up to 176,556, 194,090, 196,135
and 200,014 of our ordinary shares, respectively, at exercise prices of $21.86, $24.46,
$16.29 and $15.58 per share, respectively. The options have a term of four years from the
date of grant.

According
to our employment agreement with Mr. Shaked, he is entitled to severance pay equal to
one months salary for every year of employment. In addition, he is entitled to full
compensation and benefits during the first three month period following termination of
employment in exchange for post-termination cooperation during such period, and to full
compensation and benefits also during the second three month period following termination
of employment in exchange for post employment consulting during such period, and an
additional payment equal to five months salary in the event of termination of
employment, other than by us for cause.

In
October 2002, our shareholders approved the replacement of the employment agreement
with Mr. Shaked, with a management agreement with a private company controlled by
Mr. Shaked. This arrangement has not changed in any material respect the previous
terms of employment, including the terms described above.

Our
employment agreements with most of our employees located in Israel, including executive
officers and those that are also members of our board of directors, provide for standard
Israeli benefits, such as managers insurance and an educational fund. We make
payments under these programs as follows: pension5.0% of gross salary; severance
pay8.33% of gross salary; disability insuranceup to 2.5% of gross salary (all
of which are considered part of managers insurance); and educational fund7.5%
of gross salary. The total amount we expensed in 2007 under these arrangements for all
executive officers as a group was approximately $120,000.

During
2007,  our directors and executive officers as a group were granted options to purchase
an aggregate of 296,135 shares under our stock option plans. The exercise prices of these
options range from $16.29 to $18.54 and their expiration dates range from December 31,
2010 to November 20, 2011. Of these options, 65,379 became exercisable on January 1, 2008,
33,334 became exercisable on November 20, 2008, 65,378 became exercisable on January 1,
2009, 33,333 will become exercisable on November 20, 2009, 65,378 will become exercisable
on January 1, 2010 and 33,333 will become exercisable on November 20, 2010.These options
granted include the options granted to Mr. Shaked under his employment agreement as
described above.

During 2007, our
executive officers as a group were granted RSUs to purchase an aggregate of 30,000 shares
under our stock option plans. The exercise price of these RSUs is NIS 1.00 (approximately
$0.25). These RSUs vest in three equal installments on November 20, 2008, 2009 and 2010.

54

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# C. Board Practices

Corporate Governance
Practices

We
are incorporated in Israel and therefore are subject to various corporate governance
practices under the Companies Law relating to such matters as outside directors, the audit
committee, the internal auditor and approvals of interested party transactions. These
matters are in addition to the ongoing listing conditions of the Nasdaq Global Select
Market and other relevant provisions of U.S. securities laws. Under the Nasdaq rules, a
foreign private issuer may generally follow its home country rules of corporate governance
in lieu of the comparable Nasdaq requirements, except for certain matters such as
composition and responsibilities of the audit committee and the independence of its
members. We plan to follow the Companies Law, the relevant provisions of which are
summarized in this Annual Report, rather than comply with the Nasdaq requirements relating
to the quorum for shareholder meetings, shareholder approval with respect to issuance of
securities [and equity compensation plans] and sending annual reports to shareholders.

According
to the Companies Law and our articles of association, the oversight of the management of
our business is vested in our board of directors. The board of directors may exercise all
powers and may take all actions that are not specifically granted to our shareholders. As
part of its powers, our board of directors may cause us to borrow or secure payment of any
sum or sums of money for our purposes, at times and upon terms and conditions as it deems
fit, including the grant of security interests in all or any part of our property. Our
articles of association provide for a board of directors of not less than three and not
more than ten directors. Each director is elected at the annual general meeting of
shareholders and holds office until the election of his successor at the next annual
general meeting, except for external directors, who, subject to the provisions of the
Companies Law, hold office for one or two three-year terms. In addition, any vacancy on
the board of directors, however occurring, including a vacancy resulting from an
enlargement of the board of directors, may be filled by a vote of a simple majority of the
directors then in office. A director elected thereby may serve on the board of directors
until the next annual general meeting. Our officers serve at the discretion of the board
of directors. There are no family relationships among our directors and executive
officers.

According
to the Companies Law, a public companys chairman of the board may not serve as its
chief executive officer, unless otherwise approved by the shareholders for periods of up
to three years. The required shareholder approval is a majority of the shares voted on the
matter, including at least two-thirds of the shares of non-controlling shareholders voted
on the matter, unless the votes of the opposing non-controlling shareholders constitute
less than 1% of the voting power of the company (in which case a simple majority of shares
voted on the matter will be sufficient). Barry Shaked, one of our founders, has served as
our president, chief executive officer and chairman of the board since our inception in
1982. His most recently approved three-year period expires in 2010. Nevertheless, in
December 2007, Mr. Shaked undertook to separate the positions of Chairman and Chief
Executive Officer by the end of 2008. In March 2008, in his capacity as a shareholder, Mr.
Shaked agreed to allow Ronex, a major shareholder, to designate the Chairman of the Board.

Under
the Companies Law, our board of directors must determine the minimum number of directors
having financial and accounting expertise, as defined in the regulations that our board of
directors should have. In determining the number of directors required to have such
expertise, the board of directors must consider, among other things, the type and size of
the company and the scope and complexity of its operations. Our board of directors has
determined that we require at least one director with the requisite financial and
accounting expertise and that Brian Cooper and David Bresler have such expertise.

The
Companies Law and Nasdaq listing requirements require us to appoint an audit committee of
the board of directors and permit the creation of other committees. Currently, the audit
committee, the compensation committee and the investment committee are our only board
committees.

The board of directors has determined
that all of the members of our board of directors except Mr. Shaked are independent
directors, as defined under the rules of Nasdaq.

Alternate Directors

Our
articles of association provide that any director may appoint, by written notice to the
Company, an alternative director for himself, provided that such person meets the
qualifications of a director under the Companies Law. A person may not act as an alternate
director for more than one director, and a person serving as a director may not serve as
an alternate director. Notwithstanding the foregoing, a member of the board of directors
may be appointed as an alternate member of any committee of our board of directors,
provided that such alternate member is not already a member of such committee. Any
alternate director shall have all of the rights and obligations of the director appointing
him or her, except the power to appoint an alternate. The alternate director may not act
at any meeting at which the director appointing him or her is present. Unless the time
period or scope of any such appointment is limited by the appointing director, such
appointment is effective for all purposes and for an indefinite time, but expires upon the
expiration of the appointing directors term. To our knowledge, no director currently
intends to appoint any person as an alternate director, except if the director is unable
to attend a meeting of the board of directors.

55

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External Directors

Under
the Companies Law, companies incorporated under the laws of Israel whose shares have been
offered to the public in or outside of Israel are required to appoint at least two
individuals as external directors. External directors are required to possess professional
qualifications as set out in regulations promulgated under the Companies Law. Any
individual who is eligible to be appointed as a director may be appointed as an external
director, provided that such person, or the persons relative, partner, employer or
any entity under the persons control does not have at the date of appointment, or
has not had during the two years preceding the date of appointment, any affiliation with:

| |  | the
company;
| | - | ------------

| |  | any
person or entity controlling the company at the time of appointment; or
| | - | ---------------------------------------------------------------------------

| |  | any
entity controlled by the company or by its controlling entity on the date of the
appointment or during the two years preceding such date.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

The
term affiliation means any of:

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

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

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

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

No
person can serve as an external director if the persons position or other business
creates or may create a conflict of interest with the persons responsibilities as an
external director, or if it may adversely affect his ability to serve as a director. Until
the lapse of two years from termination of office, a company may not engage an external
director to serve as an office holder, employee or service provider, either directly or
indirectly, including through a corporation controlled by that person.

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

| |  | the
majority of shares voted on the matter, including at least one-third of the shares of
non-controlling shareholders voted on the matter, vote in favor of election; or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
total number of shares of non-controlling shareholders that 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 external director is three years and such director may be reappointed
for one additional three-year term. Thereafter, he or she may be reelected by our
shareholders for additional periods of up to three years each only if the audit committee
and the board of directors confirm that, in light of the external directors
expertise and special contribution to the work of the board of directors and its
committees, the reelection for such additional period is beneficial to the Company. Each
committee of a companys board of directors that is authorized to carry out a power
of the board of directors is required to include at least one external director. Our
external directors are David Bresler and Louis Berman.

An
external director is entitled to compensation as provided in regulations under the
Companies Law and is otherwise prohibited from receiving any other compensation, directly
or indirectly from us. We do not have, nor do our subsidiaries have, any directors
service contracts granting to the directors any benefits upon termination of their service
in their capacity as directors, except for Mr. Shaked who would be entitled to
certain benefits upon termination of his agreement with us as described above in
Item 6BCompensation.

Audit Committee

Under
the Companies Law, the board of directors of a public company must appoint an audit
committee, comprised of at least three directors, including all of the external directors,
but excluding the chairman of the board of directors and a controlling shareholder or a
relative of a controlling shareholder and any director employed by the company or who
provides services to the company on a regular basis. The role of the audit committee under
Israeli law is to examine irregularities in the management of the companys business,
including by consultation with the internal auditor and the companys independent
accountants, and recommend remedial action. In addition, the approval of the audit
committee is required to effect certain related party transactions.

56

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Under
the Companies Law, an audit committee may not approve an action or a transaction with a
related party or with an office holder unless at the time of approval the two external
directors are serving as members of the audit committee and at least one of the external
directors was present at the meeting in which any approval was granted.

Under
the Nasdaq rules, our audit committee, operating under a written charter, assists the
board of directors in fulfilling its responsibility for oversight of the quality and
integrity of our accounting, auditing and financial reporting practices and financial
statements and the independence qualifications and performance of our independent
registered public accounting firm. Our audit committee also has the authority and
responsibility to oversee our independent auditors, to recommend for shareholder approval
the appointment and, where appropriate, replacement of our independent auditors and to
pre-approve audit engagement fees and all permitted non-audit services and fees. Under
Israeli law, our shareholders have the authority to appoint and remove our independent
auditors. Our audit committee also serves as our nominations committee under the Nasdaq
rules and, until March 18, 2008, it served as our compensation committee, as well.

The members of our audit committee
are David Bresler (Chairman), Louis Berman, Amnon Lipkin-Shahak and Ian OReilly, all
of whom qualify for such membership pursuant to the applicable rules of the SEC and
Nasdaq. Our board of directors has determined that Mr. David Bresler is an audit
committee financial expert.

Investment Committee

On
February 11, 2004, our board of directors established an investment committee. The
investment committee is authorized to determine policies with respect to investing our
financial reserves based on prevailing financial and economic conditions and our ongoing
needs. The members of our investment committee are Gillon Beck and Brian Cooper.

Compensation Committee

On March 18, 2008, our board of
directors established a compensation committee, operating under a written charter, for the
purpose of: (1) granting of stock options and awards under equity incentive plans and
administration of said plans, subject to the guidelines set by the board of directors from
time to time; (2) approval of the compensation of the chief executive officer and officers
that report directly to the chief executive officer, subject to approvals required under
the Companies Law; and (3) approval and recommendation of broad-based bonuses to
employees. The members of our compensation committee are Brian Cooper (Chairman), Ishay
Davidi and David Bresler.

Internal Auditor

Under
the Companies Law, our board of directors must appoint an internal auditor proposed by the
audit committee. The role of the internal auditor is to examine whether the companys
actions comply with the law, integrity and orderly business procedure. The internal
auditor has the right to request that the chairman of the audit committee convene an audit
committee meeting, and the latter shall convene such a meeting if he believes that there
are grounds to do so. The internal auditor may participate in all audit committee
meetings. Under the Companies Law, the internal auditor may not be an interested party, an
office holder, or a relative of either, nor may the internal auditor be the companys
independent accountant or its representative. The internal auditor may not be dismissed
without the approval of the board of directors after it has received the position of the
audit committee and after the internal auditor has been given a reasonable opportunity to
be heard by the board of directors and the audit committee. Our internal auditor is Pahn
Kanne Management and Control Ltd. (an affiliate of Grant Thornton).

# D. Employees

Set
forth are tables presenting breakdowns of the total amount our employees according to
category of activity and according to main geographical locations of employment:

| |                            | As of December 31,
| | -------------------------- | ------------------
|
|
|
|
| | Research and Development   |                   
| | Operations                 |                   
| | Marketing                  |                   
| | Finance and Administration |                   
| |                            |                   
| | Total                      |                   
| |                            |                   

| |                   |  | As of December 31,
| | ----------------- |  | ------------------
|
|
|
|
| | United States     |  |                   
| | Israel            |  |                   
| | Europe            |  |                   
| | Rest of The World |  |                   
| |                   |  |                   
| | Total             |  |                   
| |                   |  |                   

57

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We
believe that we have been able to attract talented engineering and other technical
personnel. None of our employees is represented by a labor union and we have not
experienced a work stoppage. We believe that our relationship with our employees is good
and that our future success will depend on a continuing ability to hire, assimilate and
retain qualified employees.

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 Associations, are applicable to our employees by order of the
Israeli Ministry of Labor and Welfare. These provisions principally concern cost of living
increases, recreation pay and other conditions of employment.

Israeli
labor laws and regulations are applicable to all of our employees in Israel. The laws
principally concern matters such as paid annual vacation, paid sick days, the length of
the workday, payment for overtime, insurance for work-related accidents, severance pay and
other conditions of employment. Israeli law generally requires severance pay, which may be
funded, in whole or in part, by Managers Insurance described below, in certain
circumstances, including the retirement or death of an employee or termination of
employment without cause, as defined under Israeli law. The payments to Managers
Insurance in respect of severance obligations amount to approximately 8.3% of wages.
Furthermore, Israeli employees are required to pay predetermined sums to the National
Insurance Institute. The payments to the National Insurance Institute are approximately
 17.5%  of wages of which the employee contributes approximately 12% and the
employer contributes approximately 5.5%.

We
contribute amounts on behalf of most of our employees to funds known as Managers
Insurance and/or pension funds. Each employee who agrees to participate in such funds
contributes an amount equal to 5% of such employees base salary and the employer
contributes approximately 15% of such salary, which 15% includes the 8.3% for severance
pay.

# E. Share Ownership

Mr.
          Barry Shaked, our President, Chief Executive Officer and Chairman of our board
          of directors, beneficially owns, as of March 3, 2008, 1,404,806 of our ordinary
          shares (including 371,327 shares issuable upon exercise of options exercisable
          on or within 60 days of that date), which equals approximately 6.9% of our
          outstanding shares.

Mr.
          Brian Cooper, a director and our former Vice President, beneficially owns, as
of           March 3, 2008, 751,485 of our ordinary shares, which equals approximately
3.7%           of our outstanding shares.

Our
directors Messrs. Ishay Davidi and Gillon Beck, by virtue of their positions as officers
and directors of various FIMI private equity funds may be deemed to beneficially own the
2,353,085 ordinary shares held by Ronex as of March 3, 2008, representing approximately
11.6% of our outstanding shares.

In
addition, by virtue of the Shareholders Agreement, dated March 3, 2008, among Ronex, Barry
Shaked and Brian Cooper, the foregoing four directors may be deemed to beneficially own
all the 4,509,376 ordinary shares held, as of March 3, 2008, by all the parties to such
Shareholders Agreement, representing approximately 21.9% of our outstanding shares
(assuming the exercise of Mr. Shakeds options referenced above). Each party to the
Shareholders Agreement has disclaimed beneficial ownership of shares held by any other
party. To our knowledge, no other director or executive officer beneficially owns 1% or
more of our issued share capital.

In
addition, as of March 3, 2008, Mr. Shaked held options to purchase a total of up to
766,796 of our ordinary shares granted to him on January 1, 2005, January 1, 2006, January
1, 2007 and January 1, 2008 pursuant to a shareholders resolution dated May 28, 1998,
authorizing the grant to him, on January 1 of each year, of options to purchase one
percent of our issued capital. The exercise price for each share according to this
resolution is the Nasdaq closing price on December 31 of the year ending just before the
date of grant. These options have a term of four years from the date of grant and are
exercisable as follows: 33%  starting one year following the date of grant; 33%
 starting two years following the date of grant; and 34%  starting three years
following the date of grant.

The
above options held by Mr. Shaked were granted on the following principal terms:

|Amount of Shares for
which the Options are
Exercisable | Exercise Price
in U.S.
dollars | Expiration Date
|------------------------------------------------------ | ------------------------------ | ---------------
|
|
|
|
|176,557                                                | 21.86                          | January 1, 2009
|194,090                                                | 24.46                          | January 1, 2010
|196,135                                                | 16.29                          | January 1, 2011
|200,014                                                | 15.58                          | January 1, 2012

As
of  June 20, 2008, other directors and executive officers held options and RSUs to
purchase a total of up to 404,500 of our ordinary shares under our Second 1998 Share
Option Plan and the 2004 Israeli Share Option Plan (which are described below), as
follows:

58

---

---

Options
to purchase 65,000 of our ordinary shares at an exercise price of $18.56 per share. All of
the Options are fully vested. The expiration date of these options is June 30, 2008.

Options
to purchase 42,000 of our ordinary shares at an exercise price of $23.02 per share.
Options to purchase 32,667 shares of these options are fully vested, and the remaining
amount will vest on December 31, 2008. The expiration date of these options is June 30,
2009.

Options
to purchase 155,000 of our ordinary shares at an exercise price of $15.55 per share.
Options to purchase 51,667 shares of these options are fully vested, and the remaining
amount will vest in two equal portions on August 1,2008 and August 1, 2009.. The
expiration date of these options is August 1, 2010.

Options
to purchase 100,000 of our ordinary shares at an exercise price of $18.54 per share. These
Options will vest in three equal portions on November 20, 2008 , November 20, 2009 and
November 20, 2010. The expiration date of these options is November 20, 2011. RSUs
to purchase 30,000 of our ordinary shares at an exercise price of $0.25 per share.These
RSUs will vest in three equal portions on November 20, 2008 , November 20, 2009 and
November 20, 2010

RSUs
to purchase 12,500 of our ordinary shares at an exercise price of $0.25 per share.These
RSUs will vest in three equal portions on January 9, 2009 , January 9, 2010 and
January 9, 2011.

# Our Share Option Plans

# Second 1998 Share Option
Plan

Our
Second 1998 Share Option Plan, or Second 1998 Plan provides for the granting of incentive
share options to employees, and for the granting of non-statutory options to employees,
directors and consultants. Unless terminated sooner or extended, the Second 1998 Plan will
terminate automatically in May 2012. As of June 20, 2008, options to purchase
6,229,110 ordinary shares have been granted under the Second 1998 Plan, of which 3,300,470
options have been exercised, 1,219,707 options were forfeited and 1,708,933 options shares
were outstanding. The options generally vest over a period of three years and have
exercise prices ranging from $8.75 to $26.00.

The
Second 1998 Plan is administered by our compensation committee, subject to guidelines
determined by our board of directors pursuant to applicable law. The compensation
committee will, in the case of options intended to qualify as performance-based
compensation within the meaning of Section 162(m) of the U.S. Internal Revenue
Code, or the code, consist of two or more outside directors within the meaning
of Section 162(m) of the Code. The committee has the power to determine the terms of
the options granted, including the exercise price, the number of shares subject to each
option, the exercisability of the option and the form of consideration payable upon such
exercise, subject to applicable law. Our board of directors has the authority to amend,
suspend or terminate the Second 1998 Plan, provided that no such action may affect any
ordinary share previously issued and sold or any option previously granted under the
Second 1998 Plan.

Options
granted under our Second 1998 Plan are not generally transferable by the optionee, and
each option is exercisable during the lifetime of the optionee only by such optionee.
Options granted under the Second 1998 Plan must generally be exercised within three months
of the end of the optionees status as our employee or consultant or within twelve
months after such optionees termination by death or disability, but in no event
later than the expiration of the options term. The exercise price of all incentive
and nonstatutory share options granted under the Second 1998 Plan must be at least equal
to the fair market value of our ordinary shares on the date of grant, except in the event
of options granted in connection with certain merger and acquisition transactions. With
respect to any participant who owns shares possessing more than 10% of the voting power of
all classes of our outstanding share capital, the exercise price of any incentive share
option granted must equal at least 110% of the fair market value on the grant date and the
term of such incentive share option must not exceed five years. The term of all other
options granted under the Second 1998 Plan may not exceed ten years. Some holders of share
options granted under the Second 1998 Plan are entitled to participate in rights offerings
that may be made by us to our shareholders.

Our
Second 1998 Plan provides that in the event we merge with or into another corporation or
sale of substantially all of our assets, each outstanding option will be assumed or an
equivalent option will be substituted by the successor corporation. If the successor
corporation refuses to assume or substitute for our options as described in the preceding
sentence, the options will terminate as of the closing.

On
November 19, 2007 our Board of Directors amended the Second 1998 Plan to enable the
granting of restricted stock units, or RSUs, under such plan. RSUs are rights to receive
our ordinary shares, under certain conditions, for consideration of no more than the
underlying ordinary shares par value. The other terms and conditions of the Second
1998 Plan that are applicable to options also apply to RSUs, where applicable. As of
December 31, 2007, RSUs that may vest into 275,000 ordinary shares have been granted under
the Second 1998 Plan, all of which remain outstanding. The RSUs generally vest over a
period of three years.

59

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In
addition, on November 19, 2007 our Board of Directors increased the pool of authorized
ordinary shares reserved for grant of awards under the Second 1998 Plan to 7,000,000
ordinary shares. As of December 31, 2007, 1,990,597ordinary shares remain available for
future grants of Options or RSUs under said plan.

# 2004 Israeli Share
Option Plan

Our
2004 Israeli Share Option Plan provides for the granting of options to employees,
directors and consultants under either Section 102 or Section 3(9) of the Israeli Income
Tax Ordinance [New Version], 1961, or the Tax Ordinance. The options granted under our
2004 Israeli Share Option Plan are all subject to the capital gains taxation
route under Section 102 of the Tax Ordinance which generally provides for a reduced
tax rate of 25% on gains realized upon the exercise of options and sale of underlying
shares, subject to the fulfillment of certain procedures and conditions including the
deposit of such options (or shares issued upon their exercise) for a requisite period of
time with a trustee approved by the Israeli tax authorities. For as long as the shares
issued upon exercise of such options are registered in the name of the trustee, the voting
rights with respect to such shares shall remain with the trustee. Under the capital
gains taxation route, we are generally not entitled to recognize a deduction for
Israeli tax purposes on the gain recognized by the employee upon sale of the shares
underlying the options. As of December 31, 2007, 1,859,000 options to purchase ordinary
shares and RSUs were granted under the 2004 Israeli Share Option Plan, of which 75,711
have been exercised, 212,884 were forfeited and 1,570,405 remained outstanding. The
options and RSUs generally vest over a period of three years and have exercise prices
ranging from $0.25 (nominal RSUs exercise price) to $23.02.

The
2004 Israeli Share Option Plan is administered by our compensation committee, subject to
guidelines determined by our board of directors pursuant to applicable law. The
compensation committee has the power to determine the terms of the options granted,
including the exercise price, the number of shares subject to each option, the
exercisability of the option and the form of consideration payable upon such exercise,
subject to applicable law. In the event of a merger or sale of substantially all of our
assets or stock, our board of directors or compensation committee has discretion as to
whether to cause outstanding options to be assumed by the successor company, substituted
for successor company options or automatically vested in full. Subject to applicable law
and regulations, our board of directors has the authority to amend, suspend or terminate
the 2004 Israeli Share Option Plan, provided that no such action may affect any ordinary
share previously issued and sold or any option previously granted under the plan.

Options
granted under our 2004 Israeli Share Option Plan are not generally transferable by the
optionee, and each option is exercisable during the lifetime of the optionee only by such
optionee. Options granted under the 2004 Israeli Share Option Plan may generally be
exercised by the grantee in circumstances of termination by the grantee until the
termination date and in certain circumstances in which the termination was initiated by
the employer, within a period of fifteen days following termination, or within six months
after such optionees termination by death or disability, but in no event later than
the expiration of the options term and all to the extent that such options are
vested at such dates. The term of other options granted under the 2004 Israeli Share
Option Plan may not exceed ten years.

On
November 19, 2007 our Board of Directors amended the 2004 Israeli Share Option Plan to
enable the granting of RSUs. The terms and conditions of the 2004 Israeli Share Option
Plan that are applicable to options also generally apply to RSUs, where applicable. As of
December 2007, RSUs that may vest into 275,000 ordinary shares have been granted under the
2004 Israeli Share Option Plan, all of which remain outstanding. The RSUs generally vest
over a period of three years. All such RSUs are subject to the capital gains
taxation route under Section 102 of the Tax Ordinance which may under certain
conditions provide for a reduced tax rate of 25% on gains realized upon sale of underlying
shares but only with respect to gains reflecting the increase in our ordinary share price
from the date of grant onward (other gains will be subject to full marginal tax rates of
the grantee, for which we may recognize a deduction for Israeli tax purposes).

As
of December 31, 2007, 353,884 ordinary shares remain available for future grants of
Options or RSUs under the 2004 Israeli Share Option Plan.

# Stock Option Plan of
Subsidiaries

On
December 4, 2000, the board of directors of one of our subsidiaries,
StoreAlliance.com Ltd., approved an employee stock option plan. Pursuant to this
subsidiary plan, as of December 31, 2007, 233,922 ordinary shares, or approximately 6.6%
of the issued and outstanding share capital of the subsidiary as of such date, are
reserved for issuance upon the exercise of options granted to some of our and the
subsidiarys employees. The options vest as follows: 33.33% after the first year
after their grant, another 33.33% after the second year and another 33.33% after the third
year, but only during the period the employee is employed either by us or by the
subsidiary. In addition, the options are not exercisable prior to the earliest of the
following events: (1) the consummation of a public offering of the subsidiarys
securities, (2) a merger or acquisition of the subsidiary, or (3) the lapse of
seven years from the date of grant. Any vested options not exercised within the later of
90 days of (a) the end of the optionees status as our or the
subsidiarys employee, or (b) the first to occur of such exerciseability events,
will expire. The rights of ordinary shares obtained upon exercise of the options will be
identical to those of the other ordinary shares of the subsidiary. Any option not
exercised within 10 years of the grant date thereof will expire. Some of the options
under this subsidiary plan are subject to the terms stipulated by Section 102 of the
Tax Ordinance (as in effect prior to January 1, 2003). Among other things, the Section 102
to the Tax Ordinance provides that the subsidiary will be allowed to claim as an expense
for tax purposes the amounts credited to the employees as a benefit, when the related tax
is payable by the employee.

60

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On
November 23, 2004, the board of directors of StoreAlliance.com Ltd. approved an
additional employee stock option plan. Pursuant to this Plan, options to purchase 36,000
ordinary shares, NIS 0.01 par value, were granted on December 31, 2004, to certain
employees of the subsidiary all subject to the capital gains taxation route
under Section 102 of the Tax Ordinance. All options granted under this plan bear an
exercise price of $5.55 per share and vest as follows: 33.33% after the first year,
another 33.33% after the second year and another 33.33% after the third year (in cases
where the optionee is an employee of Retalix or its subsidiary  provided that the
employee is still employed by Retalix or its subsidiary at the date of vesting). In
addition, the options are not exercisable prior to: (1) the consummation of an initial
public offering of the subsidiarys securities; (2) a merger of the subsidiary; or
(3) seven years from the date of grant.

As
of December 31, 2007, options to purchase 262,255 ordinary shares of the subsidiary were
outstanding under the above subsidiary employee plans, at exercise prices ranging from
NIS0.01 per share to $5.55 per share. The rest of the above options were forfeited.

In December 2004, the board of
directors of our subsidiary StoreNext USA approved an employee stock option plan. Pursuant
to this plan, options to purchase up to 1,500,000 shares of StoreNext USA may be granted
to employees and service providers of the subsidiary or any affiliate. The options are
generally subject to vesting after seven years of service, subject to acceleration upon
the occurrence of certain events, such as (1) the conversion of StoreNext USA from a
limited liability company to a C-corporation, (2) the consummation of an initial public
offering of StoreNext USAs securities or (3) a change of control in StoreNext USA
(as defined in the option plan).   The options expire ten years from
grant.  On December 14, 2004, StoreNext USA granted options to acquire 1,169,000 of
its shares to its employees and directors. These options bear an exercise price of $0.3748
per share, which reflects the market value according to an independent valuation. In
addition, on July 31, 2006 additional options to acquire 84,000 of StoreNext USA shares
were granted to its employees at an exercise price of $0.9422 a share, which reflects the
market value according to the managements valuation. Through February 28, 2008,
51,500 of these options were forfeited.

Although
Nasdaq rules generally require shareholders approval of equity compensation plans
and material amendments thereto, we follow Israeli practice, which is to have such plans
and amendments approved only by the board of directors.

# ITEM 7  MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

# A. Major Shareholders

The
following table sets forth, as of June 20, 2008, certain information known to us with
respect to beneficial ownership of our ordinary shares by (1) each shareholder known by us
to be the beneficial owner of five percent or more of our ordinary shares and (2) all of
our executive officers and directors as a group. As of June 20, 2008, 20,228,332 of our
ordinary shares were outstanding.

|Name                                       | Number ofordinaryshares held | Percentageofoutstandingordinaryshares(1)(2)
|------------------------------------------ | ---------------------------- | -------------------------------------------
|
|
|
|
|Ronex Holdings, Limited Partnership (3)(5) |                              |                                            
|Prisma Investment House Ltd. (4)           |                              |                                            
|Barry Shaked (5)(6)                        |                              |                                            
|Brian Cooper (5)                           |                              |                                            

|(1) | Unless
otherwise indicated, each person named or included in the group has sole
               power to vote and sole power to direct the disposition of all shares
listed as                beneficially owned.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Amounts
include shares that are not currently outstanding but are deemed
               beneficially owned because of the right to purchase them pursuant to
options                exercisable on June 20, 2008, or within 60 days thereafter.
Pursuant to SEC                rules, shares deemed beneficially owned by virtue of an
individuals right                to purchase them are also treated as outstanding
when calculating the percent of                the class owned by such individual and
when determining the percent owned by any                group in which the individual is
included.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | This
information is based solely on Schedule 13G/A filed with the SEC by Ronex
               Holdings, Limited partnership, and various affiliated FIMI private equity
funds                on March 3, 2008, and relates to their holdings of our shares as of
March 3,                2008. Based on the information provided in such Schedule 13G/A,
the relevant                members of the group are: Mr. Barry Shaked, Mr. Brian Cooper
(Shaked and Cooper                are referred to as the Founders, and their address is:
c/o Retalix Ltd. 10                Zarhin Street, Raanana 43000, Israel) Ronex
Holdings Ltd., FIMI                Opportunity 2005 Ltd., FIMI IV 2007 Ltd., FIMI Israel
Opportunity Fund II,                Limited Partnership, FIMI Opportunity II Fund, L.P.,
FIMI Israel Opportunity IV,                Limited Partnership, and FIMI Opportunity IV,
L.P. The address of the FIMI                entities is: c/o FIMI IV 2007 Ltd.,
Rubinstein House, 37 Begin Road, Tel Aviv,                Israel. The respective shared
voting power of the entire group is: 4,509,376                shares.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

61

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|(4) | This
information is based solely on Schedule 13/D filed with the SEC by Prisma
               Investment House Ltd., on February 14, 2008, and relates to their holdings
of                our shares as of February 10, 2008.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Pursuant
to the Shareholders Agreement, dated March 3, 2008, among Ronex, Barry
               Shaked and Brian Cooper, the parties agreed, among other things, to vote
their                respective ordinary shares for the election to our board of
directors of four                directors designated by Ronex and four directors
designated by Messrs. Shaked                and Cooper and two external directors, one of
whom to be designated by Ronex and                the other to be designated by Messrs.
Shaked and Cooper. They also agreed to                allow Ronex to designate the
Chairman of the Board, subject to certain                conditions. The parties to the
Shareholders Agreement agreed to meet prior to                each general meeting of
shareholders and to attempt to reach a unified position                with respect to
principal issues on the agenda of each such meeting. The parties                agreed to
vote against any proposed changes to our articles of association which
               will conflict with the provisions of the Shareholders Agreement. The
               Shareholders Agreement also contains tag-along and bring-along rights. The
               foregoing is based upon the Schedule 13D/A filed by the parties on March
3,                2008. By virtue of the Shareholders Agreement, each of parties thereto
may be                deemed to beneficially own all the 4,509,376 ordinary shares held,
as of March                3, 2008, by all such parties, representing approximately 21.9%
of our                outstanding shares (assuming the exercise of Mr. Shakeds
options                referenced in footnote 6 below). Each party to the Shareholders
Agreement has                disclaimed beneficial ownership of shares held by any other
party.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Includes
options to purchase up to 371,327 shares, held by Mr. Shaked, directly                or
indirectly, that were exercisable on March 3, 2008 or within 60 days
               thereafter.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Except
as set forth in footnote 5 above, no major shareholders have any different voting rights.

As
of June 5, 2008, 7,587,772 of our ordinary shares were held in the United States, by five
record holders with mailing addresses in the United States, owning an aggregate of
approximately 38% of our outstanding ordinary shares. The number of record holders in the
United States is not representative of the number of beneficial holders nor is it
representative of where such beneficial holders are resident since many of these ordinary
shares were held of record by brokers or other nominees.

# B. Related Party
Transactions

We
are not party to any related party transactions. Certain of our shareholders have entered
into a shareholders agreement, as described above.

# C. Interests of Experts
and Counsel

Not
Applicable.

# ITEM 8  FINANCIAL INFORMATION

See
Item 18.

Legal Proceedings

Retail Control Systems
Inc.

Prior
to the acquisition of Retail Control Systems Inc., or RCS, a legal claim was filed against
RCS in the Circuit Court of the Seventeenth Judicial Circuit, County of Winnebago,
Illinois, by a dealer who sold one of RCSs products early in 1994, and claims that
RCS promised features and enhancements were never delivered. The damages claimed in this
suit are in amount of $569,000.

The
claim is covered and handled by RCSs errors and omissions insurers. The limit of
liability under the relevant errors and omissions insurance policy was $1,000,000 per
claim and in aggregate. We believe that RCS has meritorious defenses against
this claim and that it will not result in any material expense.

62

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IDS

In
June 2006, a customer in the U.S, or the customer, filed in the District Court of Madison
County, Nebraska, a complaint against our subsidiary, Retalix USA Inc., or Retalix USA,
and IDS, in which it asserts claims for misrepresentation and concealment, breach of
contract and breach of warranties arising from its contract with IDS. In August, 2006, the
action was removed to the U.S. District Court for the District of Nebraska, and IDS filed
a motion to compel arbitration and Retalix USA filed a motion to dismiss the complaint on
various grounds. The customer opposed both motions. In October 2006, however, the court
granted IDSs motion to compel arbitration and reserved judgment on Retalix
USAs motion to dismiss the complaint and stayed the federal action, all pending the
outcome of any arbitration. In February 2007, Retalix USA filed a Demand for Arbitration
against the customer with the American Arbitration Association, seeking to recover
damages, interest and attorneys fees together in excess of $2.3 million from the
customer for failing to pay for products delivered and services rendered as well as other
misconduct. In February 2007, the customer filed a Counterclaim and Demand for Arbitration
seeking to recover damages, interest, taxable arbitration costs and attorneys fees
in excess of $9.9 million for breach of contract, breach of warranties and other
misconduct. On August 30, 2007 the arbitrators approved a preliminary hearing scheduling
order, according to which the parties exchanged discovery requests, written responses and
documents. On November 1, 2007, the customer filed a statement of damages alleging total
damages in excess of $22,000,000. The arbitration is currently scheduled to November 2008,
in Omaha, Nebraska. Retalix USA intends to vigorously pursue its claims and to contest the
counterclaims asserted in the arbitration proceeding, and it has asserted its
indemnification rights against IDS.

Retalix USA

In
March 2007, a customer in the U.S., filed in the District Court of El Paso County, Texas,
a complaint against Retalix USA Inc., seeking actual and consequential damages in excess
of $270,000 and in addition, other damages totaling three times the actual damages, as
well as attorneys fees, expenses and interest for breach of contract, breach of
warranty and other misconducts. In April 2007 Retalix USA filed its Original Answer and
counterclaim against the customer for breach of contract, pursuant to which Retalix USA
seeks $ 214,000 plus interest and attorneys fees for breach of contract.

Tamar

In
September, 2006, a former employee of one of our Israeli subsidiaries  Tamar, who
was employed by said subsidiary prior to its acquisition by us, submitted in the
magistrates court in Kfar Saba a claim against the subsidiary according to which one of
the former managers of the subsidiary allegedly treated him harshly, which caused the
plaintiff severe mental damage and disability. The damages claimed under this claim total
$350,000.

Other Claims and Disputes

The
Company and its subsidiaries are also parties to several other claims filed against them
totaling approximately $167,000. In addition, the Company and its subsidiaries are parties
to several disputes with former or current customers and service providers. These
disputes, estimated at a total of $618,000, have not materialized to court claims and some
of them are in mediation process.

Dividend Policy

Since
1995, we have not paid cash dividends on our ordinary shares, and we do not intend to pay
cash dividends in the foreseeable future. Our board of directors is authorized to declare
dividends, subject to applicable law. Dividends may be paid only out of profits and other
surplus, as defined in the Companies Law, as of the end of the most recent financial
statements or as accrued over a period of two years, whichever is higher. Alternatively,
if we do not have sufficient profits or other surplus, then permission to effect a
distribution can be granted by order of an Israeli court. In any event, a distribution is
permitted only if there is no reasonable concern that the dividend will prevent us from
satisfying our existing and foreseeable obligations as they become due. Under current
Israeli regulations, any cash dividend in Israeli currency paid in respect of ordinary
shares purchased by non-residents of Israel with non-Israeli currency may be freely
repatriated in such non-Israeli currency. The Shareholders Agreement dated as of March 3,
2008 states that it is the view of the parties thereto that, subject to applicable law, we
should distribute as a dividend of at least 30% our annual net income, commencing with
calendar year 2008. Our board of directors has not yet considered such a dividend policy.

Significant
Changes

Except
as described elsewhere in this annual report, no significant change has occurred since the
date of the annual financial statements included in this annual report.

# ITEM 9  THE OFFER
AND LISTING

# A. Offer and Listing
Details

Our
ordinary shares have been quoted on the Nasdaq Global Select Market (formerly known as the
Nasdaq National Market) under the symbol RTLX since July 1998. Our ordinary
shares have also been quoted on the Tel Aviv Stock Exchange since November 1994.

63

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The
following table sets forth, for the periods indicated, the high and low market prices of
our ordinary shares, as reported on the Nasdaq Global Select Market.

|                                 | High | Low
|-------------------------------- | ---- | ---
|
|
|
|
|2003                             |      |    
|                                 |      |    
|2004                             |      |    
|                                 |      |    
|2005                             |      |    
|                                 |      |    
|2006                             |      |    
|                                 |      |    
|2007                             |      |    
|                                 |      |    
|2006:                            |      |    
|                                 |      |    
|First Quarter                    |      |    
|                                 |      |    
|Second Quarter                   |      |    
|                                 |      |    
|Third Quarter                    |      |    
|                                 |      |    
|Fourth Quarter                   |      |    
|                                 |      |    
|2007:                            |      |    
|                                 |      |    
|First Quarter                    |      |    
|                                 |      |    
|Second Quarter                   |      |    
|                                 |      |    
|Third Quarter                    |      |    
|                                 |      |    
|Fourth Quarter                   |      |    
|                                 |      |    
|2008:                            |      |    
|                                 |      |    
|First Quarter                    |      |    
|                                 |      |    
|Most recent six months:          |      |    
|                                 |      |    
|December 2007                    |      |    
|                                 |      |    
|January 2008                     |      |    
|                                 |      |    
|February 2008                    |      |    
|                                 |      |    
|March 2008                       |      |    
|                                 |      |    
|April 2008                       |      |    
|                                 |      |    
|May 2008                         |      |    
|                                 |      |    
|June 2008, through June 26, 2008 |      |    

On June 27, 2008, the last reported
sale price of our ordinary shares on the Nasdaq Global Select Market was $13.11 per share.

64

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The following table sets forth, for
the periods indicated, the high and low market prices in NIS, of our ordinary shares on
the Tel Aviv Stock Exchange.

|                                 | High | Low
|-------------------------------- | ---- | ---
|
|
|
|
|2003                             |      |    
|                                 |      |    
|2004                             |      |    
|                                 |      |    
|2005                             |      |    
|                                 |      |    
|2006                             |      |    
|                                 |      |    
|2007                             |      |    
|                                 |      |    
|2006:                            |      |    
|                                 |      |    
|First Quarter                    |      |    
|                                 |      |    
|Second Quarter                   |      |    
|                                 |      |    
|Third Quarter                    |      |    
|                                 |      |    
|Fourth Quarter                   |      |    
|                                 |      |    
|2007:                            |      |    
|                                 |      |    
|First Quarter                    |      |    
|                                 |      |    
|Second Quarter                   |      |    
|                                 |      |    
|Third Quarter                    |      |    
|                                 |      |    
|Fourth Quarter                   |      |    
|                                 |      |    
|2008:                            |      |    
|                                 |      |    
|First Quarter                    |      |    
|                                 |      |    
|Most recent six months:          |      |    
|                                 |      |    
|December 2007                    |      |    
|                                 |      |    
|January 2008                     |      |    
|                                 |      |    
|February 2008                    |      |    
|                                 |      |    
|March 2008                       |      |    
|                                 |      |    
|April 2008                       |      |    
|                                 |      |    
|May 2008                         |      |    
|                                 |      |    
|June 2008, through June 26, 2008 |      |    

On June 26, 2008, the last reported
sale price of our ordinary shares on the Tel Aviv Stock Exchange was NIS 44.31 per share.

65

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# B. Plan of Distribution

Not
applicable.

# C. Markets

Our
ordinary shares are quoted on the Nasdaq Global Select Market under the symbol
RTLX, and are quoted on the Tel Aviv Stock Exchange under the symbol
RETALIX.

# 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
memorandum of association and articles of association were last amended December 27, 2007.
The following is a summary description of certain provisions of our amended memorandum of
association and articles of association, and certain relevant provisions of the Israel
Companies Law which apply to us:

We
were first registered with the Israeli Registrar of Companies on March 5, 1982, as a
private company. On November 7, 1994, we became a public company, and were assigned Public
Company Number 520042029.

# Objects and Purposes

Our
objects and purposes include a wide variety of business purposes, and are set forth in
detail in Section 2 of our memorandum of association, previously filed with the Securities
and Exchange Commission.

We
are authorized to issue 30,000,000 ordinary shares par value NIS 1.0 per share, of which
20,288,332 ordinary shares were outstanding as of June 20, 2008.

# Directors

According
to our articles of association, our board of directors is to consist of not less than
three and not more than ten directors, such number to be determined by a resolution of our
shareholders.

# Election of Directors

Directors,
other than external directors, are elected by our shareholders at our annual general
meeting of shareholders, or, in the event of vacancies, by our board of directors. In the
event that any directors are appointed by our board of directors, their appointment is
required to be ratified by the shareholders at the next shareholders meeting
following the appointment. Our shareholders may remove a director from office. There is no
requirement that a director own any of our shares or retire at a certain age.

# Remuneration of Directors

Remuneration
of directors is subject to the approvals required under the Companies Law as described
below.

# Powers of the Board of
Directors

Our
board of directors may resolve to take action by a resolution approved by a vote of a
simple majority of the directors then in office and lawfully entitled to participate in
the meeting and vote on the matter and who are present when such resolutions are put to a
vote and voting thereon, provided that a quorum is constituted at the meeting. A quorum at
a meeting of our board of directors requires the presence, in person or by any other means
of communication by which the directors can hear each other simultaneously, of at least
three of the directors then in office and who are lawfully entitled to participate in the
meeting and vote on the matters brought before the meeting. Our board of directors may
elect one director to serve as the Chairman of the board of directors to preside at the
meetings of the board of directors, and may also remove such director or a chairman.

66

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The
oversight of the management of our business is vested in our board of directors, which may
exercise all such powers and do all such acts as we are authorized to exercise and do, and
are not, by the provisions of our articles of association or by law, required to be
exercised or done by our shareholders. Our board of directors may, in its discretion,
cause our company to borrow or secure the payment of any sum or sums of money for the
purposes of our company, at such times and upon such terms and conditions in all respects
as it deems fit, and, in particular, by the issuance of bonds, perpetual or redeemable
debentures, debenture stock, or any mortgages, charges, or other securities on the
undertaking or the whole or any part of the our property, both present and future,
including our uncalled or called but unpaid capital for the time being.

# Dividend and Liquidation
Rights

Our
board of directors is authorized to declare dividends, subject to applicable law.
Dividends on our ordinary shares may be paid only out of profits and other surplus, as
defined in the Companies Law, as of the end of the most recent financial statements or as
accrued over a period of two years, whichever is higher. Alternatively, if we do not have
sufficient profits or other surplus, then permission to effect a distribution can be
granted by order of an Israeli court. In any event, a distribution is permitted only if
there is no reasonable concern that the dividend will prevent us from satisfying our
existing and foreseeable obligations as they become due. Our board of directors is
authorized to declare dividends, provided that there is no reasonable concern that the
dividend will prevent us from satisfying our existing and foreseeable obligations as they
become due. Dividends may be paid in cash or other property.

In
the event of our liquidation, after satisfaction of liabilities to creditors, our assets
will be distributed to the holders of ordinary shares in proportion to their respective
holdings. Dividends and liquidation rights may be affected by the grant of preferential
dividends or distribution rights to the holders of a class of shares with preferential
rights that may be authorized in the future.

# Redeemable Shares

Our
articles of association allow us to create redeemable shares, but at the present time, we
do not have any redeemable shares.

# Fiduciary Duties of
Office Holders

The
Companies Law imposes a duty of care and a duty of loyalty on all office holders of a
company. The duty of care requires an office holder to act with the level of care with
which a reasonable office holder in the same position would have acted under the same
circumstances.

The
duty of care of an office holder includes a duty to use reasonable means to obtain:

| |  | information
 on the  advisability  of a given  action  brought for his approval or performed by him
by          virtue of his position; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| |  | all
other important information pertaining to these actions.
| | - | ------------------------------------------------------------

The duty of loyalty of an office
holder includes a duty to:

| |  | refrain
from any conflict of interest between the performance of his duties in the company and
the performance of his other duties or his personal affairs;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | refrain
from any activity that is competitive with the company;
| | - | ---------------------------------------------------------------

| |  | refrain
 from  exploiting  any  business  opportunity  of the  company to receive a personal
 gain for          himself or others; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| |  | disclose
to the company any information or documents relating to a companys affairs which
the office holder has received due to his position as an office holder.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Approval of Certain
Transactions Under Israeli Law

Under
the Companies Law, the approval of the board of directors is required for all compensation
arrangements of office holders who are not directors. Under the Companies Law,
directors compensation arrangements require the approval of the audit committee, the
board of directors and the shareholders, in that order. However, if the compensation terms
of external directors comply with certain provision of the applicable regulations under
the Companies Law, then board approval suffices.

The
Companies Law requires that an office holder of a company disclose to the company,
promptly and in any event no later than the board of directors meeting in which the
transaction is first discussed, any personal interest that he may have and all related
material information known to him, in connection with any existing or proposed transaction
by the company. A personal interest of an office holder includes an interest of a company
in which the office holder is, directly or indirectly, a 5% or greater shareholder,
director or general manager or in which the office holder has the right to appoint at
least one director or the general manager. In the case of an extraordinary transaction,
the office holders duty to disclose applies also to a personal interest of the
office holders relative, which term is defined in the Companies Law as the
persons spouse, siblings, parents, grandparents, descendants, spouses
descendants and the spouses of any of the foregoing.

67

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Under
Israeli law, an extraordinary transaction is a transaction:

| |  | other
than in the ordinary course of business;
| | - | ----------------------------------------------

| |  | otherwise
than on market terms; or
| | - | ----------------------------------

| |  | that
is likely to have a material impact on the companys profitability, assets or
liabilities.
| | - | -----------------------------------------------------------------------------------------------

Under
the Companies Law, once an office holder complies with the above disclosure requirements,
the board of directors may approve a transaction between the company and an office holder,
or a third party in which an office holder has a personal interest. A transaction that is
adverse to the companys interest may not be approved.

If
the transaction is an extraordinary transaction, approval of both the audit committee and
the board of directors is required. In specific circumstances, shareholder approval may
also be required. A director who has a personal interest in a transaction that is
considered at a meeting of the board of directors or the audit committee generally may not
be present at this meeting or vote on this matter, unless a majority of members of the
board of directors or the audit committee, as the case may be, has a personal interest. If
a majority of the members of the board of directors has a personal interest, shareholder
approval is also required.

In
addition, under the Companies Law, a private placement of securities requires approval by
the board of directors and the shareholders of the company if it will cause a person to
become a controlling shareholder or if:

| |  | the
securities  issued amount to 20% or more of the company's  outstanding  voting rights
                      before the issuance;
| | - | ------------------------------------------------------------------------------------------------------------------------------------

| |  | some
 or all of the  consideration  is  other  than  cash  or  listed  securities  or the
                      transaction is not on market terms; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
transaction will increase the relative holdings of a shareholder that holds five percent
or more of the companys outstanding share capital or voting rights or that it 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 or voting rights.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Based
on the foregoing provisions of Israeli law, which differ from the requirements under
Nasdaq rules, we received an exemption from the Nasdaq listing requirement requiring
shareholder approval for the issuance of securities in certain circumstances.

# Changing the Rights
Attached to Shares

We
may only change the rights of shares with the approval of the holders of a majority of
that class of shares present and voting at the separate general meeting called for that
class of shares. An enlargement of a class of shares is not considered changing the rights
of such class of shares.

# Shareholders Meetings

We
have two types of shareholders meetings: the annual general meetings and special general
meetings. An annual general meeting must be held once in every calendar year, but not more
than 15 months after the last annual general meeting. Our board of directors may (and,
under the Companies Law, shall, at the request of (1) at least two directors or one
quarter of the directors then serving or (2) any one or more shareholders holding at least
five percent (5%) of our outstanding ordinary shares) convene a special general meeting
whenever it sees fit, at any place within or outside of the State of Israel.

A
quorum in a general meeting consists of two or more holders of ordinary shares, present in
person or by proxy, and holding shares conferring in the aggregate twenty-five percent
(25%) or more of the voting power in our company (or any higher percentage which may be
required under applicable rules and regulations). If there is no quorum within half an
hour of the time set, the meeting is postponed until the following week, or any other time
that the chairman of the board of directors and the shareholders present agree to. At the
postponed meeting, any two shareholders present in person or by proxy will constitute a
quorum. Nasdaq requires a quorum of at least 33-1/3% of our ordinary shares, but we have
elected to follow our home country practice, as described above, in lieu of this Nasdaq
requirement.

Every
ordinary share entitles the holder thereof to one vote. A shareholder may vote in person
or by proxy, or if the shareholder is a corporate body, by its representative. No
cumulative voting is permitted.

68

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# Duties of Shareholders

Under
the Companies Law, the disclosure requirements which apply to an office holder also apply
to a controlling shareholder of a public company. A controlling shareholder is a
shareholder who has the ability to direct the activities of a company, including a
shareholder that holds 25% or more of the voting rights if no other shareholder owns more
than 50% of the voting rights in the company, but excluding a shareholder whose power
derives solely from his or her position as a director of the company or any other position
with the company. Extraordinary transactions with a controlling shareholder or in which a
controlling shareholder has a personal interest, and the engagement of a controlling
shareholder as an office holder or employee, require the approval of the audit committee,
the board of directors and the shareholders of the company, in that order. The shareholder
approval must be by a majority vote, provided that either:

| |  | at
least one-third of the shares of shareholders who have no personal interest in the
transaction and are present and voting, in person, by proxy or by written ballot, at the
meeting, vote in favor; or
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
votes of shareholders who have no personal interest in the transaction that are voted
against the transaction do not represent more than one percent of the voting rights in
the company.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
addition, under the Companies Law, each shareholder has a duty to act in good faith in
exercising his rights and fulfilling his obligations toward the company and other
shareholders and to refrain from abusing his power in the company, such as in certain
shareholder votes. In addition, specified shareholders have a duty of fairness toward the
company. These shareholders include any controlling shareholder, any shareholder who knows
that it possesses the power to determine the outcome of a shareholder vote and any
shareholder who, pursuant to the provisions of the articles of association, has the power
to appoint or to prevent the appointment of an office holder or any other power toward the
company. However, the Companies Law does not define the substance of this duty of
fairness.

Exculpation, Insurance
and Indemnification of Office Holders

# Exculpation of Office
Holders

Under
the Companies Law, an Israeli company may not exempt an office holder from liability with
respect to a breach of his duty of loyalty, but may exempt in advance an office holder
from his liability to the company, in whole or in part, with respect to a breach of his
duty of care (except in connection with distributions to shareholders), provided that the
articles of association of the company allow it to do so. At the 2007 annual general
meeting of the shareholders, our articles of association were amended and the article
allowing us to exempt our office holders to the fullest extent permitted by law was
removed from our articles of association.

# Insurance of Office
Holders

Our
articles of association provide that, subject to the provisions of the Companies Law, we
may enter into a contract for the insurance of the liability of any of our office holders
with respect to an act performed in his capacity of an office holder, for:

| |  | a
breach of his duty of care to us or to another person;
| | - | --------------------------------------------------------

| |  | a
breach of his duty of loyalty to us, provided that the office holder acted in good faith
and had reasonable cause to assume that his act would not prejudice our interests; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
financial liability imposed upon him in favor of another person.
| | - | ------------------------------------------------------------------

# Indemnification of
Office Holders

Our
articles of association provide that we may indemnify an office holder with respect to an
act performed in his capacity of an office holder against:

| |  | a
financial liability imposed on him in favor of another person by any judgment, including
a settlement or an arbitration award approved by a court, which indemnification may be
approved (i) after the liability has been incurred or (ii) in advance, provided that the
undertaking to indemnify is limited to events that the board of directors believes are
foreseeable in light of actual operations at the time of providing the undertaking and to
a sum or criterion that the board of directors determines to be reasonable under the
circumstances;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reasonable
litigation expenses, including attorneys fees, expended by the office holder as a
result of an investigation or proceeding instituted against him by a competent authority,
provided that such investigation or proceeding concluded without the filing of an
indictment against him and either (A) concluded without the imposition of any financial
liability in lieu of criminal proceedings or (B) concluded with the imposition of a
financial liability in lieu of criminal proceedings but relates to a criminal offense
that does not require proof of criminal intent; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reasonable
litigation expenses, including attorneys fees, expended by the office holder or
charged to him by a court, in proceedings we institute against him or instituted on our
behalf or by another person, a criminal charge from which he was acquitted, or a criminal
charge in which he was convicted for a criminal offense that does not require proof of
criminal intent.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

69

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| | In
addition, our articles of association provide that the commitment in advance to indemnify
an office holder in respect of a financial obligation imposed upon him in favor of
another person by a court judgment (including a settlement or an arbitrators award
approved by court) shall in no event exceed, in the aggregate, a total of indemnification
(for all persons we have resolved to indemnify for the matters and circumstances
described therein) equal to one quarter (25%) of our total shareholders equity at
the time of the actual indemnification.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Limitations on
Exculpation, Insurance and Indemnification

The
Companies Law provides that a company may not exculpate or indemnify an office holder nor
enter into an insurance contract which would provide coverage for any monetary liability
incurred as a result of any of the following:

| |  | a
breach by the office holder of his duty of loyalty, unless, with respect to
indemnification or insurance coverage, the office holder acted in good faith and had a
reasonable basis to believe that the act would not prejudice the company;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
breach by the office holder of his duty of care if the breach was done intentionally or
recklessly (as opposed to mere negligence);
| | - | -------------------------------------------------------------------------------------------------------------------------------------

| |  | any
act or omission done with the intent to derive an illegal personal benefit; or
| | - | ----------------------------------------------------------------------------------

| |  | any
fine levied against the office holder.
| | - | ------------------------------------------

In
addition, under the Companies Law, indemnification of, and procurement of insurance
coverage for, our office holders must be approved by our audit committee and board of
directors and, if the beneficiary is a director, by our shareholders. We have obtained
directors and officers liability insurance.

# Anti-Takeover
Provisions; Mergers and Acquisitions

The
Companies Law provides for mergers, provided that each party to the transaction obtains
the approval of its board of directors and shareholders. For purposes of the shareholder
vote of each party, unless a court rules otherwise, the merger will not be deemed approved
if a majority of the shares not held by the other party, or by any person who holds 25% or
more of the shares or the right to appoint 25% or more of the directors of the other
party, have voted against the merger. Upon the request of a creditor of either party to
the proposed merger, the court may delay or prevent the merger if it concludes that there
exists a reasonable concern that as a result of the merger the surviving company will be
unable to satisfy the obligations of that party. Finally, a merger may not be completed
unless at least (i) 50 days have passed since the filing of the merger proposal with the
Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved
by the shareholders of each of the parties.

In
addition, provisions of the Companies Law that deal with arrangements between
a company and its shareholders may be used to effect squeeze-out transactions or other
types of transactions, including mergers. These provisions generally require that the
transaction be approved by a majority of the participating shareholders holding at least
75% of the shares voted on the matter. In addition to shareholder approval, court approval
of the transaction is required, which entails further delay.

The
Companies Law also provides that an acquisition of shares in a public company must be made
by means of a tender offer if as a result of the acquisition the purchaser would become a
25% shareholder of the company, unless there is already another 25% shareholder of the
company. Similarly, the Companies Law provides that an acquisition of shares in a public
company must be made by means of a tender offer if as a result of the acquisition the
purchaser would become a 45% shareholder of the company, unless there is already a 45%
shareholder of the company. These requirements do not apply if the acquisition (i) occurs
in the context of a private placement by the company that received shareholder approval,
(ii) was from a 25% shareholder of the company and resulted in the acquirer becoming a 25%
shareholder of the company or (iii) was from a 45% shareholder of the company and resulted
in the acquirer becoming a 45% shareholder of the company. The tender offer must be
extended to all shareholders, but the offerer is not required to purchase more than 5% of
the companys outstanding shares, regardless of how many shares are tendered by
shareholders. The tender offer may be consummated only if (i) at least 5% of the
companys outstanding shares will be acquired by the offerer and (ii) the number of
shares tendered in the offer exceeds the number of shares whose holders objected to the
offer.

If
as a result of an acquisition of shares the acquirer will hold more than 90% of a
companys outstanding shares, the acquisition must be made by means of a tender offer
for all of the outstanding shares. If less than 5% of the outstanding shares are not
tendered in the tender offer, all the shares that the acquirer offered to purchase will be
transferred to it. The law provides for appraisal rights if any shareholder files a
request in court within three months following the consummation of a full tender offer. If
more than 5% of the outstanding shares are not tendered in the tender offer, then the
acquirer may not acquire shares in the tender offer that will cause his shareholding to
exceed 90% of the outstanding share

Finally,
Israeli tax law treats some acquisitions, such as stock-for-stock exchanges between an
Israeli company and other company, less favorably than U.S. tax laws. For example, Israeli
tax law may, under certain circumstances, subject a shareholder who exchanges his ordinary
shares for shares in another corporation, to taxation prior to the sale of the shares
received in such stock-for-stock swap.

70

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# C. Material Contracts

None

# D. Exchange Controls

Exchange Controls and
Other Limitations Affecting Security Holders

There
are currently no Israeli currency control restrictions on payments of dividends or other
distributions with respect to our ordinary shares or the proceeds from the sale of the
shares, except for the obligation of Israeli residents to file reports with the Bank of
Israel regarding some transactions. However, legislation remains in effect under which
currency controls can be imposed by administrative action at any time.

The
ownership or voting of our ordinary shares by non-residents of Israel, except with respect
to citizens of countries which are in a state of war with Israel, is not restricted in any
way by our memorandum of association or articles of association or by the laws of the
State of Israel.

# E. Taxation

The
following is a general summary only and should not be considered as income tax advice or
relied upon for tax planning purposes. Holders of our ordinary shares should consult their
own tax advisors as to the U.S., Israeli or other tax consequences of the purchase,
ownership and disposition of our ordinary shares, including, in particular, the effect of
any federal, foreign, state or local taxes.

# U.S. Taxation

Subject
to the limitations described in the next paragraph, the following discussion describes the
material U.S. federal income tax consequences to a U.S. holder arising from the purchase,
ownership and disposition of our ordinary shares. A U.S. holder is a holder of ordinary
shares that is: (1) an individual citizen or resident of the United States, (2) a
corporation (or other entity treated as a corporation for U.S. federal tax purposes) or
partnership (other than a partnership that is not treated as a U.S. person under any
applicable Treasury regulations) created or organized under the laws of the United States
or the District of Columbia or any political subdivision thereof, (3) an estate, the
income of which is includable in gross income for U.S. federal income tax purposes
regardless of its source, (4) a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust, and one or more U.S.
persons have the authority to control all substantial decisions of the trust, or a trust
that has a valid election in effect to be treated as a U.S. person, any person otherwise
subject to U.S. federal income tax on a net income basis in respect of ordinary shares, if
such status as a U.S. holder is not overridden pursuant to the provisions of an applicable
tax treaty.

This
summary is for general information purposes only and does not purport to be a
comprehensive description of all of the U.S. federal income tax considerations that may be
relevant to a decision to purchase our ordinary shares. This summary generally considers
only U.S. holders that will own our ordinary shares as capital assets. Except to the
limited extent discussed below, this summary does not consider the U.S. federal income tax
consequences to a person that is not a U.S. holder, nor does it describe the rules
applicable to determine a taxpayers status as a U.S. holder.

This
discussion is based on current provisions of the Internal Revenue Code of 1986, as
amended, or the Code, existing and proposed Treasury regulations promulgated thereunder,
and administrative and judicial interpretations thereof, and the U.S./Israel Income Tax
Treaty, all as in effect on the date hereof and all of which are subject to change,
possibly on a retroactive basis and open to differing interpretations. This discussion
does not address all aspects of U.S. federal income taxation that may be relevant to a
particular shareholder based on such shareholders particular circumstances. In
particular, this discussion does not address the U.S. federal income tax treatment of a
U.S. holder who is: (1) a bank, life insurance company, or other financial institution or
financial services entity; (2) a regulated investment company, real estate
investment trust or grantor trust; (3) a broker or dealer in securities or foreign
currency; (4) a person who acquires our ordinary shares in connection with employment or
other performance of services, or who acquires our ordinary shares in the form of a bonus
from us; (5) a U.S. holder that is subject to the alternative minimum tax; (6) a U.S.
holder that holds the ordinary shares as a hedge or as part of a hedging transaction,
straddle, conversion or constructive sale transaction or other risk-reduction transaction
for U.S. federal income tax purposes; (7) a tax-exempt entity; (8) a U.S. holder that
expatriates out of the United States, or a former long-term resident of the United States;
and (9) a person having a functional currency other then U.S. dollar.

This
discussion does not address the U.S. federal income tax treatment of a U.S. holder that
owns, directly or constructively, at any time, shares representing 10% or more of our
voting power. Additionally, the U.S. federal income tax treatment of persons who hold
ordinary shares through a partnership or other pass-through entity are not considered.

Further,
this description does not address any U.S. federal estate and gift tax consequences nor
any state, local or foreign tax consequences relating to the acquisition, ownership, and
disposition of our ordinary shares.

71

---

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Each
prospective investor is advised to consult his or her own tax advisor with respect to the
specific U.S. federal and state income tax consequences to such person of purchasing,
holding or disposing of the ordinary shares.

Distributions on Ordinary
Shares

Since
1995, we have not paid cash dividends on our ordinary shares.The Shareholders
Agreement dated as of March 3, 2008 states that it is the view of the parties thereto
that, subject to applicable law, we should distribute as a dividend commencing with
calendar year 2008. Our board of directors has not yet considered such a dividend policy.
In the event that we do pay dividends, and subject to the discussion under the heading
Passive Foreign Investment Companies below, a U.S. Holder will be required to
include in gross income as ordinary income the amount of any distribution paid on ordinary
shares (including the amount of any Israeli tax withheld on the date the distribution), to
the extent that such distribution does not exceed our current and accumulated earnings and
profits, as determined for U.S. federal income tax purposes. The amount of a distribution
which exceeds our current and accumulated earnings and profits will be treated first as a
non-taxable return of capital, reducing the U.S. Holders tax basis in the ordinary
shares (to the extent thereof), and then as capital gain. Corporate holders generally will
not be allowed a deduction for dividends received. In general, preferential tax rates not
exceeding 15% for qualified dividend income and long-term capital gains are
applicable for U.S. Holders that are individuals, estates or trusts. For this purpose,
qualified dividend income means, inter alia, dividends received from a
qualified foreign corporation. A qualified foreign corporation is
a corporation that is entitled to the benefits of a comprehensive tax treaty with the
United States which includes an exchange of information program. The U.S. Internal Revenue
Service, or IRS, has stated that the Israel/U.S. Tax Treaty satisfies this requirement and
we believe we are eligible for the benefits of that treaty.

The
amount of a distribution with respect to our ordinary shares will be measured by the
amount of fair market value of any property distributed, and for U.S. federal income tax
purposes, the amount of any Israeli taxes withheld therefrom. (See discussion below under
Israeli Taxation  Taxation of Dividends Applicable to Non-Residents
Shareholders.) Cash distributions paid by us in NIS will be included in the income
of U.S. Holders at a U.S. dollar amount based upon the spot rate of exchange in effect on
the date the dividend is includible in the income of the U.S. Holder, and U.S. holders
will have a tax basis in such NIS for U.S. federal income tax purposes equal to such U.S.
dollar value. If the U.S. Holder subsequently converts the NIS, any subsequent gain or
loss in respect of such NIS arising from exchange rate fluctuations will be U.S. source
ordinary exchange gain or loss.

In
addition, our dividends will be qualified dividend income if our shares are readily
tradable on Nasdaq or another established securities market in the United States.
Dividends will not qualify for the preferential rate if we are treated, in the year the
dividend is paid or in the prior year, as a passive foreign investment company, or PFIC.
Due to the nature of our operations, we do not believe we are a PFIC; see the discussions
below at Passive Foreign Investment Companies concerning our status as a PFIC.
If our beliefs concerning our PFIC status are correct, dividend distributions with respect
to our shares should be treated as qualified dividend income, subject to the U.S. holder
satisfying holding period and other requirements described below. A U.S. Holder will not
be entitled to the preferential rate: (a) if the U.S. Holder has not held the ordinary
shares or ADRs for at least 61 days of the 121 day period beginning on the date which is
60 days before the ex-dividend date, or (b) to the extent the U.S. Holder is under an
obligation to make related payments on substantially similar property. Any days during
which the U.S. Holder has diminished its risk of loss on our shares are not counted
towards meeting the 61-day holding period. Finally, U.S. Holders who elect to treat the
dividend income as investment income pursuant to Code Section 163(d)(4) will
not be eligible for the preferential rate of taxation.

Distributions
paid by us will generally be foreign source income for U.S. foreign tax credit purposes.
Subject to the limitations set forth in the Code, U.S. Holders may elect to claim a
foreign tax credit against their U.S. income tax liability for Israeli income tax withheld
from distributions received in respect of ordinary shares. In general, these rules limit
the amount allowable as a foreign tax credit in any year to the amount of regular U.S. tax
for the year attributable to foreign source taxable income. This limitation on the use of
foreign tax credits generally will not apply to an electing individual U.S. Holder whose
creditable foreign taxes during the year do not exceed $300, or $600 for joint filers, if
such individuals gross income for the tax year from non-U.S. sources consists solely
of certain passive income. A U.S. Holder will be denied a foreign tax credit with respect
to Israeli income tax withheld from dividends received with respect to the ordinary shares
if such U.S. Holder has not held the ordinary shares for at least 16 days out of the
31-day period beginning on the date that is 15 days before the ex-dividend date or to the
extent that such U.S. Holder is under an obligation to make certain related payments with
respect to substantially similar or related property. Any day during which a U.S. Holder
has substantially diminished its risk of loss with respect to the ordinary shares will not
count toward meeting the 16-day holding period referred to above. A U.S. Holder will also
be denied a foreign tax credit if the U.S. Holder holds ordinary shares in an arrangement
in which the U.S. Holders reasonably expected economic profit is insubstantial
compared to the foreign taxes expected to be paid or accrued. The rules relating to the
determination of the U.S. foreign tax credit are complex, and U.S. Holders should consult
their own tax advisors to determine whether and to what extent they would be entitled to
such credit. U.S. Holders that do not elect to claim a foreign tax credit may instead
claim a deduction for Israeli income tax withheld, provided such U.S. Holders itemize
their deductions.

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Disposition of Shares

Except
as provided under the passive foreign investment company rules described below, upon the
sale, exchange or other disposition of our ordinary shares, a U.S. Holder generally will
recognize capital gain or loss in an amount equal to the difference between such U.S.
Holders tax basis for the ordinary shares and the amount realized on the disposition
(or its U.S. dollar equivalent, determined by reference to the spot rate of exchange on
the date of disposition, if the amount realized is denominated in a foreign currency). The
gain or loss realized on the sale, exchange or other disposition of ordinary shares will
be long-term capital gain or loss if the U.S. Holder has a holding period of more than one
year at the time of disposition.

In
general, gain realized by a U.S. Holder on a sale, exchange or other disposition of
ordinary shares generally should be treated as U.S. source income for U.S. foreign tax
credit purposes. A loss realized by a U.S. Holder on the sale, exchange or other
disposition of ordinary shares is generally allocated to U.S. source income. However,
Treasury regulations require the loss to be allocated to foreign source income to the
extent certain dividends were received by the taxpayer within the 24-month period
preceding the date on which the taxpayer recognized the loss. The deductibility of a loss
realized on the sale, exchange or other disposition of ordinary shares is subject to
limitations.

Passive Foreign
Investment Companies

Special
U.S. federal income tax laws apply to a U.S. holder who owns shares of a corporation that
was (at the time during the U.S. holders holding period) a Passive Foreign
Investment Company, or PFIC. We would be a passive foreign investment company, or PFIC,
if:

| |  | 75%
or more of our gross  income,  including  the pro rata share of our gross  income for any
company,          U.S. or foreign,  in which we are  considered to own 25% or more of the
shares by value,  in a taxable          year is passive income; or
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | at
least 50% of the gross value of our assets, averaged over the year and generally
determined based upon value, including the pro rata share of the assets of any
company of which we are considered to own 25% or more of the shares by value, in a
taxable year are held for the production of, or produce, passive income.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
noted above, under certain look-through rules, the assets and income of
certain subsidiaries are taken into account in determining whether a foreign corporation
meets the income test and/or asset test.

For
this purpose, passive income generally consists of dividends, interest, rents, royalties,
annuities and income from certain commodities transactions and from notional principal
contracts. Cash is treated as generating passive income.

If
we are, or become a PFIC, each U.S. Holder who has not elected to treat us as a qualified
electing fund, QEF election, or who has not elected to mark the shares
to market as discussed below, would, upon receipt of certain distributions by us and upon
disposition of the ordinary shares at a gain, be liable to pay tax at the then prevailing
highest tax rates on ordinary income plus interest on the tax, as if the distribution or
gain had been recognized ratably over the taxpayers holding period for the ordinary
shares. In addition, when shares of a PFIC are acquired by reason of death from a decedent
that is a U.S. Holder, the tax basis of the shares does not receive a step-up to fair
market value as of the date of the decedents death, but instead would be equal to
the decedents basis if lower, unless all gain is recognized by the decedent.
Indirect investments in a PFIC may also be subject to special tax rules.

The
PFIC rules above would not apply to a U.S. holder who makes a QEF election for all taxable
years that such shareholder has held the ordinary shares while we are a PFIC, provided
that we comply with certain reporting requirements. Instead, each U.S. Holder who has made
such a QEF election is required for each taxable year that we are a PFIC to include in
income a pro rata share of our ordinary earnings as ordinary income and a pro rata
share of our net capital gain as long-term capital gain, regardless of whether we make any
distributions of such earnings or gain. In general, a QEF election is effective only if we
make available certain required information. The QEF election is made on a
shareholder-by-shareholder basis and generally may be revoked only with the consent of the
IRS. Although we have no obligation to do so, we intend to notify U.S. Holders if we
believe we will be treated as a PFIC for any tax year in order to enable U.S. Holders to
consider whether to make a QEF election. In addition, we intend to comply with the
applicable information reporting requirements for U.S. Holders to make a QEF election.
U.S. Holders should consult with their own tax advisers regarding eligibility, manner and
advisability of making the QEF election if we are treated as a PFIC.

A
U.S. holder of PFIC shares which are publicly traded can elect to mark the shares to
market annually, recognizing as ordinary income or loss each year an amount equal to the
difference as of the close of the taxable year between the fair market value of the PFIC
shares and the U.S. Holders adjusted tax basis in the PFIC shares. Losses would be
allowed only to the extent of net mark-to-market gain previously included by the U.S.
Holder under the election for prior taxable years. If the mark-to-market election were
made, then the rules set forth above would not apply for periods covered by the election.

We
believe that we were not a PFIC for 2007 and do not anticipate being a PFIC in 2008. The
tests for determining PFIC status, however, are applied annually, and it is difficult to
make accurate predictions of future income and assets which are relevant to this
determination. Accordingly, there can be no assurance that we will not become a PFIC. U.S.
Holders who hold ordinary shares during a period when we are a PFIC will be subject to the
foregoing rules, even if we cease to be a PFIC, subject to certain exceptions for U.S.
Holders who made a QEF or mark-to-market election. U.S. Holders are strongly urged to
consult their tax advisors about the PFIC rules, including the eligibility, manner and
consequences to them of making a QEF or mark-to-market election with respect to our
ordinary shares in the event that we qualify as a PFIC.

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Backup Withholding

A
U.S. Holder may be subject to backup withholding (currently at a rate of 28%) with respect
to cash dividend payments and proceeds from a disposition of ordinary shares. In general,
backup withholding will apply only if a U.S. Holder fails to comply with certain
identification procedures. Backup withholding will not apply with respect to payments made
to certain exempt recipients, such as corporations and tax-exempt organizations. Backup
withholding is not an additional tax and may be claimed as a credit against the U.S.
federal income tax liability of a U.S. Holder, provided that the required information is
timely furnished to the IRS.

Non-U.S. Holders of
Ordinary Shares

Except
as provided below, an individual, corporation, estate or trust that is not a U.S. Holder
generally will not be subject to U.S. federal income or withholding tax on the payment of
dividends on, and the proceeds from the disposition of, an ordinary share.

A
non-U.S. Holder may be subject to U.S. federal income or withholding tax on a dividend
paid on an ordinary share or the proceeds from the disposition of an ordinary share if (1)
such item is effectively connected with the conduct by the non-U.S. Holder of a trade or
business in the U.S. and, in the case of a resident of a country which has an income tax
treaty with the U.S., such item is attributable to a permanent establishment or, in the
case of gain realized by an individual non-U.S. Holder, a fixed place of business in the
U.S.; or (2) in the case of a disposition of an ordinary share, the individual non-U.S.
Holder is present in the U.S. for 183 days or more in the taxable year of the sale and
certain other conditions are met; or (3) the non-U.S. Holder is subject to U.S. federal
income tax pursuant to the provisions of the U.S. tax law applicable to U.S. expatriates.

In
general, non-U.S. holders will not be subject to the 28% backup withholding with respect
to the payment of dividends on ordinary shares if payment is made through a paying agent,
or office of a foreign broker outside the United States. However, if payment is made in
the United States or by a U.S. related person, non-U.S. Holders may be subject to backup
withholding, unless the non-U.S. Holder provides a taxpayer identification number,
certifies to its foreign status, or otherwise establishes an exemption. A U.S. related
person for these purposes is a person with one or more current relationships with the
United States.

Non-U.S.
          holders generally may be subject to backup withholding at a rate of 28% on the
          payment of the proceeds from the disposition of ordinary shares to or through
          the U.S. office of a broker, whether domestic or foreign, or the office of a
          U.S. related person, unless the holder provides a taxpayer identification
          number, certifies to its foreign status or otherwise establishes an exemption.
          Non-U.S. Holders will not be subject to backup withholding with respect to the
          payment of proceeds from the disposition of ordinary shares by a foreign office
          of a broker.

The
amount of any backup withholding from a payment to a non-U.S. Holder will be allowed as a
credit against such holders U.S. federal income tax liability and may entitle such
holder to a refund, provided that the required information is timely furnished to the IRS.

Taxation of our U.S.
Subsidiaries

The
following summary describes our organizational structure in the United States and the
applicable income taxes.

We
operate in the United States through several corporations. Retalix Holdings, Inc.,
referred to as Retalix USA Holdings, is the U.S. parent, which is wholly-owned by Retalix
Ltd. Retalix USA Holdings owns 100% of the stock of several U.S. corporations 
Retalix USA Inc., RCS, and 95% of a U.S. limited liability company  StoreNext USA.
StoreNext USA is treated as a partnership for U.S. federal tax purposes. As such, 95% of
StoreNext USAs results are included in the Retalixs U.S. federal income tax
return. Retalix USA Holdings and its wholly-owned subsidiaries have elected to file U.S.
federal income tax returns on a consolidated basis. Generally, U.S. federal income taxes
are imposed on the taxable income of the U.S. consolidated group at tax rates of 34 %. The
corporation is subject to the same U.S. federal income tax rates on capital gain income.
The U.S. companies are subject to state income/franchise taxes in the states in which they
do business. Depending on each states requirements, taxes may be imposed on a
consolidated, combined or separate company basis. State taxes are imposed on the U.S.
taxable income at an approximate rate of 6% after the federal benefit of deducting the
state income taxes.

Israeli
Taxation

The
following summary describes the current tax structure applicable to companies in Israel,
with special reference to its effect on us. It also discusses Israeli tax consequences
material to persons purchasing our ordinary shares. To the extent that the summary is
based on new tax legislation yet to be judicially or administratively interpreted, we
cannot be sure that the views expressed will accord with any future interpretation. The
summary is not intended, and should not be construed, as specific professional advice and
does not exhaust all possible tax considerations. Accordingly, you should consult your tax
advisor as to the particular tax consequences of an investment in our ordinary shares.

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General Corporate Tax
Structure

Israeli
companies are generally subject to corporate tax at the rate of 31% of the taxable income
for the 2006 tax year, at the rate of 29% of the taxable income for the 2007 and at the
rate of 27% of the taxable income for the 2008 tax year. The corporate tax rate is
scheduled to decrease as follows:, 26% for the 2009 tax year and 25% for the 2010 tax year
and thereafter. However, the effective tax rate payable by a company that derives income
from an approved enterprise may be considerably less, as further discussed below.

Law for the Encouragement
of Capital Investments, 1959

The
Law for the Encouragement of Capital Investments, 1959, (the Investments Law),
as in effect prior to 2005, provided that upon application to the Investment Center of the
Israeli Ministry of Industry (the Investment Center), Trade and Labor, a
proposed capital investment in eligible facilities may be designated as an Approved
Enterprise. See the discussion below regarding an amendment to the Investments Law that
came into effect in 2005.

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, such as the equipment to be purchased and utilized under the
program. The tax benefits derived from any certificate of approval relate only to taxable
income derived from growth in manufacturing revenues attributable to the specific Approved
Enterprise. If a company has more than one approval or only a portion of its capital
investments are approved, its effective tax rate is the result of a weighted combination
of the applicable rates. The tax benefits under the law are not available for income
derived from products manufactured outside of Israel.

Taxable
income of a company derived from an Approved Enterprise is subject to tax at the maximum
rate of 25%, rather than the regular corporate tax rate, for the benefit period. This
period is ordinarily seven years beginning with the year in which the Approved Enterprise
first generates taxable income, and is limited to 12 years from when production begins or
14 years from the date of approval, whichever is earlier. A company owning an Approved
Enterprise may elect to receive an alternative package of benefits, which allows the
company to receive tax exemptions rather than grants. Under the alternative package, the
companys undistributed income derived from an Approved Enterprise will be exempt
from tax for a period of between two and ten years from the first year of taxable income,
depending on the geographic location of the Approved Enterprise within Israel, and the
company will be eligible for the tax benefits under the law for the remainder of the
benefit period.

After
expiration of the initial tax exemption period, the company is eligible for a reduced
corporate tax rate of 10% to 25% for the following five to eight years, depending on the
extent of foreign investment in the company (as shown in the table below). The
determination of foreign ownership is made on the basis of the lowest level of foreign
ownership during the tax year. The benefits period is limited to 12 years from completion
of the investment under the approved plan or 14 years from the date of the approval,
whichever is earlier. A company in which more than 25% of the shareholders are
non-residents of Israel, defined in the Investment Law as a Foreign Investors Company, may
be eligible for benefits for an extended period of up to ten years.

|Percent ofForeign Ownership | Rate ofReduced Tax | Reduced Tax Period | Tax Exemption Period
|--------------------------- | ------------------ | ------------------ | --------------------
|
|
|
|
|0-25%                       | 25%                | 5 years            | 2 years             
|25-49%                      | 25%                | 8 years            | 2 years             
|49-74%                      | 20%                | 8 years            | 2 years             
|74-90%                      | 15%                | 8 years            | 2 years             
|90-100%                     | 10%                | 8 years            | 2 years             

The
benefits available to an approved enterprise are conditional upon compliance with the
conditions stipulated in the Investments Law and related regulations and the criteria
described in the specific certificate of approval. If a company violates these conditions,
in whole or in part, it would be required to refund the amount of tax benefits and any
grants received with interest and adjustments for inflation based on the Israeli consumer
price index.

A
portion of our production facilities has been granted the status of Approved Enterprise.
Income arising from our Approved Enterprise facilities is tax-free under the alternative
package of benefits described above (for the first 2 years) and entitled to reduced tax
rates (for the next five to years). We have derived, and expect to continue to derive, a
substantial portion of our income from our Approved Enterprise facilities. The tax
benefits attributable to our current Approved Enterprises are scheduled to expire through
2009.

If
a company distributes dividends from tax-exempt Approved Enterprise income, the company
will be taxed on the otherwise exempt income at the same reduced corporate tax rate that
applies to it after the initial exemption period. Distribution of dividends derived from
Approved Enterprise income that was taxed at reduced rates, but not tax exempt, does not
result in additional tax consequences to the company. Shareholders who receive dividends
derived from Approved Enterprise income are generally taxed at a rate of 15%, which is
withheld and paid by the company paying the dividend, if the dividend is distributed
during the benefits period or within the following 12 years (but the 12-year limitation
does not apply to a Foreign Investors Company). We are not obliged to distribute exempt
retained profits under the alternative package of benefits, and may generally decide from
which source of income to declare dividends. We currently intend to reinvest the amount of
our tax-exempt income and not to distribute such income as a dividend.

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Amendment of the
Investments Law

On
April 1, 2005, an amendment to the Investments Law came into effect, which revised the
criteria for investments qualified to receive tax benefits. An eligible investment program
under the alternative package of benefits will qualify for benefits as a Benefited
Enterprise (rather than the previous terminology of Approved Enterprise) if it is an
industrial facility (as defined in the Investments Law) that will contribute to the
economic independence of the Israeli economy and is a competitive facility that
contributes to the Israeli gross domestic product. Among other things, the amendment
provides tax benefits to both local and foreign investors and simplifies the approval
process  the Benefited Enterprise routes do not require pre-approval by the
Investment Center. A company wishing to receive the tax benefits afforded to a Benefited
Enterprise is required to select the tax year from which the period of benefits under the
Investment Law are to commence by simply notifying the Israeli Tax Authority on the date
on which it is obligated to file its tax return for such year or within 12 months of the
end of that year, the earlier. In order to be recognized as owning a Benefited Enterprise,
a company is required to meet a number of conditions set forth in the amendment, including
making a minimal investment in manufacturing assets for the Benefited Enterprise and
having completed a cooling-off period of no less than three years from the companys
previous year of commencement of benefits under the Investments Law. The amendment does
not apply to investment programs approved prior to December 31, 2004.

Pursuant
to the amendment, a company with a Benefited Enterprise is entitled to certain tax
benefits, provided that no more than 12 to 14 years have passed since the beginning of the
year of election under the Investments Law. The tax benefits granted to a Benefited
Enterprise are determined, as applicable to us, according to one of the following new tax
routes:

| |  | Similar
to the currently available alternative route, exemption from corporate tax on
undistributed income for a period of two to ten years, depending on the geographic
location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of
10% to 25% for the remainder of the benefits period, depending on the level of foreign
investment in each year. Benefits may be granted for a term of from seven to ten years,
depending on the level of foreign investment in the company. If the company pays a
dividend out of income derived from the Benefited Enterprise during the tax exemption
period, such income will be subject to corporate tax at the applicable rate (10%-25%).
The company is required to withhold tax at the source at a rate of 15% from any dividends
distributed from income derived from the Benefited Enterprise; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | A
special tax route enabling companies owning facilities in certain geographical locations
in Israel to pay corporate tax at the rate of 11.5% on income of the Benefited
Enterprise. The benefits period is ten years. Upon payment of dividends, the company is
required to withhold tax at source at a rate of 15% for Israeli residents and at a rate
of 4% for foreign residents.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Generally,
a company that is Abundant in Foreign Investment (as defined in the Investments Law) is
entitled to an extension of the benefits period by an additional five years, depending on
the rate of its income that is derived in foreign currency.

The
amendment changes the definition of foreign investment in the Investments Law
so that the definition now also includes the purchase of shares of a company from another
shareholder, provided that the companys outstanding and paid-up share capital
exceeds NIS 5 million. Such changes to the aforementioned definition are retroactive to
2003.

The
amendment will apply to programs in which the year of election under the Investments Law
is 2004 or later, unless such programs received Approved Enterprise approval from the
Investment Center on or prior to December 31, 2004, in which case the amendment provides
that the 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.

Tax
Benefits for Research and Development

Israeli
tax law allows, under specific 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 and
the research and development is for the promotion of the enterprise. Such of research and
development expenditures not so approved are deductible over a three-year period.

Law for the Encouragement
of Industry (Taxes), 1969

According
to the Law for the Encouragement of Industry (Taxes), 1969, an industrial company is a
company resident in Israel, at least 90% of the income of which, in a given tax year,
determined in Israeli currency exclusive of income from defense loans, capital gains,
interest and dividends, is derived from an industrial enterprise owned by it. An
industrial enterprise is defined as an enterprise whose primary activity in a given tax
year is industrial production activity. We believe that we currently qualify as an
industrial company under this definition.

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Under
the law, industrial companies are entitled to the following preferred corporate tax
benefits:

| |  | Deduction
of costs related to shares  issued in a stock market over a three-year period for tax
purposes;
| | - | ---------------------------------------------------------------------------------------------------------

| |  | Amortization
 of the  cost of  purchased  know-how  and  patents  over an  eight-year  period  for tax
         purposes;
| | - | -------------------------------------------------------------------------------------------------------------------------

| |  | The
option to file a consolidated tax return with related Israeli industrial companies that
satisfy conditions described in the law; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

| |  | Accelerated
depreciation rates on equipment and buildings.
| | - | ----------------------------------------------------------

Our
status as an industrial company is not contingent upon the receipt of prior approval from
any governmental authority. However, entitlement to certain benefits under the law is
conditioned upon receipt of approval from Israeli tax authorities. Also, the Israeli tax
authorities may determine that we do not qualify as an industrial company, which would
entail the loss of the benefits that relate to this status. In addition, we might not
continue to qualify for industrial company status in the future, in which case the
benefits described above might not be available to us in the future.

Special Provisions
Relating to Taxation Under Inflationary Conditions

The
Income Tax Law (Inflationary Adjustments), 1985, or the Adjustments Law, represents an
attempt to overcome the problems presented to a traditional tax system by an economy
undergoing inflation. This law is highly complex. We measure our Israeli taxable income in
accordance with the provisions of this law. Its features which may be material to us can
be summarized as follows:

| |  | There
is a special tax adjustment for the preservation of equity whereby some corporate assets
are classified broadly into fixed assets and non-fixed assets. Where a companys
equity, as defined in such law, exceeds the depreciated cost of fixed assets, a deduction
from taxable income that takes into account the effect of the applicable annual rate of
inflation on such excess is allowed up to a ceiling of 70% of taxable income in any
single tax year, with the unused portion permitted to be carried forward on a linked
basis. If the depreciated cost of fixed assets exceeds a companys equity, then such
excess multiplied by the applicable annual rate of inflation is added to taxable income.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Subject
to specific limitations, depreciation deductions on fixed assets and losses carried
forward are adjusted for inflation based on the increase in the consumer price index.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On
February 26, 2008 the Israeli parliament approved an amendment to the Adjustments Law that
limits the applicability of such law so that it will generally cease to apply after the
2007 tax year.

Israeli Transfer Pricing
Regulations

On November 29, 2006, Income Tax
Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the
Tax Ordinance, came into force. Accordingly, all cross-border transactions carried out
between related parties must be conducted on an arms length principle basis and will
be taxed accordingly.

# Capital Gains Tax
Applicable to Resident and Non-Resident Shareholders

Israeli
law generally imposes a capital gains tax on the sale of capital assets located in Israel,
including shares in Israeli resident companies, by both residents and non-residents of
Israel, unless a specific exemption is available or unless a treaty between Israel and the
country of the non-resident provides otherwise. The law distinguishes between real gain
and inflationary surplus. The inflationary surplus is a portion of the total capital gain
that is equivalent to the increase of the relevant assets purchase price which is
attributable to the increase in the Israeli consumer price index or, in certain
circumstances, a foreign currency exchange rate, between the date of purchase and the date
of sale. The real gain is the excess of the total capital gain over the inflationary
surplus.

The
tax rate generally applicable to capital gains derived from the sale of shares, whether
listed on a stock market or not, is 20% for Israeli individuals, unless such individual is
considered a significant shareholder at any time during the 12-month period
preceding such sale (i.e., such shareholder holds directly or indirectly, including with
others, at least 10% of any means of control in the company), in which case the tax rate
will be 25%. Israeli resident companies are subject to tax on capital gains derived from
the sale of listed shares at the regular corporate tax rate, unless such companies were
not subject to the Adjustments Law (or certain regulations) as of August 10, 2005, in
which case the applicable tax rate is 25%. However, the foregoing tax rates will not apply
to: (i) dealers in securities; and (ii) shareholders who acquired their shares prior to an
initial public offering (that may be subject to a different tax arrangement).

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Non-Israeli
residents are exempt from Israeli capital gains tax on any gains derived from the sale of
shares publicly traded on the TASE, provided such gains did not derive from a permanent
establishment of such shareholders in Israel, and are exempt from Israeli capital gains
tax on any gains derived from the sale of shares of Israeli companies publicly traded on a
recognized stock market outside of Israel (including Nasdaq), provided however that such
shareholders did not acquire their shares prior to an initial public offering, that such
capital gains are not derived from a permanent establishment in Israel, and that such
shareholders are not subject to the Adjustments Law. However, non-Israeli corporations
will not be entitled to such exemption if Israeli residents (i) have a controlling
interest of 25% or more in such non-Israeli corporation, or (ii) are the beneficiaries of
or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation,
whether directly or indirectly.

In
certain instances where our shareholders may be liable to Israeli tax on the sale of their
ordinary shares, the payment of the consideration may be subject to the withholding of
Israeli tax at the source.

In
addition, under the convention between the United States and Israel concerning taxes on
income, as amended, or the U.S.-Israel Tax Treaty, generally, Israeli capital gains tax
will not apply to the sale, exchange or disposition of shares by a person who holds the
shares as a capital asset and who qualifies as a resident of the United States within the
meaning of the U.S.-Israel Tax Treaty, and who is entitled to claim the benefits available
under the U.S.-Israel Tax Treaty. However, this exemption will not apply if (i) the treaty
U.S. resident holds, directly or indirectly, shares representing 10% or more of our issued
voting power during any part of the 12-month period preceding the sale, exchange or
disposition, subject to specified conditions, or (ii) the capital gains from such sale,
exchange or disposition can be allocated to a permanent establishment in Israel. In this
case, the sale, exchange or disposition would be subject to Israeli tax, to the extent
applicable. However, under the U.S.-Israel Tax Treaty, the treaty U.S. resident would be
permitted to claim a credit for the taxes against the U.S. federal income tax imposed on
the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to
foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local
taxes.

# Taxation of Dividends
Applicable to Non-Resident Shareholders

Non-residents
of Israel are subject to Israeli income tax on income accrued or derived from sources in
Israel, including passive income such as dividends. On distributions of dividends, other
than bonus shares and stock dividends, income tax is withheld at the source at the rate
of 20%, or 25% for a shareholder that is considered a significant shareholder at any
time during the 12-month period preceding such distribution, unless a different rate is
provided in a treaty between Israel and the shareholders country of residence. As
aforesaid, dividends of income generated by an Approved Enterprise (or Benefited
Enterprise) are subject to withholding tax at a rate of 15%.

Under
the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of shares who is
a treaty U.S. resident is 25%, or 15% if the dividends are generated by an Approved
Enterprise (or Benefited Enterprise). However, if the income out of which the dividend is
being paid is not attributable to an Approved Enterprise (or Benefited Enterprise) and not
more than 25% of our gross income consists of interest or dividends, then such tax rate is
reduced to 12.5% for a non-resident that is a U.S. corporation and holds 10% or more of
our issued voting power during the part of the tax year that precedes the date of payment
of the dividend and during the whole of its prior tax year.

# F. Dividends and Paying
Agents

Not
applicable.

# G. Statements by Experts

Not
applicable.

# H. Documents on Display

We
are subject to the informational requirements of the Exchange Act applicable to foreign
private issuers and fulfill the obligations with respect to such requirements by filing
reports with the SEC. You may read and copy any document we file with the SEC without
charge at the SECs public reference room at 100 F Street, N.E., Washington, D.C.
20549. Copies of such material may be obtained by mail from the Public Reference Branch of
the SEC at such address, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference room. Certain of our SEC filings are also
available to the public at the SECs website at http://www.sec.gov.

As
a foreign private issuer, we are 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 short-swing profit recovery
provisions contained in Section 16 of the Exchange Act. In addition, we are not required
under the Exchange Act to file periodic reports and financial statements with the SEC as
frequently or as promptly as United States companies whose securities are registered under
the Exchange Act. Nasdaq rules generally require that companies send an annual report to
shareholders prior to the annual general meeting. Instead, we follow the generally
accepted business practice for companies in Israel. Specifically, we file annual reports
on Form 20-F, which contain financial statements audited by an independent public
registered accounting firm, electronically with the SEC and place a link to it on our
website. We will also furnish to the SEC quarterly reports on Form 6-K containing
unaudited financial information after the end of each of the first three quarters.

78

---

---

# I. Subsidiary
Information

Not
applicable.

# ITEM 11 
QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market
risks relating to our operations may result primarily from weak economic conditions in the
markets in which we sell our products and from changes in exchange rates or in interest
rates. We have only limited involvement with derivative financial instruments. From time
to time we carry out transactions involving foreign exchange derivative financial
instruments (forward exchange contracts). These transactions do not qualify for hedge
accounting under SFAS 133, and are designed to minimize non-dollar currency exposure
resulting from the difference between non-dollar financial assets and liabilities.

As
of December 31, 2007, we had the following open foreign currency forward contracts all of
up to six months in term and maturing between January to February 2008:

|Sell                     | Buy  |               |              
|------------------------ | ---- | ------------- | -------------
|
|
|
|
|Pounds Sterling 1.0      | $2.0 | October 2007  | January 2008 
|                        
|New Israeli Shekels 27.8 | $7.2 | November 2007 | February 2008
|                        
|Euros 0.6                | $0.9 | October 2007  | January 2008 
|                        
|Euros 0.8                | $1.2 | November 2007 | February 2008
|                        
|Euros 2.8                | $4.0 | December 2007 | February 2008

The
fair value of these outstanding contracts as of December 31, 2007 reflects a liability in
the amount of $147,000, which was charged to financial expenses.

Other
than foreign exchange derivative financial instruments as described above, we do not use
derivative financial instruments in our investment portfolio.

The
table below presents principal amounts and related weighted average rates by periods of
maturity for our investments in deposits (primarily included in cash and cash equivalents
in our consolidated financial reports) and marketable securities held as of December 31,
2007.

(In thousands, except percentages)

|                                                    |  | Maturity | Totalbookvalue | Totalfairvalue
|--------------------------------------------------- |  | -------- | -------------- | --------------
|
|
|
|
|Corporate securities held to maturity bearing fixed |  |          | Book value     |               
|interest rate (1)                                   |  |          | WAYM *         |               
|Marketable Securities (1)                           |  |          | Book value     |               
|                                                    |  |          | WAY**          |               
|Dollar linked money market funds and deposits (2)   |  |          | Book value     |               
|                                                    |  |          | WAIR***        |               
|New Israeli Shekels linked Deposits (2)             |  |          | Book value     |               
|                                                    |  |          | WAIR***        |               
|British Pounds Sterling linked Deposits (2)         |  |          | Book value     |               
|                                                    |  |          | WAIR***        |               
|Euro linked deposits (2)                            |  |          | Book value     |               
|                                                    |  |          | WAIR***        |               
|Australian Dollars Linked deposits (2)              |  |          | Book value     |               
|                                                    |  |          | WAIR***        |               
|                                                    |  |          |                |               
|Total                                               |  |          | Book value     |               
|                                                    |  |          | WAY****        |               
|                                                    |  |          |                |               

|* | Weighted
average yield to maturity
|- | ----------------------------------

|** | Weighted
average yield as per the performance of 2007
|-- | -----------------------------------------------------

|*** | Weighted
average interest rate
|--- | ------------------------------

|**** | Weighted
average yield
|---- | ----------------------

|(1) | Classified
in the consolidated financial statements attached herein as marketable securities and
marketable debt securities
|--- | ---------------------------------------------------------------------------------------------------------------------------

|(2) | Classified
in the consolidated financial statements attached herein as cash and cash equivalents
|--- | ------------------------------------------------------------------------------------------------

79

---

---

# Foreign Currency Risk

The
majority of our revenues is denominated in U.S. Dollars and or linked to the U.S. dollar,
and our financing is mostly in U.S. dollars, and thus the U.S. dollar is our functional
currency. However, some portions of our revenues are denominated in British Pounds
Sterling, Euros, Australian Dollars and New Israeli Shekels. This situation exposes us
from time to time, to fluctuations between the exchange rates of the dollar and the NIS,
the British Pound Sterling, the Euro and the Australian Dollar. We hold most of our
financial assets in dollar or dollar linked investment channels. In addition, we tend from
time to time, to enter into short-term forward inter-currency transactions in an attempt
to maintain a similar level of assets and liabilities in any non-U.S. Dollar currency and
thus trying to offset exposures to inter-currency fluctuations.

The
following table sets forth our non-dollar assets and liabilities as of December 31, 2007:

(in thousands)

|Currency    | Israeli
currency | Other non-dollar
currency
|----------- | ---------------- | -------------------------
|
|
|
|
|Assets      |                  |                          
|            |                  |                          
|Liabilities |                  |                          

# Interest Rate Risk

Our
interest expenses and income are sensitive to changes in interest rates, as all of our
cash reserves and borrowings are subject to interest rate changes. Most of our financial
reserves are invested in short term interest-bearing deposits. The interest rate on these
deposits as well as the interest rate on most of our borrowings is linked to the London
Interbank Offered Rate.

The
policies under which our exposures to currency and interest rate fluctuations are managed
is reviewed and supervised by our board of directors. We manage these exposures by
performing ongoing evaluations including on a timely basis.

# ITEM 12 
DESCRIPTION OF SECURITIES OTHER THEN 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.

80

---

---

# PART III

# ITEM 15  CONTROLS
AND PROCEDURES

# Disclosure controls and procedures

As
of December 31, 2007, we performed an evaluation under the supervision and with the
participation of our management including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended, or the Exchange Act). Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required
to be disclosed by an issuer in the reports that it files or submits under
the Exchange Act is accumulated and communicated to the issuers management,
including its principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required disclosure.
There can be no assurance that our disclosure controls and procedures will detect or
uncover all failures of persons within Retalix to disclose material information otherwise
required to be set forth in our reports. Nevertheless, our disclosure controls and
procedures are designed to provide reasonable assurance of achieving the desired control
objectives.  Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were not effective
at a reasonable level of assurance as of December 31, 2007, because of a material weakness
in our internal control over financial reporting discussed below.

# Managements Annual
Report on Internal Control over Financial Reporting.

Our
management, under the supervision of our Chief Executive Officer and Chief Financial
Officer, is responsible for establishing and maintaining adequate internal control over
our financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act. The Companys internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles.

Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

Under
the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we assessed the effectiveness of our
internal control over financial reporting as of December 31, 2007 based on the
framework for Internal Control-Integrated Framework set forth by The Committee of
Sponsoring Organizations of the Treadway Commission (COSO).

During
the fourth quarter of 2007, we experienced the following problems with our internal
control over financial reporting in relation to the recording of a few transactions in one
of our U.S. offices: an invoice was issued with an incorrect discount, a formula error
caused the miscalculation of certain revenues that are based on percentage of completion
accounting, and an adjustment to the provision for sales commissions was under-accrued. We
performed sufficient procedures to ensure that all material errors were identified and
corrected before we reported our results of operations to the public. Nevertheless, we
concluded that the aggregation of these separate deficiencies reflects insufficient
complement of personnel in one of our U.S. subsidiaries with an appropriate level of
knowledge, experience and training in the application of generally accepted accounting
principles commensurate with our financial reporting requirements, and therefore
constitutes a material weakness, which still existed as of the end of the
year.Therefore, our management concluded that as of December 31, 2007,
our internal control over financial reporting was not effective.

Notwithstanding
the foregoing, our independent registered public accounting firm has concluded that our
consolidated financial statements included in this annual report present fairly, in all
material respects, the financial condition and results of operations of the Company in
accordance with U.S. generally accepted accounting principles for the year ended December
31, 2007.

# Managements
Remediation Initiatives.

Under
the direction of our Chief Executive Officer and Chief Financial Officer and in
consultation with the Audit Committee of our Board of Directors, we have already begun
taking measures to remediate the effectiveness of our internal control over financial
reporting.

Since
the beginning of 2008, we have replaced several employees and made organizational changes
in the accounting department of our U.S. office. In addition, we are reexamining the
control design in this office as well as its appropriate professional staffing and
training. We have also started implementing additional reconciliation controls.

We
believe that these measures, as well as additional measures that are planned for 2008,
will remediate the material weakness of our internal control over financial reporting.

# Attestation report of
the registered public accounting firm

Kesselman
& Kesselman, a member of PricewaterhouseCoopers International Limited, the independent
registered public accounting firm that audited our 2007 consolidated financial statements
included in this annual report, has issued an attestation report on our internal control
over financial reporting. The report appears elsewhere herein.

# Changes in internal
control over financial reporting

Although we have made changes since
the end of 2007 as described above, there were no changes in our internal control over
financial reporting that occurred during the period covered by this annual report that
have materially affected, or that are reasonably likely to materially affect, our internal
control over financial reporting.

# ITEM 16A. AUDIT
COMMITTEE FINANCIAL EXPERT

Our
board of directors determined that Mr. David Bresler is an audit committee financial
expert as defined in Item 16A of Form 20-F. Mr. Bresler has long term experience in
senior financial positions in large corporations and the board of directors has relied on
his experience in determining that he is an audit committee financial expert.
Mr. Bresler is independent as defined in Nasdaq rules.

# ITEM 16B. CODE OF ETHICS

Our
board of directors has adopted a Code of Ethics, which applies to all of our employees,
officers and directors. We will provide a copy of our Code of Ethics, free of charge, to
any person who requests one. Such requests may be sent to our offices at 10 Zarhin Street,
Raanana, Israel, Attention: Controller.

81

---

---

# ITEM 16C. PRINCIPAL
ACCOUNTANT FEES AND SERVICES

Kesselman
& Kesselman, a member of PricewaterhouseCoopers International Limited, has served as
our principal independent registered public accounting firm since October 2006. Kost,
Forer, Gabbay & Kasierer, a member firm of Ernst & Young,  served as our
independent registered public accounting firm from April, 2005 until
October, 2006. Kesselman & Kesselman also served as our principal independent
registered public accounting firm from 1997 until April 2005. The following table presents
the aggregate fees for professional audit services and other services rendered by our
principal independent registered public accounting firm in 2006 and 2007:

|                   | Year Ended December 31,(U.S. $ in thousands)
|------------------ | --------------------------------------------
|
|
|
|
|Audit Fees         |                                             
|Audit Related Fees |                                             
|Tax Fees           |                                             
|
|                   |                                             
|Total              |                                             
|                   |                                             

Audit
Fees are the aggregate fees billed for the audit of our annual financial statements.
This category also includes services that generally the independent registered public
accounting firm provides, such as statutory audits including audits required by the Office
of the Chief Scientist and other Israeli government institutes, consents and assistance
with and review of documents filed with the SEC. Audit-Related Fees are the
aggregate fees billed for assurance and related services that are reasonably related to
the performance of the audit and are not reported under Audit Fees. These fees include
mainly accounting consultations regarding the accounting treatment of matters that occur
in the regular course of business, implications of new accounting pronouncements, due
diligence related to acquisitions and other accounting issues that occur from time to
time. Tax Fees are the aggregate fees billed for professional services
rendered for tax compliance and tax advice, other than in connection with the audit. Tax
compliance involves preparation of original and amended tax returns, tax planning and tax
advice.

Our
audit committee has adopted a pre-approval policy for the engagement of our independent
registered public accounting firm to perform certain audit and non-audit services.
Pursuant to this policy, which is designed to assure that such engagements do not impair
the independence of our auditors, the audit committee pre-approves on a specific basis
non-audit services in the categories of Audit-Related Services and Tax Services and other
services that may be performed by our independent registered public accounting firm, and
the maximum pre-approved fees that may be paid as compensation for each pre-approved
service in those categories. Any proposed services exceeding the maximum pre-approved fees
require specific approval by the Audit Committee.

With
respect to each pre-approved service actually requested to be provided, an executive
officer is required to notify the audit committee in writing and state whether, in the
executive officers view, the provision of such service by the outside auditor would
impair its independence. The audit committee has the ultimate authority to determine which
services to pre-approve.

# ITEM 16D. EXEMPTION FROM
THE LISTING STANDARDS FOR AUDIT COMMITTEES

None.

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

None.

# ITEM 17  FINANCIAL
STATEMENTS

We
have responded to Item 18 in lieu of this item.

# 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.

82

---

---

# ITEM 19  EXHIBITS

| | (a) | Financial
Statements
| | --- | --------------------

| | 1.
Reports of Independent Registered Public Accounting Firm
| | -----------------------------------------------------------

| | 2.
          Consolidated Balance Sheets
| | ----------------------------------------

| | 3.
          Consolidated Statements of Income
| | ----------------------------------------------

| | 4.
          Statements of Changes in Shareholders Equity
| | ----------------------------------------------------------

| | 5.
          Consolidated Statements of Cash Flows
| | --------------------------------------------------

| | 6.
          Notes to Consolidated Financial Statements
| | -------------------------------------------------------

| | 7.
          Reports of Independent Auditors of Certain Associated Companies
| | ----------------------------------------------------------------------------

| | (b) | Exhibits
| | --- | --------

|Exhibit No. |  | Exhibit
|----------- |  | -------

|1.1 |  | Memorandum
of Association of Registrant, as amended (previously filed as an exhibit to Retalix's
report                          on Form 6-K filed on November 2, 2005 and incorporated
herein by reference)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|1.2 |  | Articles
of Association of Registrant, as amended.
|--- |  | --------------------------------------------------

|4.1 |  | Employment
Agreement dated December 1, 1999, between Point of Sale Limited and Danny Moshaioff
                         (previously filed as an exhibit to Retalix's annual report on
Form 20-F for the fiscal year ended                          December 31, 1999 and
incorporated herein by reference)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Agreement
dated December 30, 1999, between Point of Sale Limited and the Corex Development Company
(C.                          D. C.) Limited (previously filed as an exhibit to Retalix's
annual report on Form 20-F for the                          fiscal year ended December
31, 1999 and incorporated herein by reference)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | Second
1998 Share Option Plan, as amended.
|--- |  | ------------------------------------------

|4.4 |  | 2004
Israeli Share Option Plan, as amended.
|--- |  | -------------------------------------------

|4.5 |  | Asset
Purchase Agreement, dated as of April 1, 2005, among Retalix Ltd., Integrated
Distribution                          Solutions, LLC, certain owners of Integrated
Distribution Solutions, LLC, and Retalix SCM, Inc.                          (previously
filed as exhibit 2.1 to Retalix's registration statement on Form F-3 filed on June 2,
                         2005 and incorporated herein by reference)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8 |  | Principal
Subsidiaries of Retalix Ltd. (previously filed as an exhibit to Retalix's annual report
on                          Form 20-F for the fiscal year ended December 31, 2006 on Form
20-F filed on June 21, 2007, and                          incorporated herein by
reference).
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12.1 |  | Certification
required by Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of
                         the Sarbanes-Oxley Act of 2002.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|12.2 |  | Certification
required by Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of
                         the Sarbanes-Oxley Act of 2002.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|13 |  | Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                         Sarbanes-Oxley Act of 2002 (furnished herewith).
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15.1 |  | Consent
of Kesselman & Kesselman, a member of PricewaterhouseCoopers International Limited.
|---- |  | -------------------------------------------------------------------------------------------

|15.2 |  | Consent
of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global.
|---- |  | --------------------------------------------------------------------------

83

---

---

# SIGNATURES

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

|Date: July 2, 2008 |  | RETALIX LTD.By: /s/ Barry Shaked
Barry Shaked, President, Chief Executive Officerand Chairman of the Board of Directors
|------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------

|Date: July 2, 2008 |  | By: /s/ Hugo Goldman
Hugo Goldman, Chief Financial Officer
|------------------ |  | ------------------------------------------------------------------------

84

---

---

RETALIX LTD.2007 ANNUAL REPORT ON FORM 20-F

INDEX TO THE FINANCIAL STATEMENTS

|                                                                                            |  |                
|------------------------------------------------------------------------------------------- |  | ---------------
|                                                                                            |  | Page           
|                                                                                           
|REPORT OF INDEPENDENT REGISTERED PUBLIC
 ACCOUNTING FIRM CONSOLIDATED FINANCIAL STATEMENTS: |  | F  2          
|Balance sheets                                                                              |  | F  3  F  4  
|Statements of income
(loss)                                                                 |  | F  5          
|Statements of changes in
shareholders
 equity                                              |  | F  6          
|Statements of cash
flows                                                                    |  | F  7  F  9  
|Notes to consolidated financial
statements                                                  |  | F  10  F  47

The amounts are stated in U.S. dollars ($) in
thousands.

|
|

F  1

---

---

---

| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Kesselman & KesselmanCertified Public Accountants Trade Tower, 25 Hamered Street
Tel Aviv 68125 IsraelP.O Box 452 Tel Aviv 61003Telephone +972-3-7954555Facsimile +972-3-7954556

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders ofRETALIX LTD.

We have audited the accompanying
consolidated balance sheets of Retalix Ltd. (the Company) and its subsidiaries
as of December 31, 2007 and 2006, and the related consolidated statements of operations,
changes in shareholders equity and cash flows for each of the years in the two year
period ended December 31, 2007. We also have audited the Companys internal control
over financial reporting as of December 31, 2007, based on criteria established in
Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys Board of Directors and
management are responsible for these financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Managements Annual Report on Internal Control over Financial Reporting
under Item 15. Our responsibility is to express an opinion on these financial statements
and an opinion on the companys internal control over financial reporting based on
our integrated audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.

A companys internal control
over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that: (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the companys assets that could have
a material effect on the financial statements.

Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position of the Company and its subsidiaries as of December 31, 2007 and 2006, and the
results of their operations and their cash flows for each of the years in the two-year
period ended December 31, 2007, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, as of December 31, 2007,
the Company did not maintain, in all material respects, effective internal control over
financial reporting as of December 31, 2007, based on criteria established in Internal
Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) becauseof a material weakness in
internal control over financial reporting related to an insufficient complement of
personnel in one of the Companys United States subsidiaries with an appropriate
level of knowledge, experience and training in the application of generally accepted
accounting principles commensurate with the Companys financial reporting
requirements. This material weakness, at the United States

subsidiary, resulted in the
miscalculation of a customer discount, certain revenue based on percentage of completion
accounting and certain commission accruals. A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of the annual financial
statements will not be prevented or detected on a timely basis. The material weakness
referred to above is described in the accompanying Managements Annual Report
on Internal Control over Financial Reporting under Item 15. We considered this
material weakness in determining the nature, timing, and extent of audit tests applied in
our audit of the 2007 consolidated financial statements, and our opinion regarding the
effectiveness of the Companys internal control over financial reporting does not
affect our opinion on those consolidated financial statements.

As discussed in note 1s to the
consolidated financial statements, in 2006 the Company changed the manner in which it
accounts for share-based compensation. In addition, as discussed in note 1w to the
consolidated financial statements, in 2006 the Company changed the manner in which it
accounts for quantifying of prior year misstatements. In addition, as discussed in note 1k
to the consolidated financial statements, in 2007 the Company changed the manner in which
it accounts for income tax uncertainties.

Kesselman & KesselmanA member of PricewaterhouseCoopers International Limited
Tel Aviv, Israel July 2, 2008

F  2

---

---

RETALIX LTD.CONSOLIDATED BALANCE SHEETS

|                                                                      |  |                      |         |      |  |         | 
|--------------------------------------------------------------------- |  | -------------------- | ------- | ---- |  | ------- | 
|                                                                      |  | December
 31         |        
|                                                                      |  |                      |        
|                                                                      |  | 2007                 |         | 2006 | 
|                                                                      |  |                      |         |      | 
|                                                                      |  | U.S. $
 in thousands |        
|                                                                      |  |                      |        
|A s s e t s                                                           |  |                      |         |      |  |         | 
|CURRENT ASSETS (note 10)                                              |  |                      |         |      |  |         | 
|Cash and cash equivalents                                             |  |                      | 22,484  |      |  | 55,186  | 
|Marketable securities (notes 7c; 11b)                                 |  |                      | 3,455   |      |  | 4,554   | 
|Accounts receivable (note 11a)                                        |  |                      |         |      |  |         | 
|Trade                                                                 |  |                      | 81,429  |      |  | 48,469  | 
|Other                                                                 |  |                      | 5,485   |      |  | 5,524   | 
|Inventories                                                           |  |                      | 1,289   |      |  | 1,154   | 
|Deferred income taxes (note 9g)                                       |  |                      | 8,286   |      |  | 5,930   | 
|                                                                      |  |                      |         |      |  |         | 
|T o t a l current assets                                              |  |                      | 122,428 |      |  | 120,817 | 
|                                                                      |  |                      |         |      |  |         | 
|NON-CURRENT ASSETS(note 10)                                           |  |                      |         |      |  |         | 
|Marketable securities (note 11b)                                      |  |                      | 1,657   |      |  | 1,237   | 
|Deferred income taxes (note 9g)                                       |  |                      | 7,050   |      |  | 4,035   | 
|Long-term receivables (note 11c)                                      |  |                      | 5,681   |      |  | 3,395   | 
|Amounts funded in respect of employee rights upon retirement (note 6) |  |                      | 8,806   |      |  | 6,759   | 
|Other                                                                 |  |                      | 795     |      |  | 747     | 
|                                                                      |  |                      |         |      |  |         | 
|T o t a l non  current assets                                        |  |                      | 23,989  |      |  | 16,173  | 
|                                                                      |  |                      |         |      |  |         | 
|PROPERTY, PLANT AND EQUIPMENT,net (note 3)                            |  |                      | 12,568  |      |  | 11,180  | 
|                                                                      |  |                      |         |      |  |         | 
|GOODWILL(note 4)                                                      |  |                      | 108,926 |      |  | 107,506 | 
|                                                                      |  |                      |         |      |  |         | 
|OTHER INTANGIBLE ASSETS, net of accumulated
 amortization (note 4)    |  |                      |         |      |  |         | 
|                                                                      |  |                      |         |      |  |         | 
|Customer relationship                                                 |  |                      | 16,450  |      |  | 17,721  | 
|Other                                                                 |  |                      | 4,229   |      |  | 5,777   | 
|                                                                      |  |                      |         |      |  |         | 
|                                                                      |  |                      | 20,679  |      |  | 23,498  | 
|                                                                      |  |                      |         |      |  |         | 
|T o t a l assets                                                      |  |                      | 288,590 |      |  | 279,174 | 
|                                                                      |  |                      |         |      |  |         | 

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

F  3

---

---

RETALIX LTD.CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                                                         |  |                                            |         |      |  |         | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ------- | ---- |  | ------- | 
|                                                                                                                                                                                                                                         |  | December
 31                               |        
|                                                                                                                                                                                                                                         |  |                                            |        
|                                                                                                                                                                                                                                         |  | 2007                                       |         | 2006 | 
|                                                                                                                                                                                                                                         |  |                                            |         |      | 
|                                                                                                                                                                                                                                         |  | U.S. $
 in thousands 
 (except share data) |        
|                                                                                                                                                                                                                                         |  |                                            |        
|                                                                                                                                                                                                                                         |  |                                            |        
|Liabilities and shareholders equity                                                                                                                                                                                                     |  |                                            |         |      |  |         | 
|CURRENT LIABILITIES(note 10):                                                                                                                                                                                                            |  |                                            |         |      |  |         | 
|Short-term bank credit                                                                                                                                                                                                                   |  |                                            | 11      |      |  | 4,742   | 
|Current maturities of long-term bank loans
 (note 5)                                                                                                                                                                                     |  |                                            | 258     |      |  | 224     | 
|Accounts payable and accruals:                                                                                                                                                                                                           |  |                                            |         |      |  |         | 
|Trade                                                                                                                                                                                                                                    |  |                                            | 15,410  |      |  | 11,535  | 
|Employees and employee institutions                                                                                                                                                                                                      |  |                                            | 8,977   |      |  | 7,179   | 
|Accrued expenses                                                                                                                                                                                                                         |  |                                            | 6,393   |      |  | 7,288   | 
|Other                                                                                                                                                                                                                                    |  |                                            | 3,005   |      |  | 7,443   | 
|Deferred revenues                                                                                                                                                                                                                        |  |                                            | 16,763  |      |  | 13,747  | 
|                                                                                                                                                                                                                                         |  |                                            |         |      |  |         | 
|T o t a l current liabilities                                                                                                                                                                                                            |  |                                            | 50,817  |      |  | 52,158  | 
|                                                                                                                                                                                                                                         |  |                                            |         |      |  |         | 
|LONG-TERM LIABILITIES(note 10):                                                                                                                                                                                                          |  |                                            |         |      |  |         | 
|Long-term loans, net of current maturities
 (note 5)                                                                                                                                                                                     |  |                                            | 786     |      |  | 1,058   | 
|Employee rights upon retirement (note 6)                                                                                                                                                                                                 |  |                                            | 14,362  |      |  | 11,392  | 
|Deferred tax liability (note 9g)                                                                                                                                                                                                         |  |                                            | 219     |      |  | 1,016   | 
|Other tax payables                                                                                                                                                                                                                       |  |                                            | 1,097   |      |  | -       | 
|Deferred revenues                                                                                                                                                                                                                        |  |                                            | -       |      |  | 206     | 
|                                                                                                                                                                                                                                         |  |                                            |         |      |  |         | 
|T o t a l long-term liabilities                                                                                                                                                                                                          |  |                                            | 16,464  |      |  | 13,672  | 
|                                                                                                                                                                                                                                         |  |                                            |         |      |  |         | 
|T o t a l liabilities                                                                                                                                                                                                                    |  |                                            | 67,281  |      |  | 65,830  | 
|                                                                                                                                                                                                                                         |  |                                            |         |      |  |         | 
|COMMITMENTS, PLEDGES AND CONTINGENT LIABILITIES(note 7)                                                                                                                                                                                  |  |                                            |         |      |  |         | 
|MINORITY INTERESTS                                                                                                                                                                                                                       |  |                                            | 2,791   |      |  | 2,293   | 
|                                                                                                                                                                                                                                         |  |                                            |         |      |  |         | 
|                                                                                                                                                                                                                                         |  |                                            |         |      |  |         | 
|SHAREHOLDERS EQUITY(note 8):                                                                                                                                                                                                            |  |                                            |         |      |  |         | 
|Share capital  Ordinary shares of NIS 1.00
 par value (authorized: December 31, 2007 and December 31, 2006  30,000,000
 shares; issued and outstanding: December 31, 2007  20,001,382 shares;
 December 31, 2006  19,613,454 shares) |  |                                            | 5,273   |      |  | 5,178   | 
|Additional paid in capital                                                                                                                                                                                                               |  |                                            | 166,752 |      |  | 156,583 | 
|Retained earnings                                                                                                                                                                                                                        |  |                                            | 46,195  |      |  | 49,188  | 
|Accumulated other comprehensive income                                                                                                                                                                                                   |  |                                            | 298     |      |  | 102     | 
|                                                                                                                                                                                                                                         |  |                                            |         |      |  |         | 
|T o t a l shareholders equity                                                                                                                                                                                                           |  |                                            | 218,518 |      |  | 211,051 | 
|                                                                                                                                                                                                                                         |  |                                            |         |      |  |         | 
|T o t a l liabilities and shareholders
 equity                                                                                                                                                                                          |  |                                            | 288,590 |      |  | 279,174 | 
|                                                                                                                                                                                                                                         |  |                                            |         |      |  |         | 

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

F  4

---

---

RETALIX LTD.CONSOLIDATED
STATEMENTS OF INCOME

|                                                                                                               |  |                                                         |         |      |  |         |   |  |         |  
|-------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------- | ------- | ---- |  | ------- | - |  | ------- | -
|                                                                                                               |  | Year ended
  December 31                                |        
|                                                                                                               |  |                                                         |        
|                                                                                                               |  | 2007                                                    |         | 2006 |  | 2005    |  
|                                                                                                               |  |                                                         |         |      |  |         |  
|                                                                                                               |  | U.S. $ in thousands
  (except share and per share data) |        
|                                                                                                               |  |                                                         |        
|REVENUES:(note 13a)                                                                                            |  |                                                         |         |      |  |         |   |  |         |  
|Product sales                                                                                                  |  |                                                         | 80,511  |      |  | 73,195  |   |  | 91,692  |  
|Services and projects                                                                                          |  |                                                         | 140,900 |      |  | 130,549 |   |  | 95,679  |  
|                                                                                                               |  |                                                         |         |      |  |         |   |  |         |  
|T o t a l revenues                                                                                             |  |                                                         | 221,411 |      |  | 203,744 |   |  | 187,371 |  
|                                                                                                               |  |                                                         |         |      |  |         |   |  |         |  
|COST OF REVENUES:                                                                                              |  |                                                         |         |      |  |         |   |  |         |  
|Cost of product sales                                                                                          |  |                                                         | 39,132  |      |  | 36,690  |   |  | 31,521  |  
|Cost of services and projects                                                                                  |  |                                                         | 65,281  |      |  | 44,562  |   |  | 34,465  |  
|                                                                                                               |  |                                                         |         |      |  |         |   |  |         |  
|T o t a l cost of revenues                                                                                     |  |                                                         | 104,413 |      |  | 81,252  |   |  | 65,986  |  
|                                                                                                               |  |                                                         |         |      |  |         |   |  |         |  
|GROSS PROFIT                                                                                                   |  |                                                         | 116,998 |      |  | 122,492 |   |  | 121,385 |  
|                                                                                                               |  |                                                         |         |      |  |         |   |  |         |  
|                                                                                                               |  |                                                         |         |      |  |         |   |  |         |  
|OPERATING EXPENSES:                                                                                            |  |                                                         |         |      |  |         |   |  |         |  
|Research and development - net                                                                                 |  |                                                         | 58,653  |      |  | 60,375  |   |  | 44,683  |  
|Selling and marketing                                                                                          |  |                                                         | 31,617  |      |  | 33,495  |   |  | 33,382  |  
|General and administrative (note 14a)                                                                          |  |                                                         | 27,539  |      |  | 27,426  |   |  | 23,131  |  
|Other expenses - net (note 14c)                                                                                |  |                                                         | 643     |      |  | 22      |   |  | -       |  
|                                                                                                               |  |                                                         |         |      |  |         |   |  |         |  
|T o t a l operating expenses                                                                                   |  |                                                         | 118,452 |      |  | 121,318 |   |  | 101,196 |  
|                                                                                                               |  |                                                         |         |      |  |         |   |  |         |  
|INCOME (LOSS) FROM OPERATIONS                                                                                  |  |                                                         | (1,454  | )    |  | 1,174   |   |  | 20,189  |  
|FINANCIAL INCOME,net (note 14b)                                                                                |  |                                                         | 1,032   |      |  | 79      |   |  | 202     |  
|GAIN ARISING FROM ISSUANCE OF SHARES BY AN
  ASSOCIATED COMPANY                                                |  |                                                         | -       |      |  | -       |   |  | 83      |  
|                                                                                                               |  |                                                         |         |      |  |         |   |  |         |  
|INCOME (LOSS) BEFORE TAXES ON INCOME                                                                           |  |                                                         | (422    | )    |  | 1,253   |   |  | 20,474  |  
|TAXES ON INCOME (TAX BENEFIT) (note 9)                                                                         |  |                                                         | (435    | )    |  | (507    | ) |  | 5,912   |  
|                                                                                                               |  |                                                         |         |      |  |         |   |  |         |  
|INCOME AFTER TAXES ON INCOME                                                                                   |  |                                                         | 13      |      |  | 1,760   |   |  | 14,562  |  
|SHARE IN LOSSES OF AN ASSOCIATED COMPANY                                                                       |  |                                                         | (3      | )    |  | (57     | ) |  | (130    | )
|MINORITY INTERESTS IN LOSSES (GAINS) OF
SUBSIDIARIES                                                           |  |                                                         | (508    | )    |  | (425    | ) |  | 189     |  
|                                                                                                               |  |                                                         |         |      |  |         |   |  |         |  
|NET INCOME (LOSS)                                                                                              |  |                                                         | (498    | )    |  | 1,278   |   |  | 14,621  |  
|                                                                                                               |  |                                                         |         |      |  |         |   |  |         |  
|EARNINGS (LOSS) PER SHARE  in U.S. $ (note14d):                                                               |  |                                                         |         |      |  |         |   |  |         |  
|Basic                                                                                                          |  |                                                         | (0.02   | )    |  | 0.07    |   |  | 0.78    |  
|                                                                                                               |  |                                                         |         |      |  |         |   |  |         |  
|Diluted                                                                                                        |  |                                                         | (0.02   | )    |  | 0.06    |   |  | 0.74    |  
|                                                                                                               |  |                                                         |         |      |  |         |   |  |         |  
|WEIGHTED AVERAGE NUMBER OF SHARES USED IN  COMPUTATION OF EARNINGS  (LOSS) PER SHARE  in thousands(note 14d): |  |                                                         |         |      |  |         |   |  |         |  
|Basic                                                                                                          |  |                                                         | 19,851  |      |  | 19,491  |   |  | 18,710  |  
|                                                                                                               |  |                                                         |         |      |  |         |   |  |         |  
|Diluted                                                                                                        |  |                                                         | 19,851  |      |  | 20,127  |   |  | 19,659  |  
|                                                                                                               |  |                                                         |         |      |  |         |   |  |         |  

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

F  5

---

---

RETALIX LTD.STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY

|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  |         |  
|--------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | ------ | ------ |  | ------------------------------ |  | ------------------- | ------- | --------------------------------------------------- | ----- | ------ | - |  | ---- | - |  | ------- | -
|                                                                                                                |  | Share capital                     |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |     
|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |     
|                                                                                                                |  | Ordinary shares                   |        |        |  |                                |  |                     |         | Accumulated
  other
  comprehensive
  Income (loss) |       |        |   | 
|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |  
|                                                                                                                |  | Number of
  shares in
  thousands |        | Amount |  | Additional
  paid-in
  capital |  | Retained
  earnings |         |                                                     | Total |       
|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |  
|                                                                                                                |  | U . S . $ i n  t h o u s a n d s  |       
|                                                                                                                |  |                                   |        |        |  |                               
|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  |         |  
|BALANCE AT JANUARY 1, 2005                                                                                      |  |                                   | 17,577 |        |  | 4,717                          |  |                     | 116,277 |                                                     |       | 34,910 |   |  | 267  |   |  | 156,171 |  
|CHANGES DURING 2005:                                                                                            |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  |         |  
|Net income                                                                                                      |  |                                   |        |        |  |                                |  |                     |         |                                                     |       | 14,621 |   |  |      |   |  | 14,621  |  
|Differences from translation of non
dollar currency financial
statements of a subsidiary and
associated company |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  | (555 | ) |  | (555    | )
|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  |         |  
|Comprehensive income                                                                                            |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  | 14,066  |  
|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  |         |  
|Stock based compensation expenses                                                                               |  |                                   |        |        |  |                                |  |                     | 167     |                                                     |       |        |   |  |      |   |  | 167     |  
|Issuance of share capital in respect of
acquisition of a subsidiary, net of
issuance expenses                   |  |                                   | 1,006  |        |  | 230                            |  |                     | 23,633  |                                                     |       |        |   |  |      |   |  | 23,863  |  
|Issuance of share capital to
employees and non-employee
resulting from exercise of options                      |  |                                   | 826    |        |  | 185                            |  |                     | 9,965   |                                                     |       |        |   |  |      |   |  | 10,150  |  
|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  |         |  
|BALANCE AT DECEMBER 31, 2005                                                                                    |  |                                   | 19,409 |        |  | 5,132                          |  |                     | 150,042 |                                                     |       | 49,531 |   |  | (288 | ) |  | 204,417 |  
|Effect of SAB 108 adjustments (note 1w)                                                                         |  |                                   |        |        |  |                                |  |                     |         |                                                     |       | (1,621 | ) |  |      |   |  | (1,621  | )
|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  |         |  
|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       | 47,910 |   |  |      |   |  | 202,796 |  
|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  |         |  
|CHANGES DURING 2006:                                                                                            |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  |         |  
|Net income                                                                                                      |  |                                   |        |        |  |                                |  |                     |         |                                                     |       | 1,278  |   |  |      |   |  | 1,278   |  
|Differences from translation of non
dollar currency financial
statements of a subsidiary and
associated company |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  | 390  |   |  | 390     |  
|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  |         |  
|Comprehensive income                                                                                            |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  | 1,668   |  
|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  |         |  
|Stock based compensation expenses                                                                               |  |                                   |        |        |  |                                |  |                     | 3,891   |                                                     |       |        |   |  |      |   |  | 3,891   |  
|Issuance of share capital to
employees and non-employee
resulting from exercise of options                      |  |                                   | 204    |        |  | 46                             |  |                     | 2,650   |                                                     |       |        |   |  |      |   |  | 2,696   |  
|BALANCE AT DECEMBER 31, 2006                                                                                    |  |                                   | 19,613 |        |  | 5,178                          |  |                     | 156,583 |                                                     |       | 49,188 |   |  | 102  |   |  | 211,051 |  
|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  |         |  
|Effect of FIN 48 adjustments (note 9f)                                                                          |  |                                   |        |        |  |                                |  |                     |         |                                                     |       | (2,495 | ) |  |      |   |  | (2,495  | )
|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  |         |  
|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       | 46,693 |   |  |      |   |  | 208,556 |  
|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  |         |  
|CHANGES DURING 2007:                                                                                            |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  |         |  
|Net loss                                                                                                        |  |                                   |        |        |  |                                |  |                     |         |                                                     |       | (498   | ) |  |      |   |  | (498    | )
|Unrealized losses on investments                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  | (200 | ) |  | (200    | )
|Differences from translation of non
dollar currency financial
statements of a subsidiary and
associated company |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  | 396  |   |  | 396     |  
|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  |         |  
|Comprehensive loss                                                                                              |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  | (302    | )
|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  |         |  
|Stock based compensation expenses                                                                               |  |                                   |        |        |  |                                |  |                     | 3,889   |                                                     |       |        |   |  |      |   |  | 3,889   |  
|Additional consideration in respect of
  acquisition of a subsidiary                                            |  |                                   | 207    |        |  | 50                             |  |                     | 3,923   |                                                     |       |        |   |  |      |   |  | 3,973   |  
|Issuance of share capital to employees and
  non-employee resulting from exercise of options                    |  |                                   | 181    |        |  | 45                             |  |                     | 2,357   |                                                     |       |        |   |  |      |   |  | 2,402   |  
|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  |         |  
|BALANCE AT DECEMBER 31, 2007                                                                                    |  |                                   | 20,001 |        |  | 5,273                          |  |                     | 166,752 |                                                     |       | 46,195 |   |  | 298  |   |  | 218,518 |  
|                                                                                                                |  |                                   |        |        |  |                                |  |                     |         |                                                     |       |        |   |  |      |   |  |         |  

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

F  6

---

---

(Continued) - 1

RETALIX
LTD.CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                            |  |                         |         |      |  |         |   |  |        |  
|------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ------- | - |  | ------ | -
|                                                                                            |  | Year ended
 December 31 |        
|                                                                                            |  |                         |        
|                                                                                            |  | 2007                    |         | 2006 |  | 2005    |  
|                                                                                            |  |                         |         |      |  |         |  
|                                                                                            |  | U.S. $ in thousands     |        
|                                                                                            |  |                         |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                       |  |                         |         |      |  |         |   |  |        |  
|Net income (loss)                                                                           |  |                         | (498    | )    |  | 1,278   |   |  | 14,621 |  
|Adjustments required to reconcile net
 income to net cash provided by operating activities: |  |                         |         |      |  |         |   |  |        |  
|Minority interests in gains (losses) of
 subsidiaries                                       |  |                         | 508     |      |  | 425     |   |  | (189   | )
|Depreciation and amortization                                                               |  |                         | 6,947   |      |  | 8,362   |   |  | 6,422  |  
|Gain arising from issuance of shares by an
 associated company                              |  |                         | -       |      |  | -       |   |  | (83    | )
|Share in losses of an associated company                                                    |  |                         | 3       |      |  | 57      |   |  | 130    |  
|Stock based compensation expenses                                                           |  |                         | 3,889   |      |  | 3,891   |   |  | 167    |  
|Changes in accrued liability for employee
 rights upon retirement                           |  |                         | 2,739   |      |  | 2,102   |   |  | 989    |  
|Losses (gains) on amounts funded in respect
 of employee rights upon retirement             |  |                         | (950    | )    |  | (580    | ) |  | 155    |  
|Deferred income taxes - net                                                                 |  |                         | (6,570  | )    |  | (2,699  | ) |  | (1,498 | )
|Net decrease (increase) in trading securities                                               |  |                         | (216    | )    |  | 3,025   |   |  | (2,969 | )
|Amortization of discount on marketable debt
 securities                                     |  |                         | 11      |      |  | 56      |   |  | 92     |  
|Other                                                                                       |  |                         | (109    | )    |  | (32     | ) |  | (565   | )
|Changes in operating assets and
 liabilities:                                               |  |                         |         |      |  |         |   |  |        |  
|Increase in accounts receivable:                                                            |  |                         |         |      |  |         |   |  |        |  
|Trade (including the non-current portion)                                                   |  |                         | (34,700 | )    |  | (10,588 | ) |  | (5,212 | )
|Other  (including long term other tax payables)                                             |  |                         | 1,278   |      |  | (889    | ) |  | (926   | )
|Increase (decrease) in accounts payable and
 accruals:                                      |  |                         |         |      |  |         |   |  |        |  
|Trade                                                                                       |  |                         | 3,537   |      |  | (730    | ) |  | (300   | )
|Employees, employee institutions and
other                                                  |  |                         | (2,290  | )    |  | 933     |   |  | 2,149  |  
|Decrease (increase) in inventories                                                          |  |                         | (118    | )    |  | 1,022   |   |  | (1,045 | )
|Increase (decrease) in deferred revenues
 (including the non-current portion)               |  |                         | 2,810   |      |  | (2,616  | ) |  | 558    |  
|                                                                                            |  |                         |         |      |  |         |   |  |        |  
|                                                                                            |  |                         |         |      |  |         |   |  |        |  
|Net cash provided by (used in) operating
 activities - forward                              |  |                         | (23,729 | )    |  | 3,017   |   |  | 12,496 |  
|                                                                                            |  |                         |         |      |  |         |   |  |        |  

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

F  7

---

---

(Continued) - 2

RETALIX LTD.CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                           |  |                        |         |      |  |        |   |  |         |  
|-------------------------------------------------------------------------- |  | ---------------------- | ------- | ---- |  | ------ | - |  | ------- | -
|                                                                           |  | Year ended December 31 |        
|                                                                           |  |                        |        
|                                                                          
|                                                                           |  | 2007                   |         | 2006 |  | 2005   |  
|                                                                           |  |                        |         |      |  |        |  
|                                                                           |  | U.S. $ in thousands    |        
|                                                                           |  |                        |        
|                                                                          
|Net cash provided by (used in) operating
 activities - brought forward     |  |                        | (23,729 | )    |  | 3,017  |   |  | 12,496  |  
|                                                                           |  |                        |         |      |  |        |   |  |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                      |  |                        |         |      |  |        |   |  |         |  
|Maturity of marketable debt securities held
 to maturity                   |  |                        | 9,743   |      |  | 6,212  |   |  | 12,111  |  
|Investment in marketable debt securities
 held to maturity                 |  |                        | (9,047  | )    |  | (2,066 | ) |  | (1,876  | )
|Acquisition of subsidiaries consolidated
 for the first time (a)           |  |                        | (1,370  | )    |  | (2,653 | ) |  | (50,312 | )
|Additional investments in subsidiaries                                     |  |                        | -       |      |  | (5,754 | ) |  | (3,764  | )
|Refund in respect of cost of investment                                    |  |                        | -       |      |  | 651    |   |  | -       |  
|Purchase of property, plant, equipment and
 other assets                   |  |                        | (4,676  | )    |  | (2,567 | ) |  | (3,069  | )
|Proceeds from sale of property, plant and
 equipment                       |  |                        | 69      |      |  | 35     |   |  | 25      |  
|Amounts funded in respect of employee
 rights upon retirement, net         |  |                        | (1,097  | )    |  | (777   | ) |  | (905    | )
|Long-term loans collected from (granted to)
 employees                     |  |                        | 17      |      |  | (4     | ) |  | 114     |  
|                                                                           |  |                        |         |      |  |        |   |  |         |  
|Net cash used in investing activities                                      |  |                        | (6,361  | )    |  | (6,923 | ) |  | (47,676 | )
|                                                                           |  |                        |         |      |  |        |   |  |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                      |  |                        |         |      |  |        |   |  |         |  
|Repayment of short-term bank loans                                         |  |                        | -       |      |  | -      |   |  | (2,284  | )
|Repayment of long-term bank loans                                          |  |                        | (352    | )    |  | (117   | ) |  | (4,698  | )
|Issuance of share capital to employees
 resulting from exercise of options |  |                        | 2,402   |      |  | 2,696  |   |  | 10,150  |  
|Net increase (decrease) in short-term bank credit                          |  |                        | (4,731  | )    |  | 760    |   |  | (3,525  | )
|Minority investment in a subsidiary                                        |  |                        | -       |      |  | -      |   |  | 34      |  
|                                                                           |  |                        |         |      |  |        |   |  |         |  
|Net cash provided by (used in) financing
 activities                       |  |                        | (2,681  | )    |  | 3,339  |   |  | (323    | )
|                                                                           |  |                        |         |      |  |        |   |  |         |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                    |  |                        | 69      |      |  | 61     |   |  | (218    | )
|                                                                           |  |                        |         |      |  |        |   |  |         |  
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                  |  |                        | (32,702 | )    |  | (506   | ) |  | (35,721 | )
|BALANCE OF CASH AND CASH EQUIVALENTS AT
 BEGINNING OF YEAR                 |  |                        | 55,186  |      |  | 55,692 |   |  | 91,413  |  
|                                                                           |  |                        |         |      |  |        |   |  |         |  
|BALANCE OF CASH AND CASH EQUIVALENTS AT END
 OF YEAR                       |  |                        | 22,484  |      |  | 55,186 |   |  | 55,692  |  
|                                                                           |  |                        |         |      |  |        |   |  |         |  

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

F  8

---

---

(Continued) - 3

RETALIX LTD.CONSOLIDATED STATEMENTS OF CASH FLOWS

SUPPLEMENTARY
DISCLOSURE OF CASH FLOW INFORMATION:

|                                                                                                                            |  |                        |        |      |  |        |   |  |         |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | ---- |  | ------ | - |  | ------- | -
|                                                                                                                            |  | Year ended December 31 |       
|                                                                                                                            |  |                        |       
|                                                                                                                            |  | 2007                   |        | 2006 |  | 2005   |  
|                                                                                                                            |  |                        |        |      |  |        |  
|                                                                                                                            |  | U.S. $ in thousands    |       
|                                                                                                                            |  |                        |       
|(a) Supplementary disclosure of cash flow
 information -                                                                    |  |                        |        |      |  |        |   |  |         |  
|Fair value of assets acquired and
 liabilities assumed of subsidiaries and activities acquired at the date of
 acquisition: |  |                        |        |      |  |        |   |  |         |  
|Working capital (excluding cash and cash
 equivalents)                                                                      |  |                        | 174    |      |  | 302    |   |  | (1,441  | )
|Deferred revenues                                                                                                           |  |                        |        |      |  | -      |   |  | 10,677  |  
|Deferred income taxes                                                                                                       |  |                        |        |      |  | -      |   |  | (396    | )
|Property plant and equipment                                                                                                |  |                        | (6     | )    |  | (54    | ) |  | (1,867  | )
|Short- term bank credit                                                                                                     |  |                        |        |      |  | -      |   |  | 2,230   |  
|Goodwill and other intangible assets
 arising on acquisition                                                                |  |                        | (1,679 | )    |  | (2,901 | ) |  | (84,211 | )
|Issuance of the Companys share capital                                                                                     |  |                        |        |      |  | -      |   |  | 23,863  |  
|Increase in account payable- other                                                                                          |  |                        | 141    |      |  | -      |   |  | 833     |  
|                                                                                                                            |  |                        |        |      |  |        |   |  |         |  
|                                                                                                                            |  |                        | (1,370 | )    |  | (2,653 | ) |  | (50,312 | )
|                                                                                                                            |  |                        |        |      |  |        |   |  |         |  
|                                                                                                                            |  |                        |        |      |  |        |   |  |         |  
|(b) Supplementary disclosure of cash flow
 information -                                                                    |  |                        |        |      |  |        |   |  |         |  
|cash paid during the year for:                                                                                              |  |                        |        |      |  |        |   |  |         |  
|                                                                                                                            |  |                        |        |      |  |        |   |  |         |  
|Interest                                                                                                                    |  |                        | 1,766  |      |  | 1,508  |   |  | 1,895   |  
|                                                                                                                            |  |                        |        |      |  |        |   |  |         |  
|Income tax                                                                                                                  |  |                        | 6,713  |      |  | 4,605  |   |  | 4,236   |  
|                                                                                                                            |  |                        |        |      |  |        |   |  |         |  

(c)
Supplemental information on investing activities not involving cash flows:

| |    |                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1) | On April 1, 2005, the Company
acquired substantially all of the assets of Integrated Distribution Solutions Inc.
(IDS), in consideration for cash, as well as the issuance of share capital. In
addition, in respect of this acquisition, in 2007 additional 207,236 shares valued at
$3,973,129 that were released from escrow as certain customer retention milestones agreed
upon were met.

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

F  9

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|           |                                  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---------- | -------------------------------- | -------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES:
|           |                                  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | a.                               | General:
|           |                                  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                  | 1)       | Nature of
 operations:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                  |          | a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Retalix Ltd.
 (the Company), an Israeli corporation whose shares are listed on the Nasdaq
 Global Select Market (under the symbol RTLX) and on the Tel-Aviv Stock
 Exchange (TASE), separately and together with its subsidiaries and an
 associated company (the Group), develops, manufactures and markets
 integrated enterprise-wide, open software solutions for the sales operations
 and supply chain management operations of food and fuel retailers, including
 supermarkets, convenience stores and fuel stations as well as suppliers and
 manufacturers in the food industry.
|           |                                  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                  |          | b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | As to the Groups
 geographical segments and principal customers, see note 13.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                  |          | c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Subsidiary -
 over which the Company has control and over 50% of the ownership.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                  |          | d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Associated
 company - an investee company (which is not a subsidiary), over which financial
 and operational policy the Company exerts material influence.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                  | 2)       | Accounting
 principles and use of estimates in the preparation of financial statements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                  |          | The
 financial statements have been prepared in accordance with accounting principles
 generally accepted (GAAP) in the United States of America (U.S. GAAP).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                  |          | The
 preparation of financial statements in conformity with GAAP requires
 management to make estimates and assumptions that affect the reported amounts
 of assets and liabilities, and the disclosure of contingent assets and
 liabilities at the dates of the financial statements as well as the reported
 amounts of revenues and expenses during the reporting years. Actual results
 could differ from those estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                  | 3)       | Functional
 currency:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                  |          | The currency
 of the primary economic environment in which the operations of the Group and
 almost each member of the Group (except for one subsidiary and the associated
 company) are conducted is the U.S. dollar (dollar; $). Most of the
 Groups revenues and also most of the Groups expenses incur in dollars or in
 Israeli currency linked to the dollar. The Groups financing is mostly in
 dollars. Thus, the functional currency of the Group is the dollar.                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                  |          | Transactions
 and balances originally denominated in dollars are presented at their
 original amounts. Balances in non-dollar currencies are translated into
 dollars using historical and current exchange rates for non-monetary and
 monetary balances, respectively. For non-dollar transactions and other items
 (stated below) reflected in the statements of income (loss), the following exchange
 rates are used: (i) for transactions - exchange rates at transaction dates or
 average rates; and (ii) for other items (derived from non-monetary balance
 sheet items such as depreciation and amortization, changes in inventories,
 etc.) - historical exchange rates. Currency transaction gains or losses are
 carried to financial income or expenses, as appropriate. The functional
 currency of one subsidiary and of the associated company is their local
 currency

F  10

---

---

RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                   | 
|---------- | ------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES(continued):
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                   | 
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | (Euro and
 New Israeli Shekel, respectively) (NIS). The financial statements of the
 said subsidiary are included in the consolidation based on translation into
 dollars in accordance with Financial Accounting Standards Board (FASB)
 Statement No. 52 Foreign Currency Translation (FAS 52):                                      
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                   | 
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Assets and
 liabilities are translated at year end exchange rates, while operating
 results items are translated at average exchange rates during the year.
 Differences resulting from translation are presented in shareholders equity
 under accumulated other comprehensive income (loss).                                                  
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                   | 
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | The
 financial statements of the associated company are included in the financial
 statements of the Company in accordance with the equity method, based on
 translation into dollars in accordance with FAS 52- the resulting translation
 adjustments are presented under shareholders equity- accumulated other
 comprehensive income (loss).
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                   | 
|           | b.                                          | Principles of consolidation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                   | 
|           |                                             | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | The
 consolidated financial statements include the accounts of the Company and its
 subsidiaries.                                                                                                                                                                                                                                                
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                   | 
|           |                                             | 2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Intercompany
 balances and transactions have been eliminated in consolidation.                                                                                                                                                                                                                                                                   
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                   | 
|           |                                             | 3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | As for
 goodwill and other intangible assets arising on business combinations, see h.
 below.                                                                                                                                                                                                                                                    
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                   | 
|           | c.                                          | Cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                   | 
|           |                                             | The Group considers
 all highly liquid investments, which include short-term bank deposits with an
 original maturity date of three months or less that are not restricted as to
 withdrawal or use, to be cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                   | 
|           | d.                                          | Marketable securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                   | 
|           |                                             | Marketable
 securities consist of debt securities. The Company accounts for investments
 in marketable securities in accordance with FASB Statement No. 115,
 Accounting for Certain Investments in Debt and Equity Securities.                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                   | 
|           |                                             | Investments
 in certain marketable bonds are classified as held to maturity because the
 Company has the intent and ability to hold such bonds to maturity and are
 stated at amortized cost with the addition of computed interest accrued to
 balance sheet date (such interest represents the computed yield on cost from
 acquisition to maturity). Interest and amortization of premium discount for
 debt securities are carried to financial income or expenses.                                                                                                                                                                          
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                   | 
|           |                                             | Investments
 in other bonds and marketable securities that are classified as trading
 securities are stated at market value. The changes in market value of these
 securities are carried to financial income or expenses.                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                   | 
|           |                                             | Sales of
 securities classified as trading securities are accounted for on specific
 cost basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                   | 
|           |                                             | Investment in one marketable bond is
classified as available-for-sale and is recorded at fair value. Since this security do not
have an active market, fair value is determined using a valuation model. This model is
based on reference to other instruments with similar characteristics, or a discounted cash
flow analysis, or other pricing models making use of market inputs and relying as little
as possible on entity-specific inputs. Changes in fair value, net of taxes, are reflected
in other comprehensive income (loss). Unrealized losses considered to be other than
temporary are charged to income as an impairment charge;

F  11

---

---

RETALIX LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                                             |                                                                                                                                                                                 
|---------- | ------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES(continued):
|           |                                             |                                                                                                                                                                                 
|           | e.                                          | Investment in an associated company                                                                                                                                             
|           |                                             |                                                                                                                                                                                 
|           |                                             | This investment
 is accounted for by the equity method and included among other non-current
 assets.                                                                            
|           |                                             |                                                                                                                                                                                 
|           | f.                                          | Inventories                                                                                                                                                                     
|           |                                             |                                                                                                                                                                                 
|           |                                             | Inventories
 include hardware products that are included in finished goods and are valued
 at the lower of cost or market. Cost is determined on a first-in, first-out
 basis.

| |    |                                |                                                                                                                                                  
| | -- | ------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------
| | g. | Property, plant and equipment:
|
| |    | 1)                             | These assets
 are stated at cost; assets of acquired subsidiaries are included at their
 fair value at date of acquisition of these subsidiaries.
| |    |                                |                                                                                                                                                  
| |    | 2)                             | The assets
 are depreciated by the straight-line method, on the basis of their estimated
 useful life.                                           
| |    |                                |                                                                                                                                                  
| |    |                                | Annual rates
 of depreciation are as follows:                                                                                                    

|                                    |  |       |           
|----------------------------------- |  | ----- | ----------
|                                    |  | %    
|                                    |  |      
|Computers
 and peripheral equipment |  | 20-33
|Vehicles                            |  | 15    |           
|Office
 furniture and equipment     |  | 6-25  | (mainly 6)
|Building                            |  | 4     |           
|Land leasing
 rights                |  | 3     |           

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                              
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Leasehold
 improvements are amortized by the straight line method over the term of the
 lease, which is shorter than the estimated useful life of the improvements.
 Land lease rights are amortized by the straight line method over the term of
 the lease.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                              
| | h. | Goodwill and other intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                              
| |    | Goodwill is the excess of the
purchase price over the fair value of identifiable net assets acquired in business
combinations accounted for as purchases. The goodwill is not amortized to earnings, but
instead is subject to periodic testing for impairment at least annually or between annual
tests if certain events or indicators of impairment occur.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                              
| |    | Other
 intangible assets are amortized over a period of one to fifteen years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                              
| | i. | Impairment in value of long-lived assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                              
| |    | Assets that are to be held and used
by an entity are being reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                              
| | j. | Contingent Consideration                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                              
| |    | The
 aggregate consideration for certain of the Companys acquisitions increased
 when certain future internal performance goals were later satisfied. Such
 additional consideration was paid in the form of additional shares of the
 Company, which were reserved for that purpose. The measurement and
 recognition of contingent consideration are accounted in accordance with SFAS
 No. 141, Business Combinations (SFAS 141), contingent consideration is
 recorded when a contingency is satisfied and additional consideration is
 issued or become issuable. The Company records the additional consideration
 issued or issuable in connection with the relevant acquisition when a
 specified internal performances goal is met. For additional consideration
 paid in stock, the Company calculates the amount of
 additional consideration using the closing price of its stock on the date the
 performance goal is satisfied,

F  12

---

---

RETALIX LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                                              |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|---------- | -------------------------------------------- | ------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES (continued):
|           |                                              |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           | k.                                           | Income taxes:
|           |                                              |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                              | 1)            | The Company accounts for income taxes in accordance with FASB Statement No. 109,
Accounting for Income Taxes. Deferred income taxes are determined by
the asset and liability method based on the estimated future tax effects of
differences between the financial accounting and the tax bases of assets and
liabilities under the applicable tax law. Deferred tax balances are computed
using the tax rates expected to be in effect at time when these differences
reverse. Valuation allowances in respect of the deferred tax assets are provided
when it is more likely than not that all or a portion of the deferred income tax
assets will not be realized. See note 9g for additional information
regarding the composition of the deferred taxes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                              |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                              | 2)            | Upon the distribution of dividends from the tax-exempt income of Approved
Enterprises (see also notes 8c and 9g), the amount distributed will
be subject to tax at the rate that would have been applicable had the Company
not been exempted from payment thereof. The Company intends to permanently
reinvest the amounts of tax exempt income and it does not intend to cause
distribution of such dividends. Therefore, no deferred income taxes have been
provided in respect of such tax-exempt income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                              |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                              | 3)            | The Group
 may incur an additional tax liability in the event of an inter-company
 dividend distribution from foreign subsidiaries; no additional deferred
 income taxes have been provided, since it is the Groups policy not to
 distribute, in the foreseeable future, dividends which would result in
 additional tax liability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                              |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                              | 4)            | Taxes which
 would apply in the event of disposal of investments in foreign subsidiaries
 have not been taken into account in computing the deferred income taxes, as
 it is the Companys policy to hold these investments, not to realize them.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                              |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                              | 5)            | As of January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109"
(FIN 48). FIN 48 specifies how tax benefits for uncertain tax positions are to be
recognized, measured, and derecognized in financial statements; requires certain
disclosures of uncertain tax positions; specifies how reserves for uncertain tax positions
should be classified on the balance sheet; and provides transition and interim-period
guidance, among other provisions. On May 2, 2007, the FASB issued FASB Staff Position No.
FIN 48-1, Definition of Settlement in FASB Interpretation No. 48-1"(FSP
FIN 48-1). FSP FIN 48-1 provides guidance on how an entity should determine whether
a tax position is effectively settled for the purpose of recognizing previously
unrecognized tax benefits. The Company adopted FSP FIN 48-1 As of January 1, 2007. The
Companys policy to include interest and penalties relating to uncertain tax
positions, within the provision for income taxes has not change as a result of
implementing FIN 48. The adoption of FIN 48 resulted in the
recording as of January 1, 2007, of an increase of the tax liabilities totaling $2,495,000
(including interest in the amount of $222,000) associated with tax benefits and other
uncertainties related to tax returns, which was accounted for as a reduction of the
retained earnings balance as of January 1, 2007.

F  13

---

---

RETALIX LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---------- | ------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES(continued):
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           | l.                                          | Revenue recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                             | The Group
 derives its revenues from the licensing of integrated software products, and
 to some extent from the sale of complementary computer and other hardware
 equipment, all of which it classifies as revenues from product sales. The
 Group also derives revenues from maintenance and other professional services
 which are principally software changes and enhancements requested by
 customers as well as on-line application, information and messaging services,
 mostly associated with products sold by the Group and which it classifies as
 revenues from services and projects.                                                                                                                                                                                                                    
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                             | Revenues
 from sales of products and software license agreements are recognized when
 all of the criteria in Statement of Position (SOP) 97-2, Software Revenue
 Recognition as amended by SOP 98-9, Modification of SOP 97-2, Software
 Revenue Recognition With Respect to Certain Transactions, herein referred to
 as SOP 97-2, are met. Revenues from products and license fees are recognized
 when persuasive evidence of an agreement exists, delivery of the product has
 occurred, the fee is fixed or determinable, no further obligations exist and
 collectability is probable.                                                                                                                                                                                                                      
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                             | Revenues from software licenses and
or sale of products that require significant customization, integration and installation
are recognized based on SOP 81-1, Accounting for Performance of Construction-Type
and Certain Production-Type Contracts, according to which revenues are recognized on
a percentage of completion basis. Percentage of completion is determined based on the
Input Method when collectability is probable. Provisions for estimated losses
on uncompleted contracts are recognized in the period in which the likelihood of the
losses is identified. As of December 31, 2007, no such estimated losses were identified.                                                                                                                                                               
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                             | Where
 software license arrangements involve multiple elements (mostly software
 licenses, maintenance and other professional services), the arrangement
 consideration is allocated using the residual method. Under the residual
 method, revenue is recognized for the delivered elements when (1) Vendor
 Specific Objective Evidence (VSOE) of the fair values of all the
 undelivered elements exists, and (2) all revenue recognition criteria of SOP
 97-2, as amended, are satisfied. Under the residual method, any discount in
 the arrangement is allocated to the delivered element. The Companys VSOE of
 fair value for maintenance is based on a consistent renewal percentage.
 Revenues from maintenance services are recognized ratably over the
 contractual period or as services are performed.
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                             | Revenues
 from professional services that are not bundled or linked to a software sale
 are recognized as services are performed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                             | Hardware
 sales are recognized on a gross price basis, in accordance with Emerging
 Issues Task Force (EITF) 99-19, Reporting Gross Revenue as a Principal
 versus Net as an Agent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                             | In cases
 where the products are sold to smaller retailers, through resellers, revenues
 are recognized as the products are supplied to the resellers in accordance
 with the provisions of Statement of FASB Statement No. 48  Revenue
 Recognition When Right of Return Exists. In specific cases where resellers
 have right of return or the Company is required to repurchase the products or
 in case the Company guarantees the resale value of the products, revenues are
 recognized as the products are delivered by the resellers.                                                                                                                                                                                                                                                                        

F  14

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---

RETALIX LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|---------- | ------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES(continued):
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           | l.                                          | Revenue recognition (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                             | Revenues
 from on-line application, information and messaging services, are recognized
 as rendered in accordance with the provisions of Staff Accounting Bulletin
 No. 104 of the Securities and Exchange Commission.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                             | Deferred
 revenue includes advances and payments received from customers, for which
 revenue has not yet been recognized as well as obligations related to the
 provision of maintenance services.
                  The Company recognizes revenues net of VAT.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           | m.                                          | Research and development                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                             | Research and
 development expenses are charged to expenses as incurred. Participations
 received from the Government of Israel for development of approved projects
 are recognized as a reduction of expenses when the related costs are
 incurred. Development costs incurred subsequent to the establishment of
 technological feasibility are capitalized in accordance with the principles
 set forth in FASB Statement No. 86, Accounting for the Costs of Computer
 Software to be Sold, Leased or Otherwise Marketed. Based on the Companys
 product development process technological feasibility is established upon
 completion of a working model i.e. only when all planning, designing, coding
 and testing have been completed according to design specifications. Costs
 incurred by the Company between completion of the working models and the
 point at which the products are ready for general release has been
 insignificant. Therefore, all research and development costs have been
 expensed.
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           | n.                                          | Issuance of shares by associated company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                             | Capital gains
 arising from the issuance of shares by an investee company to third parties
 are reflected in the statement of income (loss) on current basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           | o.                                          | Concentration of credit risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                             | Financial
 instruments, which potentially subject the Company to credit risk, consist
 principally of trade receivables and interest bearing investments. The cash
 and cash equivalents as of December 31, 2007 are deposited mainly with
 leading Israeli and U.S. banks. As of December 31, 2007, the Company had
 an investment of $1 million of a security held in auction rate security  see
 note 1d. In the opinion of the Company, the credit risk inherent in these
 balances is remote. In addition, the Company performs on-going credit
 evaluations of its clients and generally does not require collateral.                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           | p.                                          | Allowance for doubtful accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                             | The
 allowance for doubtful accounts is determined on the basis of rates applied
 to customer balances in accordance with aging and on the basis of analysis of
 specific debts which are doubtful of collection. In determining the allowance
 for doubtful accounts, the Group considers, among other things, its past
 experience with such customers, the economic environment, the industry in
 which such customers operate, financial information available on such
 customers, etc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F  15

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---

RETALIX LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | ------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1 | SIGNIFICANT ACCOUNTING POLICIES(continued):
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | q.                                          | Earnings per share (EPS)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        |                                             | Basic EPS is computed by dividing net
income (loss) by the weighted average number of shares outstanding during the year.
Diluted EPS reflects the increase in the weighted average number of shares outstanding
that would result from the assumed exercise of options, calculated using the
treasury-stock method in accordance with FASB Statement No. 128, Earnings Per
Share (FAS 128). The options of certain subsidiaries (see
note 8b) have no effect on the Companys diluted EPS since their effect on the
subsidiaries EPS is anti-dilutive. As to the data used in the per share computation,
see note 14d.                                                                                                                                                                                                                                                                                                                                                                    
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | r.                                          | Other comprehensive income (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        |                                             | Other comprehensive income, presented
in shareholders equity, represents currency translation adjustments of non-dollar
currency financial statements of a subsidiary and of an associated company (accumulated
balance at December 31, 2007, 2006 and 2005, is $498,000, $102,000 and ($288,000),
respectively) and in 2007 the unrealized losses of investment in available for sale
security.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | s.                                          | Stock based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        |                                             | Effective
  January 1, 2006, the Company adopted FASB Statement No. 123 (Revised 2004),
  Share-Based Payment, a revision of FASB Statement No. 123 (SFAS 123(R)).
  SFAS 123(R) supersedes Accounting Principles Board (APB) Opinion No. 25,
  Accounting for Stock Issued to Employees (APB No. 25) and related
  interpretations, and amends FASB Statement No. 95, Statement of Cash Flows
  Generally, the approach in SFAS 123(R) is similar to the approach described
  in SFAS 123. However, SFAS 123(R) requires all equity-based payments to
  employees, including grants of employee stock options, to be recognized in
  the income statement based on their fair values. Pro forma disclosure is no
  longer an alternative. In March 2005, the SEC issued Staff Accounting
  Bulletin No. 107 (SAB 107), which provides supplemental implementation
  guidance on SFAS 123(R). The Company has applied the provisions of SAB 107 in
  its adoption of SFAS 123(R).
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        |                                             | Prior
to January 1, 2006, The Company accounted for employee stock-based compensation in
accordance with Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees and related interpretations. In
accordance with FASB Statement No. 123, Accounting for Stock-Based
Compensation (SFAS 123), the Group disclosed proforma information on the
net income and earning per share assuming the Group had accounted for employee stock
option grants using the fair value-based method defined in SFAS 123.                                                                                                                                                                                                                                                                                                                                                                                                                                              

F  16

---

---

RETALIX LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------- | ------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1 | SIGNIFICANT ACCOUNTING POLICIES(continued):
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | s.                                          | Stock based compensation (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        |                                             | The Company adopted SFAS 123(R) using
the modified prospective method. Under this transition method, compensation costs
recognized as from January 1, 2006 include (a) compensation costs for all equity-based
payments granted prior to, but that had not yet vested as of, January 1, 2006, based on
the grant date fair value estimated in accordance with the pro forma provisions of SFAS
123 adjusted for estimated forfeitures, see below, and (b) compensation costs for the
equity-based payments granted subsequent to January 1, 2006 based on the grant date fair
value estimated in accordance with SFAS 123(R). The Companys consolidated financial
statements for prior periods have not been restated to reflect, and do not include, the
impact of SFAS 123(R). The Company selected the Black-Scholes option pricing model as the
appropriate fair value method for its stock-options awards based on the market value of
the underlying shares at the date of grant. The Company recognizes compensation costs
using the multiple option award approach that results in an accelerated recognition of
compensation costs in comparison to the straight line method.
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        |                                             | The Company
  uses historical stock price volatility as the expected volatility assumption
  required in the Black-Scholes option valuation model. As equity-based
  compensation expense recognized in the Companys consolidated statement of
  income for fiscal 2006 is based on awards ultimately expected to vest, such
  expense has been reduced for estimated forfeitures. SFAS 123(R) requires
  future forfeitures to be estimated at grant date and at each balance sheet
  date thereafter. In the Companys pro forma information required under SFAS
  123 for the periods prior to fiscal 2006, the Company accounted for
  forfeitures as they occurred. As a result of the adoption of SFAS 123(R),
  starting 2006, the Company recorded the compensation cost based on an
  expected forfeiture rate.                                                                                                                                                                                                                                                                                                                                                              
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        |                                             | The Company
  accounts for equity instruments issued to third party service providers
  (non-employees) in accordance with the fair value based on an option-pricing
  model, pursuant to the guidance in EITF 96-18 Accounting for Equity
  Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction
  with Selling Goods or Services. The fair value of the options granted is
  revalued over the related service periods and recognized over the vesting
  period using the accelerated method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        |                                             | The total
  compensation costs recognized in the year ended December 31, 2007 and 2006
  income statement for stock-based employee compensation awards were $3,017,000
  and $2,923,000, respectively, net of the tax effect of $40,000 and $45,000,
  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        |                                             | The total
  compensation costs recognized in the year ended December 31, 2007 and 2006
  income statement for stock-based non employee compensation awards were
  $799,000 and $516,000, respectively, net of the tax effect of $33,000 and
  $237,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

F  17

---

---

RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                      
|------- | ------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1 | SIGNIFICANT ACCOUNTING POLICIES(continued):
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                      
|        | s.                                          | Stock based compensation (Continued)                                                                                                                                                                                                                                                                                                                                                                 
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                      
|        |                                             | As discussed
  above, prior to fiscal 2006, the Group followed the disclosure-only
  provisions of SFAS 123. The following table illustrates the effect on net
  income and earnings per share assuming the Group had applied the fair value
  recognition provisions of SFAS 123 to its stock-based employee compensation
  in the year ended December 31, 2005, before the adoption of SFAS 123(R):

|                                                                                                                |  |                                                  |        |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------ | ------ | -
|                                                                                                                |  | Year
  ended December
  31                       |       
|                                                                                                                |  |                                                  |       
|                                                                                                                |  | 2005                                             |       
|                                                                                                                |  |                                                  |       
|                                                                                                                |  | U.S. $
  in thousands,
  except per share
  data |       
|                                                                                                                |  |                                                  |       
|                                                                                                                |  |                                                  |        |  
|Net income, as reported                                                                                         |  |                                                  | 14,621 |  
|Deduct  the stock based employee
  compensation effect determined under the fair value method for all awards * |  |                                                  | (3,832 | )
|                                                                                                                |  |                                                  |        |  
|Pro forma net income                                                                                            |  |                                                  | 10,789 |  
|                                                                                                                |  |                                                  |        |  
|                                                                                                                |  |                                                  |        |  
|Earnings per share:                                                                                             |  |                                                  |        |  
|Basic - as reported                                                                                             |  |                                                  | 0.78   |  
|                                                                                                                |  |                                                  |        |  
|Basic - pro forma                                                                                               |  |                                                  | 0.58   |  
|                                                                                                                |  |                                                  |        |  
|Diluted - as reported                                                                                           |  |                                                  | 0.74   |  
|                                                                                                                |  |                                                  |        |  
|Diluted - pro forma                                                                                             |  |                                                  | 0.55   |  
|                                                                                                                |  |                                                  |        |  

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | The fair
  value of each option granted is estimated on the date of grant using the
  Black-Scholes option-pricing model. See note  8b for weighted average
  assumptions:
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                           
| | t. | Advertising expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | These costs
  are charged to selling and marketing expenses as incurred. Advertising
  expenses totaled $2,820,000, $2,095,000 and $2,716,872 in the years ended
  December 31, 2007, 2006 and 2005, respectively.                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                           
| | u. | Derivative financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                           
| |    | The Company
  has only limited involvement with foreign exchange derivative financial
  instruments (forward exchange contracts). The transactions are designed to
  hedge the currency exposure on identifiable assets and liabilities in
  currencies other than the functional currency. These contracts do not qualify
  for hedge accounting under FAS 133. As a result, changes in the fair value of
  derivatives are reflected, as incurred, in the statements of income and
  included in financial expenses - net.

F  18

---

---

RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------- | ------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1 | SIGNIFICANT ACCOUNTING POLICIES(continued):
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | v.                                          | Sale of receivables                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        |                                             | The Group
  factors some of its trade receivables. The factoring is effected through
  banks, on a non-recourse basis. The transfer of accounts receivable qualify
  as a sales transaction under the provisions of FASB Statement No.140,
  Accounting for Transfers and Servicing of Financial Assets and
  Extinguishments of Liabilities (FAS 140). The resulting costs are charged
  to financial expenses - net, as incurred. The balance of factored receivables
  amounted approximately $10,448,000 and $35,900,000 as of December 31, 2007
  and 2006, respectively. The expenses resulting from the sales of trade
  receivables in the years ended December 31, 2007, 2006 and 2005 amounted to
  $1,862,000, 1,482,000 and $1,836,000, respectively, and are included in
  financial expenses. In the fourth quarter of the year the company decided to discontinue the factoring of receivables.                                                                                                                                                                                                                                                                                                                                  
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | w.                                          | Adoption of Staff Accounting Bulletin No. 108, Considering the
  Effects of Prior Year Misstatements when Quantifying Misstatements in Current
  Year Financial Statements. (SAB 108):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        |                                             | In September
  2006, the SEC staff issued SAB 108. SAB 108 was issued in order to eliminate
  the diversity of practice surrounding how public companies quantify financial
  statement misstatements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        |                                             | Traditionally,
  there have been two widely-recognized methods for quantifying the effects of
  financial statement misstatements: the roll-over method and the iron
  curtain method. The roll-over method focuses primarily on the impact of a
  misstatement on the income statementincluding the reversing effect of prior
  year misstatementsbut its use can lead to the accumulation of misstatements
  in the balance sheet. The iron-curtain method, on the other hand, focuses
  primarily on the effect of correcting the period-end balance sheet with less
  emphasis on the reversing effects of prior year errors on the income
  statement. Prior to our application of the guidance in SAB 108, the Group
  used the roll-over method for quantifying financial statement misstatements.
  In SAB 108, the SEC staff established an approach that requires
  quantification of financial statement misstatements based on the effects of
  the misstatements on each of the companys financial statements and the
  related financial statement disclosures. This model is commonly referred to
  as a dual approach because it requires quantification of errors under both
  the iron curtain and the roll-over methods.
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        |                                             | SAB 108
  permitted existing public companies to initially apply its provisions either
  by (i) restating prior financial statements as if the dual approach had
  always been applied or (ii) recording the cumulative effect of initially
  applying the dual approach as adjustments to the carrying values of assets
  and liabilities as of January 1, 2006 with an offsetting adjustment recorded
  to the opening balance of retained earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        |                                             | The Group elected to record the
effects of applying SAB 108 using the cumulative effect transition method. The adoption of
SAB 108 resulted in a cumulative effect in an aggregate amount of $1,621,000 being
recorded against the Groups retained earnings as of January 1, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F  19

---

---

RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|        |                                             |                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------- | ------------------------------------------- | --------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1 | SIGNIFICANT ACCOUNTING POLICIES(continued):
|        |                                             |                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | x.                                          | Newly issued accounting pronouncements:                                                            
|        |                                             |                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |                                             | 1)                                                                                                  | In September 2006, the FASB issued
Statement of Financial Accounting Standards No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 defines fair value, establishes a framework and gives
guidance regarding the methods used for measuring fair value, and expands disclosures
about fair value measurements. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal
years (January 1, 2008, for the Company). Subsequent to the issuance of SFAS 157, the FASB
issued FASB Staff Positions (FSP) 157-1, Application of FASB Statement No. 157 to
FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement 13
and FSP 157-2 Effective Date of FASB Statement No. 157. FSP 157-1 excludes, in
certain circumstances, SFAS 13 and other accounting pronouncements that address fair value
measurements for purposes of lease classification or measurement under Statement 13 from
the provision of SFAS 157. FSP 157-2 delays the effective date of SFAS 157 for
nonfinancial assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least
annually). FSP 157-2 defers the effective date of SFAS 157 for such instruments to fiscal
years beginning after November 15, 2008, and interim periods within those fiscal (January
1, 2009, for the Company). The Company is currently assessing the impact that SFAS 157
will have on its consolidated financial statements.
|        |                                             |                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |                                             | 2)                                                                                                  | In February
  2007, the Financial Accounting Standards Board (FASB) issued Statement of
  Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for
  Financial Assets and Financial Liabilities, Including an Amendment of FASB
  Statement No. 115, which will become effective in 2008. SFAS No. 159 permits
  entities to measure eligible financial assets, financial liabilities and firm
  commitments at fair value, on an instrument-by-instrument basis, that are
  otherwise not permitted to be accounted for at fair value under other
  generally accepted accounting principles. The fair value measurement election
  is irrevocable and subsequent changes in fair value must be recorded in
  earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        |                                             |                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |                                             | 3)                                                                                                  | In December 2007, the FASB issued FAS
No. 141 (revised 2007), Business Combinations, and FAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements-an amendment of ARB No. 51 . FAS
No. 141 (revised 2007) requires an acquirer to measure the identifiable assets
acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their
fair values on the acquisition date, with goodwill being the excess value over the net
identifiable assets acquired. This standard also requires the fair value measurement of
certain other assets and liabilities related to the acquisition such as contingencies and
research and development. FAS No. 160 clarifies that a noncontrolling interest in a
subsidiary should be reported as a component of shareholders equity in the
consolidated financial statements. Consolidated net income should include the net income
for both the parent and the noncontrolling interest with disclosure of both amounts on the
consolidated statement of income. The calculation of earnings per share will continue to
be based on income amounts attributable to the parent. The effective date for both
Statements is for fiscal years beginning after December 15, 2008. The adoption of FAS
No. 141 (revised 2007) is prospective. The adoption of FAS No. 160 is
prospective. The impact to presentation and disclosure are applied retrospectively. We are
currently in the process of evaluating the impact, if any, that the adoption of FAS
No. 141 (revised 2007) and FAS No. 160 will have on our financial position,
consolidated results of operations and cash flows.                     
|        |                                             |                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |                                             | 4)                                                                                                  | In March 2008, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 161, Disclosures about Derivative Instruments and Hedging Activities-an
amendment of FASB Statement No. 133. SFAS No. 161 expands the current disclosure
requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, such that entities must now provide enhanced disclosures on a quarterly
basis regarding how and why the entity uses derivatives; how derivatives and related
hedged items are accounted for under SFAS No. 133 and how derivatives and related hedged
items affect the entitys financial position, performance and cash flow. Pursuant to
the transition provisions of the Statement, the company will adopt SFAS No. 161 in fiscal
year 2009 and will present the required disclosures in the prescribed format on a
prospective basis. This Statement will not impact the Consolidated Financial Statements as
it is disclosure-only in nature.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |                                             |                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | y.                                          | Reclassification                                                                                   
|        |                                             |                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |                                             | Certain
  comparative figures have been reclassified to conform to the current year
  presentation.

F  20

---

---

RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|        |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- | ------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2 | ACQUISITIONS:
|        |              
|        |               | The results
 of the following acquisitions done by the Company to further expand its
 product offerings and market position are included in the Companys consolidated
 statement of operations as of the date of the acquisition of each company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | a.            | In May 1, 2007, the Company, through
its subsidiary Retalix Holdings Inc. acquired substantially all of the assets and certain
identified liabilities of BGI International for $1,370,000 in cash (including transaction
costs in amount of $20,000) and an additional $150,000 amount to be paid on the two years
anniversary date of the acquisition. In addition, up to an additional $1.4 million will be
payable by the Company over the next three years based on the excess of revenues derived
from the BGI acquired assets over certain defined thresholds. The identified intangible
assets acquired amounted to approximately $736,000 and included customer relationships of
approximately $200,000 to be amortized over an estimated useful life of 6 years and
Acquired Technology of approximately $536,000 to be amortized over an estimated useful
life of 3 years. Goodwill arising on the acquisition amounted to approximately $943,000.
The goodwill will be amortized for tax purposes over a period of 15 years. The Company
expects that this acquisition will enhance the suite of software solutions to include
grocery and transportation management tools and save time on development of such solutions
on a standalone basis. Accordingly, the acquisition resulted in a significant allocation
to goodwill.
|        |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | b.            | In February
 2006, the Company, through its subsidiary Retalix Holdings Inc. acquired substantially
 all of the assets and liabilities of Base Products, Inc., a provider of a
 suite of hardware and software products and services for food and consumer
 goods retailers, for $2,653,000 in cash. The identified intangible assets
 acquired amounted to approximately $1,287,000 and included mainly customer
 relationships of approximately $1,277,000 to be amortized over an estimated
 useful life of 15 years. Goodwill arising on the acquisition amounted to
 approximately $1,614,000. The goodwill will be amortized for tax purposes
 over a period of 15 years. The Company expects that this acquisition will
 strengthen and significantly widen its customer relationship in the
 independent food and consumer goods retail industry and thus improve its
 position in its target markets. Accordingly, the acquisition resulted in a
 significant allocation to goodwill.                                                                                                                                                                                                                                                                                                                                            
|        |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | c.            | In March
 2006, the Company through its subsidiary Retalix Holdings Inc., acquired an
 additional 45% of the equity of StoreNext Retail Technology LLC (StoreNext
 USA) and increased its holdings in StoreNext USA to 95%. The consideration
 the Company paid for this acquisition was approximately $4,875,000 in cash.
 The identified intangible assets acquired amounted to approximately
 $1,553,000 and included mainly customer relationships of approximately
 $833,000 to be amortized over an estimated useful life of 15 years - see also
 note 4b. Goodwill arising on the acquisition amounted to approximately
 $3,323,000. The Company expects that this acquisition will strengthen
 StoreNext USA and widen its access to hardware sources and thus increase its
 customer relationship and improve its position in its target markets.
 Accordingly, the acquisition resulted in a significant allocation to
 goodwill. In March 2008, the Company exercised its right and option to
 purchase from a third party additional 5% of StoreNext USA for an aggregate
 amount of $625,000.                                                                                                                                                                                                                              
|        |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | d.            | In August
 2006, the Company acquired an additional 31% of the equity of P.O.S.
 (Restaurant Solutions) Ltd., or PRS. This acquisition increased the Companys
 holdings in PRS to 100%. The consideration the Company paid for this
 acquisition was approximately $730,000 in cash. Goodwill arising on the
 acquisition amounted to approximately $288,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F  21

---

---

RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------- | ------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2    | ACQUISITIONS
(continued):
|           |                          
|           | e.                        | On April 1,
 2005, the Company, through its subsidiary Retalix Holdings Inc., acquired
 approximately 73.4% of the issued and outstanding shares (on an as-converted-to-common-stock
 basis) of TCI Solutions Inc. (TCI), a provider of retail store and
 headquarters solutions, including pricing, promotions, inventory, management
 and DSD solutions for the grocery industry in consideration of $32,600,000,
 comprised of $15,603,000 in cash, including direct costs consisting mostly of
 legal, consulting and registration fees, and 715,730 of the Companys
 Ordinary shares valued at approximately $16,980,000. The identified
 intangible assets acquired amounted to approximately $9,596,000 and included
 mainly acquired technology of approximately $2,810,000 and customer
 relationship of approximately $6,506,000 to be amortized over their estimated
 useful lives (4 to 15 years). Goodwill arising on the acquisition amounted to
 approximately $29,413,000. The Company expects that this acquisition will
 strengthen and widen its product offerings and thus improve its position in
 its target markets. In addition, the Company believed it would gain the
 ability to increase sales of both its traditional products and the new
 products gained from the acquisition by cross selling into each others
 established markets. Synergies may also be realized through the use of some
 common corporate overhead resources. Accordingly, the acquisition resulted in
 a significant allocation to goodwill due to the above factors. Also in April,
 2005, the Company through its subsidiary Retalix Holdings Inc., executed an
 agreement and plan of merger with TCI, pursuant to which in November 2005,
 TCI merged with and into one of the Companys subsidiaries and all the
 additional outstanding common stock and Preferred stock of TCI (other than
 shares held by the Company and shares as to which appraisal rights had been
 properly perfected under Delaware law), were acquired by the subsidiary for
 an aggregate of approximately $2,570,000 in cash. Goodwill arising from this
 transaction amounted to approximately $2,570,000.
|           |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           | f.                        | On April 1, 2005, the Company through
its subsidiary Retalix Holdings Inc., acquired substantially all of the assets of
Integrated Distribution Solutions Inc. (IDS), a provider of ERP and
distribution solutions for the food service, convenience store and grocery industries in
consideration of $44,859,000, comprised of $37,976,000 in cash, including direct costs
consisting mostly of legal, consulting and registration fees, and 290,128 of the
Companys Ordinary shares valued at approximately $6,883,000. In addition, the
sellers were issued additional 207,236 shares valued at $3,973, 000 that were released
from escrow to the sellers after certain customer retention milestones were met as of
April 1, 2007. 69,481 shares and approximately $1.1 million in cash are still being held
in escrow pending third party claim that has not yet been resolved. The identified
intangible assets acquired amounted to approximately $15,463,000 and included mainly
acquired technology of approximately $4,120,000 and customer relationship of approximately
$ 10,852,000 to be amortized over their estimated useful lives (2 to 15 years). Goodwill
arising on the acquisition amounted to approximately $33,356,000. The goodwill will be
amortized for tax purposes over a period of 15 years. The Company expects that this
acquisition will strengthen and significantly widen its product offerings and thus improve
its position in its target markets. In addition, the Company believed it would gain the
ability to increase sales of both its traditional products and the new products gained
from the acquisition by cross selling into each others established markets.
Additionally, IDSs reputation in the industry and its name recognition are also
factors in the valuation of IDSs goodwill. Accordingly, the acquisition resulted in
a significant allocation to goodwill due to the above factors.                                                                                                                                                                                                                                                

F  22

---

---

RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|---------- | ------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2    | ACQUISITIONS
(continued):
|           |                          
|           | g.                        | In July
 2005, the Company, through its subsidiary Retalix Italia S.p.A., acquired in
 whole M.P.S. Millennium Pos Solution S.r.l. in consideration of $604,000 in
 cash. The identified intangible assets acquired amounted to approximately
 $239,000 consisting primarily from acquired technology of approximately
 $193,000 and customer relationship of approximately $46,000, to be amortized
 over their estimated useful lives (5 years). - see also note 4b. Goodwill
 arising on the acquisition amounted to approximately $305,000.
|           |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           | h.                        | The
 following presents certain unaudited pro forma combined condensed income
 statement information for the years ended December 31, 2007 and 2006,
 assuming that acquisition taken place during 2007, had taken place on January
 1, 2006 and January 1, 2007 and that the acquisitions taken place in 2006 had
 taken place on January 1, 2006, after giving effect to certain adjustments,
 including amortization of identifiable intangible assets of $71,000 and
 $227,000 in 2007 and 2006, respectively:                             

|                              |  |                                               |         |             |  |         | 
|----------------------------- |  | --------------------------------------------- | ------- | ----------- |  | ------- | 
|                              |  | 2007                                          |         | 2006        | 
|                              |  |                                               |         |             | 
|                              |  | U.S. $
 in thousands
 (except per share data) |        
|                              |  |                                               |        
|                              |  | (Unaudited)                                   |         | (Unaudited) | 
|                              |  |                                               |         |             | 
|Revenues                      |  |                                               | 221,811 |             |  | 206,114 | 
|                              |  |                                               |         |             |  |         | 
|                              |  |                                               |         |             |  |         | 
|Net income
 (loss)            |  |                                               | (569    | )           |  | 1,140   | 
|                              |  |                                               |         |             |  |         | 
|Earnings
 (losses) per share: |  |                                               |         |             |  |         | 
|Basic                         |  |                                               | (0.03   | )           |  | 0.06    | 
|                              |  |                                               |         |             |  |         | 
|Diluted                       |  |                                               | (0.03   | )           |  | 0.06    | 
|                              |  |                                               |         |             |  |         | 

| |  |                                                                                                                                                                                                                                                                                                                                                                                    
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The amounts
 are based upon certain assumptions and estimates and do not reflect any
 benefits which might be achieved from combined operations. The pro forma
 results do not necessarily represent results, which would have been achieved
 if the acquisition had taken place on the basis assumed above, nor are they
 indicative of the results of future combined operations.
| |  |                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Following is
 the allocation of the purchase price of the 2007 acquisitions:                                                                                                                                                                                                                                                                                                       

|                                           |  |                                |       |  
|------------------------------------------ |  | ------------------------------ | ----- | -
|                                           |  | Year
 ended
 December 31, 2007 |      
|                                           |  |                                |      
|                                           |  | Initially
 consolidated        |      
|                                          
|                                           |  |                                |      
|                                           |  | U.S. $
 in thousands           |      
|                                           |  |                                |      
|Current liabilities, net of current assets |  |                                | (315  | )
|Property and equipment                     |  |                                | 6     |  
|Goodwill arising on Acquisitions           |  |                                | 943   |  
|Identified intangible assets               |  |                                | 736   |  
|                                           |  |                                |       |  
|                                           |  |                                | 1,370 |  
|                                           |  |                                |       |  

F  23

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

|        |                                |                                                                                               
|------- | ------------------------------ | ----------------------------------------------------------------------------------------------
|NOTE 3 | PROPERTY, PLANT AND EQUIPMENT:
|        |                               
|        | a.                             | Composition
 of property, plant and equipment, grouped by major classification is as
 follows:

|                                    |  |                      |        |      |  |        | 
|----------------------------------- |  | -------------------- | ------ | ---- |  | ------ | 
|                                    |  | December
 31         |       
|                                    |  |                      |       
|                                    |  | 2007                 |        | 2006 | 
|                                    |  |                      |        |      | 
|                                    |  | U.S. $
 in thousands |       
|                                    |  |                      |       
|Computers
 and peripheral equipment |  |                      | 18,729 |      |  | 17,630 | 
|Land lease
 rights and building     |  |                      | 9,901  |      |  | 7,140  | 
|Vehicles                            |  |                      | 538    |      |  | 797    | 
|Office
 furniture and equipment     |  |                      | 5,137  |      |  | 4,799  | 
|Leasehold
 improvements             |  |                      | 2,404  |      |  | 1,935  | 
|                                    |  |                      |        |      |  |        | 
|                                    |  |                      | 36,709 |      |  | 32,301 | 
|                                    |  |                      |        |      |  |        | 
|Less -
 accumulated depreciation    |  |                      | 24,141 |      |  | 21,121 | 
|                                    |  |                      |        |      |  |        | 
|                                    |  |                      | 12,568 |      |  | 11,180 | 
|                                    |  |                      |        |      |  |        | 

|           |                                       |                                                                                                                                          
|---------- | ------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------
|           | b.                                    | As to
 geographical locations, see note 13b.                                                                                             
|           |                                       |                                                                                                                                          
|           | c.                                    | Depreciation
 expenses totaled $3,352,000 $3,431,000 and $2,996,000, in the years
 ended December 31, 2007, 2006 and
 2005, respectively.
|           |                                       |                                                                                                                                          
|NOTE 4    | GOODWILL AND
OTHER INTANGIBLE ASSETS:
|           |                                       |                                                                                                                                          
|           | a.                                    | Goodwill                                                                                                                                 
|           |                                       |                                                                                                                                          
|           |                                       | The changes
 in the carrying amount of goodwill for each reportable geographical segment
 are as follows:                                

|                                                                                                         |  |                     |         |        |  |                         |   |       |       |  |  |         |  
|-------------------------------------------------------------------------------------------------------- |  | ------------------- | ------- | ------ |  | ----------------------- | - | ----- | ----- |  |  | ------- | -
|                                                                                                         |  | U.S.                |         | Israel |  | International
 (Europe) |   | Total |      
|                                                                                                         |  |                     |         |        |  |                         |   |       |      
|                                                                                                         |  | U.S $
 in thousands |        
|                                                                                                         |  |                     |        
|Balance as of January 1, 2006                                                                            |  |                     | 93,827  |        |  | 3,541                   |   |       | 3,841 |  |  | 101,209 |  
|Goodwill attributed to new subsidiaries
 acquired during 2006 and additional investments in subsidiaries |  |                     | 4,937   |        |  | 288                     |   |       | -     |  |  | 5,225   |  
|Differences from translation of non dollar
 currencies                                                   |  |                     | -       |        |  | -                       |   |       | 335   |  |  | 335     |  
|Other adjustments*                                                                                       |  |                     | 765     |        |  | (28                     | ) |       | -     |  |  | 737     |  
|                                                                                                         |  |                     |         |        |  |                         |   |       |       |  |  |         |  
|Balance as of December 31, 2006                                                                          |  |                     | 99,529  |        |  | 3,801                   |   |       | 4,176 |  |  | 107,506 |  
|Goodwill attributed to new subsidiaries
 acquired during 2007 and additional investments in subsidiaries |  |                     | 4,916   |        |  | -                       |   |       | -     |  |  | 4,916   |  
|Differences from translation of non dollar
 currencies                                                   |  |                     | -       |        |  | -                       |   |       | 387   |  |  | 387     |  
|Other adjustments*                                                                                       |  |                     | (3,883  | )      |  | -                       |   |       | -     |  |  | (3,883  | )
|                                                                                                         |  |                     |         |        |  |                         |   |       |       |  |  |         |  
|Balance as of December 31, 2007                                                                          |  |                     | 100,562 |        |  | 3,801                   |   |       | 4,563 |  |  | 108,926 |  
|                                                                                                         |  |                     |         |        |  |                         |   |       |       |  |  |         |  

| |  |   |                                                                                             
| |  | - | --------------------------------------------------------------------------------------------
| |  | * | Resulting
 mainly from changes in deferred tax assets resulting from business
 combinations.

F  24

---

---

RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|        |                                                   
|------- | --------------------------------------------------
|NOTE 4 | GOODWILL AND OTHER INTANGIBLE ASSETS
 (continued):

| |    |                                                                                                                                                                                                                                                                                                                                              |                                                                                                               
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------
| |    | The Company
 identified its various reporting units, which consist of geographical areas,
 and for which separately identifiable cash flow information is available. The
 Company uses a valuation model of future discounted cash flows to determine
 the fair value of the reporting units and whether any impairment of goodwill
 exists.
| |    |                                                                                                                                                                                                                                                                                                                                              |                                                                                                               
| | b. | Intangible assets:                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                              |                                                                                                               
| |    | 1)                                                                                                                                                                                                                                                                                                                                           | The
 following table presents the components of the Companys acquired intangible
 assets with definite lives:

|                                   |  |                                         |              |                      |              |                    |      |  |        |  |  |        |  |  |        | 
|---------------------------------- |  | --------------------------------------- | ------------ | -------------------- | ------------ | ------------------ | ---- |  | ------ |  |  | ------ |  |  | ------ | 
|                                   |  | Weighted
 average
 amortization
 period |              | Original
 amount     |              | Amortized
 balance |     
|                                   |  |                                         |              |                      |              |                   
|                                   |  |                                         | December
 31 |                      | December
 31 |                   
|                                   |  |                                         |              |                      |              |                   
|                                   |  |                                         | 2007         |                      | 2006         |                    | 2007 |  | 2006   | 
|                                   |  |                                         |              |                      |              |                    |      |  |        |  | 
|                                   |  | Years                                   |              | U.S. $
 in thousands |             
|                                   |  |                                         |              |                      |             
|                                  
|Customer relationship              |  |                                         | 14.3         |                      |              | 24,572             |      |  | 24,372 |  |  | 16,450 |  |  | 17,721 | 
|Maintenance and license agreements |  |                                         | -            |                      |              | 2,638              |      |  | 2,638  |  |  | -      |  |  | -      | 
|Acquired technology                |  |                                         | 4.5          |                      |              | 10,777             |      |  | 10,242 |  |  | 3,516  |  |  | 4,810  | 
|Distribution rights                |  |                                         | -            |                      |              | 759                |      |  | 759    |  |  | 19     |  |  | 113    | 
|Other identified intangible assets |  |                                         | 2.9          |                      |              | 1,937              |      |  | 1,937  |  |  | 694    |  |  | 854    | 
|                                   |  |                                         |              |                      |              |                    |      |  |        |  |  |        |  |  |        | 
|Total                              |  |                                         |              |                      |              | 40,683             |      |  | 39,948 |  |  | 20,679 |  |  | 23,498 | 
|                                   |  |                                         |              |                      |              |                    |      |  |        |  |  |        |  |  |        | 

| |  |    |                                                                                                                                                                                                                                                                                                                                  
| |  | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 2) | Intangible
 assets amortization expenses totaled $3,595,000 $5,130,000 and $4,474,000 in
 the years ended December 31, 2007, 2006 and 2005, respectively. Future annual
 amortization expenses are approximately $3,353,000, $2,808,000, $1,724,000,
 $1,298,000 and $1,298,000 in 2008, 2009, 2010, 2011 and 2012, respectively.

|           |                                            
|---------- | -------------------------------------------
|NOTE 5    | LONG-TERM
LOANS, NET OF CURRENT MATURITIES:

| |    |                                                                      
| | -- | ---------------------------------------------------------------------
| | a. | Long- term
 loans classified by currency of repayment are as follows:

|                                       |  |                                         |              |              |                      |       |      |  |       | 
|-------------------------------------- |  | --------------------------------------- | ------------ | ------------ | -------------------- | ----- | ---- |  | ----- | 
|                                       |  | Interest
 rate as of
 December 31, 2007 |              | December
 31 |                     
|                                       |  |                                         |              |              |                     
|                                       |  |                                         | %            |              | 2007                 |       | 2006 | 
|                                       |  |                                         |              |              |                      |       |      | 
|                                       |  |                                         |              |              | U.S. $
 in thousands |      
|                                       |  |                                         |              |              |                      |      
|Bank loan
 - In EURO                   |  |                                         | Fixed at 2%  |              |                      | 911   |      |  | 1,153 | 
|Other:                                 |  |                                         |              |              |                      |       |      |  |       | 
|Loan from shareholders of a subsidiary |  |                                         | LIBOR*+0.75% |              |                      | 133   |      |  | 129   | 
|                                       |  |                                         |              |              |                      |       |      |  |       | 
|                                       |  |                                         |              |              |                      | 1,044 |      |  | 1,282 | 
|Less - current maturities              |  |                                         |              |              |                      | 258   |      |  | 224   | 
|                                       |  |                                         |              |              |                      |       |      |  |       | 
|                                       |  |                                         |              |              |                      | 786   |      |  | 1,058 | 
|                                       |  |                                         |              |              |                      |       |      |  |       | 

| |   |                                                   
| | - | --------------------------------------------------
| | * | The $ LIBOR
 rate as of December 31, 2007  4.70%.

F  25

---

---

RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                            
|---------- | ---------------------------
|NOTE 5    | LONG-TERM LOANS(continued):

| |    |                                                                                                    
| | -- | ---------------------------------------------------------------------------------------------------
| | b. | The loans
 (net of current maturities) mature in the following years after the balance
 sheet date:

|                                    |  |                      |     |      |  |       | 
|----------------------------------- |  | -------------------- | --- | ---- |  | ----- | 
|                                    |  | December
 31         |    
|                                    |  |                      |    
|                                    |  | 2007                 |     | 2006 | 
|                                    |  |                      |     |      | 
|                                    |  | U.S. $
 in thousands |    
|                                    |  |                      |    
|2008                                |  |                      |     |      |  | 229   | 
|2009                                |  |                      | 263 |      |  | 233   | 
|2010                                |  |                      | 269 |      |  | 241   | 
|2011 and
 thereafter (through 2012) |  |                      | 254 |      |  | 355   | 
|                                    |  |                      |     |      |  |       | 
|                                    |  |                      | 786 |      |  | 1,058 | 
|                                    |  |                      |     |      |  |       | 

|           |                                 
|---------- | --------------------------------
|NOTE 6    | EMPLOYEE
RIGHTS UPON RETIREMENT:

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Israeli,
 Italian, U.K. and Australian labor laws generally require payment of
 severance pay upon dismissal of an employee or upon termination by the
 employees of employment in certain other circumstances. The severance pay liability
 of the Israeli companies and one of the Italian subsidiaries in the Group to
 their employees, which reflects the undiscounted amount of the liability, is
 based upon the number of years of service and the latest monthly salary, and
 is partly covered by insurance policies and by regular deposits with
 recognized severance pay funds. The amounts funded as above are presented
 among  non-current assets. The Israeli companies in the Group may only
 make withdrawals from the amounts funded for the purpose of paying severance
 pay.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | b. | Some of the
 Companys U.S. subsidiaries provide 401 (k) plans for the benefit of their
 employees. Under these plans, contributions are based on a specified
 percentage of pay.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | c. | The
 severance expenses amounted to $3,417,000, $2,469,000 and $1,308,000 in the
 years ended December 31, 2007, 2006 and 2005, respectively. The 401(k) plans
 expenses as mentioned in b. above amounted to $985,000, $1,029,000 and
 $826,000 in the years ended December 31, 2007, 2006 and 2005, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | d. | The profits
 (loss) on the amounts funded totaled $950,000, $580,000 and $ (155,000) in
 the years ended December 31, 2007, 2006 and 2005, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | e. | Cash flow
 information regarding the Companys liability for employee rights upon
 retirements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | The Group
 expects to contribute in the year ending December 31, 2008, $2,690,000 to the
 insurance companies and severance pay funds in respect of its severance pay
 obligation.                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | 2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | The Company
 expects to pay $747,000 future benefits to its employees during 2008 to 2017
 upon their normal retirement age - see breakdown below. The amount was
 determined based on the employees current salary rates and the number of
 service years that will be accumulated upon the retirement date. These
 amounts do not include amounts that might be paid to
 employees that will cease working for the Company before their normal
 retirement age.

F  26

---

---

RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                                             
|---------- | --------------------------------------------
|NOTE 6    | EMPLOYEE
RIGHTS UPON RETIREMENT (continued):

|                          |  |                      |     | 
|------------------------- |  | -------------------- | --- | 
|                          |  | U.S. $
 in thousands |    
|                          |  |                      |    
|Year ending
 December 31: |  |                      |     | 
|2008                      |  |                      | 216 | 
|2009                      |  |                      | 58  | 
|2010                      |  |                      | 210 | 
|2011                      |  |                      | 57  | 
|2012                      |  |                      | 54  | 
|Thereafter (through 2013) |  |                      | 152 | 
|                          |  |                      |     | 
|                          |  |                      | 747 | 
|                          |  |                      |     | 

|           |                                                 
|---------- | ------------------------------------------------
|NOTE 7    | COMMITMENTS,
PLEDGES AND CONTINGENT LIABILITIES:

| |    |              |                                                                                                                                                                                                                                     
| | -- | ------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Commitments:
| |    |              |                                                                                                                                                                                                                                     
| |    | 1)           | Lease
 agreements:                                                                                                                                                                                                                  
| |    |              |                                                                                                                                                                                                                                     
| |    |              | The Group
 has entered into operating lease agreements for the premises it uses; the
 last lease expires in 2012. In addition, the Company leases vehicles under
 standard commercial leases for periods of three years per vehicle.
| |    |              |                                                                                                                                                                                                                                     
| |    |              | The
 projected charges under the above leases are mainly denominated in U.S. $, at
 rates in effect as of December 31, 2007, as follows:                                                                                            

|                          |  |                      |        | 
|------------------------- |  | -------------------- | ------ | 
|                          |  | U.S. $
 in thousands |       
|                          |  |                      |       
|Year ending
 December 31: |  |                      |        | 
|2008                      |  |                      | 6,108  | 
|2009                      |  |                      | 3,991  | 
|2010                      |  |                      | 1,247  | 
|2011                      |  |                      | 435    | 
|2012                      |  |                      | 322    | 
|                          |  |                      |        | 
|                          |  |                      | 12,103 | 
|                          |  |                      |        | 

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    | Office and
 vehicles lease expenses totaled $5,594,000, $5,509,000 and $4,844,000 in the
 years ended December 31, 2007, 2006 and 2005, respectively.                                                                                                                                                                                                                                                                                                                                                                   
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | 2) | Effective
 April 1, 1998, the Companys Chief Executive Officer (the CEO), is entitled
 to receive a bonus subject to the Companys attaining certain performance
 milestones: For the first $1,000,000 of the Companys net income, he is
 entitled to a bonus of $65,000 and for every subsequent $1,000,000 of net
 income $5,000 less than the entitlement in respect of the previous
 $1,000,000, but not less than a bonus of $35,000 for every million dollars
 over the seventh million of net income.        
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |    | In addition,
 according to the same arrangement, the CEO is entitled to options to be
 granted beginning each calendar year equal to 1% of the Companys issued
 share capital per grantee for each year. The exercise price of the options is
 equal to the closing market price of the shares at the day preceding the
 grant date. The options are fully vested and blocked over three years from
 grant date, and become exercisable in three equal portions at the end of each
 year during said three-year period.

F  27

---

---

RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|            |                                                            
|----------- | -----------------------------------------------------------
|NOTE
7     | COMMITMENTS,
PLEDGES AND CONTINGENT LIABILITIES(continued):

| |    |                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | --------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 3)                                                  | Royalty
 commitments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                     | The Company
 and some of its subsidiaries are committed to pay the Government of Israel
 royalties on revenues derived from certain products, the research and
 development of which, is partly financed by royalty-bearing Government
 participations. These funding programs are managed by the Israeli government
 within the jurisdiction of The Ministry of Commerce and Industry and
 specifically by the Office of the Chief Scientist. At the time the grants
 were received, successful development of the related projects was not
 assured.                                                                                                                               
| |    |                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                     | In case of
 failure of a project that was partly financed, the Company is not obligated
 to pay any such royalties. Under the terms of these funding programs,
 royalties of 3%-3.5% are payable on sales of products developed under such
 funding programs, up to 100% of the amount of funding received (dollar linked
 and bearing annual interest at the LIBOR rate). Payment of royalties on
 account of development projects funded as above is conditional upon the
 ability to generate revenues from products developed under such projects.
 Accordingly, the Group is not obligated to pay any royalties on account of
 funded projects, which fail to generate revenues.
| |    |                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                     | As of
 December 31, 2007, total royalty to be paid by the Group in the future on
 account of projects funded under the Office of the Chief Scientist is
 $5,455,000, including interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | b. | Contingent liabilities:                            
| |    |                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Lawsuits
 against the Company and its subsidiaries:
| |    |                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | 1)                                                  | Prior to the
 acquisition of Retail Control Systems Inc., or RCS, a legal claim was filed
 against RCS in the Circuit Court of the Seventeenth Judicial Circuit, County
 of Winnebago, Illinois, by a dealer who sold one of RCSs products early in
 1994, and claims that RCS promised features and enhancements were never
 delivered. The damages claimed in this suit are in amount of $569,000.                                                                                                                                                                                                                                                                                
| |    |                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                     | The claim is
 covered and handled by RCSs errors and omissions insurers. The limit of
 liability under the relevant errors and omissions insurance policy was
 $1,000,000 per claim and in aggregate. The Company is of the opinion that RCS has
 meritorious defenses against this claim and that it will not result in any
 material expense and therefore no provision was recorded in regard to this
 claim as of December 31, 2007.                                                                                                                                                                                                                                            
| |    |                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | 2)                                                  | In March,
 2005, a former dealer in the U.S. (Sierra Nevada Cash Register) filed in the
 Third Judicial District Court of Salt Lake County, Utah, a complaint against
 StoreNext USA, seeking actual and subsequent damages in excess of $300,000
 for breach of the distributorship agreement and unfair competition. In addition,
 the Company filed a counter claim against Sierra Nevada for unpaid
 receivables for product in the amount of $119,000. As of December 31, 2007
 this matter has been settled, according to which the customer will return the
 products and no mutual payment will be needed.                                                                   

F  28

---

---

RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|        |                                                             |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | ----------------------------------------------------------- | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 7 | COMMITMENTS, PLEDGES AND CONTINGENT LIABILITIES(continued):
|        |                                                             |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |                                                             | 3) | In June 2006, a customer in the U.S
(the customer), filed in the District Court of Madison County, Nebraska,
complaint against the Companys subsidiary, Retalix USA Inc. (Retalix
USA) and IDS, in which it asserts claims for misrepresentation and concealment,
breach of contract and breach of warranties arising from its contract with IDS. In August,
2006, the action was removed to the U.S. District Court for the District of Nebraska, and
IDS filed a motion to compel arbitration and Retalix USA filed a motion to dismiss the
complaint on various grounds. In September, 2006, the customer opposed to these motions.
In October, 2006, the court granted IDSs motion to compel arbitration and reserved
judgment on Retalix USAs motion to dismiss the complaint and stayed the federal
action, all pending the outcome any arbitration. In February, 2007, Retalix USA filed a
Demand for Arbitration against the customer with the American Arbitration Association in
Dallas, Texas, seeking to recover damages, interest and attorneys fees in excess of
$2.3 million as a result of the customers failure to pay for products delivered and
services rendered as well as other misconducts. In February, 2007, the customer filed a
Counterclaim and Demand for Arbitration seeking to recover damages, interest, taxable
arbitration costs and attorneys fees in excess of $9.9 million for breach of
contract, breach of warranties and other misconducts. In August 30, 2007 the arbitrators
approved a preliminary hearing scheduling order, according to which the parties exchanged
discovery requests, written responses and documents. On November 1, 2007 the customer
filed a statement of damages alleging total damages in excess of $22,000,000. The
arbitration is currently scheduled to November 2008, in Omaha, Nebraska. Retalix USA
intends to vigorously pursue its claims, to contest the counterclaims asserted in the
arbitration proceeding and to assert its indemnification rights, if necessary. As of
December 31, 2007, the balance of debt of this customer for services supplied by the
Company approximately $2,569,000, was fully reserved as doubtful debts. The Company is of the
opinion that it does not have any additional exposure due to this claim and thus no
additional provision was recorded as of December 31, 2007.
|        |                                                             |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |                                                             | 4) | In March
 2007, a customer in the U.S., filed in the District Court of El Paso County,
 Texas, a complaint against Retalix USA Inc., seeking actual and consequential
 damages in excess of $ 270,000 and in addition, other damages totaling three
 times the actual damages, as well as attorneys fees, expenses and interest
 for breach of contract, breach of warranty and other misconducts. In April
 2007 Retalix USA filed its Original Answer and counterclaim against the
 customer for breach of contract, pursuant to which Retalix USA seeks $
 214,000 plus interest and attorneys fees for breach of contract. Since no
 discovery has actually been compelled as of December 31, 2007 in this matter,
 no provision was recorded in regard to this claim as of December 31, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        |                                                             |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |                                                             | 5) | In August,
 2005, an Italian distributor of Retalix Italia approached the Company and
 Retalix Italia claiming that the acquisition of M.P.S. Millennium Pos
 Solution S.r.l. (MPS) by Retalix Italia in July 2005 formed an act of
 unfair competition. No further action has been taken by the above party, in
 connection with its above allegation to date. In addition, in April, 2006,
 the above distributor exercised arbitration proceedings in order to enforce
 its claims of co-ownership to a certain product of M.P.S., as well as
 indemnity for certain damages allegedly suffered by him within this context.
 In May 2006, MPS requested the arbitral court to reject all claims filed by
 the above party. In May 2007, the parties to this dispute signed a settlement
 agreement according to which all previous agreements in connection with the
 relationship between the parties are cancelled and MPS and the distributor
 are the sole owners of the product may further develop and sell the product -
 each at its own discretion, and such action by either will not create any
 obligation towards the other party. In addition, and regardless of any
 further sales of the product by either party, the distributor is to pay MPS
 use fees totaling approximately $ 53,000, in installments, during the period
 of June 2007 to June 2010. The agreement also stipulates that MPS is to
 provide the distributor training for a consideration totaling approximately $
 40,000 as well as support services to continue until the end of January 2008,
 for a consideration totaling approximately $ 66,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F  29

---

---

RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---------- | ------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 7    | COMMITMENTS, PLEDGES AND CONTINGENT LIABILITIES (continued):
|           |                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                                              | 6)                                                                                                                                                                                                                                                                                                                                                                                                                | In
 September, 2006, a former employee of one of the Companys Israeli
 subsidiaries - Tamar, who was employed by said subsidiary prior to its acquisition
 by the Company, submitted in the magistrates court in Kfar Saba a claim
 against the subsidiary according to which one of the former managers of the
 subsidiary allegedly treated him harshly, which caused the plaintiff severe
 mental damage and disability. The damages claimed under this claim total
 approximately $ 364,000. The Company is of the opinion that its exposure due to this
 claim is immaterial and thus no provision was recorded in regard to this
 claim as of December 31, 2007.
|           |                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                                              | 7)                                                                                                                                                                                                                                                                                                                                                                                                                | The Company
 and its subsidiaries are also parties to several other claims filed against
 them totaling approximately $ 167,000. In addition, the Company and its
 subsidiaries are parties to several disputes with former or current customers
 and service providers. These disputes, estimated at a total of $ 618,000,
 have not materialized to court claims and some of them are in mediation
 process. The Company is of the opinion that its exposure due to the claims above is
 immaterial and thus no provision was recorded in regard to this claim as of
 December 31, 2007.                                                                             
|           |                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           | c.                                                           | Pledges:                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                                              | A certain bank account containing $ 1.2
million in marketable securities as of December 31, 2007, is pledged to
secure any bank credit, including but not limited to loans, given by the bank
that holds such securities. Additional bank accounts and deposits totaling as
of December 31, 2007 $ 473,000 are held as collateral for a credit guarantee
and a letter of credit issued on behalf of a subsidiary.
|           |                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           | d.                                                           | Line of credit:                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                                              | As of December 31, 2007, the
Company had unutilized credit lines of approximately $2 million bearing annual interest
rate of 5.75%.                                                                                                                                                                                                                                                                              
|           |                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|NOTE 8    | SHAREHOLDERS EQUITY:                                       
|           |                                                             
|           | a.                                                           | Share capital:                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                                              | 1)                                                                                                                                                                                                                                                                                                                                                                                                                | The
 Companys shares confer upon the holders the right to receive notice to
 participate and vote in the general meetings of the Company and right to
 receive dividends, if and when declared.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                                              | 2)                                                                                                                                                                                                                                                                                                                                                                                                                | As to shares
 issued in consideration for acquisitions of subsidiaries, see note 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F  30

---

---

RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                                  |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---------- | -------------------------------- | ------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 8    | SHAREHOLDERS EQUITY(continued):
|           |                                 
|           | b.                               | Stock based compensation:
|           |                                  |                          
|           |                                  | 1)                        | Companys
 Option plans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                  |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                  |                           | On March 5,
 1998, the Companys Board of Directors approved the Second 1998 Share Option
 Plan (the Second 1998 Plan). Under the Second 1998 Plan (as was amended
 from time to time) up to 5,000,000 options are available for grant to
 employees, directors and consultants of the Company, to purchase Ordinary
 shares of the Company. Each option is exercisable into one ordinary share of
 the Company. The exercise price of each option under this plan is to be at
 least equal to the fair value of one Ordinary share at the grant date. Unless
 terminated earlier, the options will expire starting from 2005 through May
 2012. These options vest over the period of 0 - 3.5 years.
|           |                                  |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                  |                           | On November
 19, 2007, the Companys Board of Directors amended the Companys Second 1998
 share Option Plan (the US Plan) so as to enable to grant of Restricted
 Stock Units pursuant to such US Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |                                  |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                  |                           | In addition, On November 19, 2007,
the Companys Board of Directors approved to increase the pool of authorized and
unissued Ordinary Shares nominal value of NIS 1.00 for the purpose of grant of awards
under the companys Second 1998 share Option Plan by 2,000,000 shares,
such that the aggregate pool of reserved shares shall be of 7,000,000 shares.                                                                                                                                                                                                                                                                                                                                       
|           |                                  |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                  |                           | As of
 December 31, 2007 and 2006, 1,990,597 and 35,787 options, respectively
 remained available for grant under the Second 1998 Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                  |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                  |                           | Through
 December 31, 2007 and 2006, 3,300,470 and 3,165,200 options, respectively,
 had been exercised under the Second 1998 Plan at exercise prices ranging
 between $ 7.125 and $$ 23.02 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                  |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                  |                           | On May 10,
 2004, the Companys Board of Directors approved the 2004 Israeli Share Option
 Plan (the Israeli Plan). Under the Israeli Plan up to 2,000,000 options can
 be granted to Israeli employees, directors and consultants of the Company to
 purchase Ordinary shares of the Company. Each option is exercisable into one
 Ordinary share of the Company. Unless terminated earlier, the options granted
 to date under the Israeli Plan will expire under the terms of the option
 agreements beginning in May 2008 through May 2010. These options vest over
 the period of 0 - 3.5 years.                                                                                                
|           |                                  |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                  |                           | On November
 19, 2007, the Companys Board of Directors amended the companys 2004
 Israeli Share Option so as to enable to grant of Restricted Stock Units
 pursuant to such Israeli Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                  |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                  |                           | As of
 December 31, 2007 and 2006, 353,884 and 677,314 options, respectively
 remained available for grant under the Israeli Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                  |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                  |                           | Through
 December 31, 2007 and 2006, 75,711 and 30,289 options, respectively had been
 exercised under the Israeli Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F  31

---

---

RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---------- | -------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 8    | SHAREHOLDERS EQUITY(continued):
|           |                                 
|           |                                  |  | On November 19, 2007 the
Companys Board of Directors approved to grant up to an aggregate of 275,000
Restricted Stock Units (RSUs), in an exercise price of NIS 1, pursuant to the
Israeli Plan and the US plan, exercisable into Shares of the Company to Israeli employees
or consultants of the company and to US employees. As of December 31, 2007, all the
RSUs are nonvested and none of them are forfeited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                  |  | The options and the RSUs
granted under the Israeli Plan are all subject to the capital gains taxation
route under Section 102 of the Income Tax Ordinance [New Version], 1961, which
generally provides for a reduced tax rate of 25% on gains realized upon the exercise of
options and sale of underlying shares, subject to the fulfillment of certain procedures
and conditions including the deposit of such options (or shares issued upon their
exercise) for a requisite period of time with a trustee approved by the Israeli tax
authorities. For as long as the shares issued upon exercise of such options are registered
in the name of the trustee, the voting rights with respect to such shares shall remain
with the trustee. Under the capital gains taxation route, the Company is not
entitled to recognize a deduction for tax purposes of the gain recognized by the employee
upon sale of the shares underlying the options.
|           |                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                  |  | Compensation
 expense in respect of the CEO entitlement to options (in prior years, due to
 the CEOs status as a service provider), was determined also prior to the
 adoption of SFAS 123(R), based on the fair value of the options. Total
 expenses in the years ended December 31, 2007, 2006 and 2005 in respect of
 these options, before the tax effect, were $ 832,000 $ 923,000 and $ 167,000,
 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                  |  | Following is
 a summary of the status of the option  plans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                                                               |  |                     |           |                                    |  |                     |  |                                    |           |                     |  |                                    |  |  |           |   |  |       | 
|-------------------------------------------------------------- |  | ------------------- | --------- | ---------------------------------- |  | ------------------- |  | ---------------------------------- | --------- | ------------------- |  | ---------------------------------- |  |  | --------- | - |  | ----- | 
|                                                               |  | 2007                |           | 2006                               |  | 2005                | 
|                                                               |  |                     |           |                                    |  |                     | 
|                                                               |  | Number
 of
 options |           | Weighted
 average
 exercise
 price |  | Number
 of
 options |  | Weighted
 average
 exercise
 price |           | Number
 of
 options |  | Weighted
 average
 exercise
 price | 
|                                                               |  |                     |           |                                    |  |                     |  |                                    |           |                     |  |                                    | 
|                                                               |  |                     |           | U.S. $                             |  |                     |  | U.S. $                             |           |                     |  | U.S. $                             | 
|                                                               |  |                     |           |                                    |  |                     |  |                                    |           |                     |  |                                    | 
|                                                               |  |                     |           |                                    |  |                     |  |                                    |           |                     |  |                                    | 
|Options
 outstanding at beginning of year                      |  |                     | 3,091,410 |                                    |  | 18.05               |  |                                    | 2,134,998 |                     |  | 17.63                              |  |  | 2,648,019 |   |  | 15.06 | 
|Changes
 during the year:                                      |  |                     |           |                                    |  |                     |  |                                    |           |                     |  |                                    |  |  |           |   |  |       | 
|Granted                                                        |  |                     | 396,135   |                                    |  | 17.40               |  |                                    | 1,325,090 |                     |  | 18.07                              |  |  | 476,556   |   |  | 22.59 | 
|Exercised*                                                     |  |                     | (180,692  | )                                  |  | 13.36               |  |                                    | (204,451  | )                   |  | 13.16                              |  |  | (825,213  | ) |  | 12.26 | 
|Forfeited or expired                                           |  |                     | (302,515  | )                                  |  | 20.36               |  |                                    | (164,227  | )                   |  | 18.79                              |  |  | (164,364  | ) |  | 17.57 | 
|                                                               |  |                     |           |                                    |  |                     |  |                                    |           |                     |  |                                    |  |  |           |   |  |       | 
|Options
 outstanding at end of year**                          |  |                     | 3,004,338 |                                    |  | 18.02               |  |                                    | 3,091,410 |                     |  | 18.05                              |  |  | 2,134,998 |   |  | 17.63 | 
|                                                               |  |                     |           |                                    |  |                     |  |                                    |           |                     |  |                                    |  |  |           |   |  |       | 
|Options
 exercisable at year-end                               |  |                     | 1,798,963 |                                    |  | 17.88               |  |                                    | 1,429,256 |                     |  | 17.18                              |  |  | 1,244,117 |   |  | 15.99 | 
|                                                               |  |                     |           |                                    |  |                     |  |                                    |           |                     |  |                                    |  |  |           |   |  |       | 
|Weighted average fair value of options granted during the year |  |                     |           |                                    |  | 4.8                 |  |                                    |           |                     |  | 6.10                               |  |  |           |   |  | 6.92  | 
|                                                               |  |                     |           |                                    |  |                     |  |                                    |           |                     |  |                                    |  |  |           |   |  |       | 

| | *  | The total
 intrinsic value of options exercised during the years ended December 31 2007,
 2006 and 2005 is $ 1,163,741, $ 1,492,000 and $ 9,793,000, respectively.                                                                                                                                                                                                                    
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | ** | As of
 December 31, 2007, there was $ 5,958,542 of total unrecognized compensation
 cost (net of forfeitures) related to nonvested share-based compensation
 arrangements granted under the plans. The weighted average realization period
 of the above unrecognized compensation cost was 1.42 years.The weighted average fair value of
the RSUs granted during the year is $18.54.

F  32

---

---

RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                                  
|---------- | ---------------------------------
|NOTE 8    | SHAREHOLDERS EQUITY (continued):

| |  |                                                                                                                                                                                  
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The fair
 value of each option granted is estimated on the date of grant using the
 Black-Scholes option-pricing model. Following are the relevant weighted
 average assumptions:

|                                    |  |                        |  |         |  |        
|----------------------------------- |  | ---------------------- |  | ------- |  | -------
|                                    |  | Year ended December 31
|                                    |  |                       
|                                    |  | 2007                   |  | 2006    |  | 2005   
|                                    |  |                        |  |         |  |        
|Dividend
 yield                     |  | 0%                     |  | 0%      |  | 0%     
|Expected
 volatility                |  | 33%-42%                |  | 33%-42% |  | 35%-37%
|Risk free
 interest rate            |  | 3%-5%                  |  | 3%-5%   |  | 4%     
|Expected
 holding period (in years) |  | 2.5-4                  |  | 3-4     |  | 3      

| |  |                                                                                                                       
| |  | ----------------------------------------------------------------------------------------------------------------------
| |  | The
 following table summarizes information about options under the Companys
 plans outstanding at December 31, 2007:

|                       |  |                                                         |           |                                                       |  |                                                         |  |                                                       |           |                                                                                      |  |                                                                                      |  |  |        |  |  |        | 
|---------------------- |  | ------------------------------------------------------- | --------- | ----------------------------------------------------- |  | ------------------------------------------------------- |  | ----------------------------------------------------- | --------- | ------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------ |  |  | ------ |  |  | ------ | 
|Exercise
 price
 U.S.$ |  | Number
 of
 options
 outstanding at
 December 31,
 2007 |           | Aggregate
 intrinsic value
 * in U.S. $
 In thousands |  | Number
 of
 options
 exercisable at
 December 31,
 2007 |  | Aggregate
 intrinsic value
 * in U.S. $
 In thousands |           | Weighted
 average
 remaining
 contractual
 life (in
 years) of
 options
 outstanding |  | Weighted
 average
 remaining
 contractual
 life (in
 years) of
 exercisable
 options | 
|                       |  |                                                         |           |                                                       |  |                                                         |  |                                                       |           |                                                                                      |  |                                                                                      | 
|                       |  |                                                         |           |                                                       |  |                                                         |  |                                                       |           |                                                                                      |  |                                                                                      |  |  |        |  |  |        | 
|RSUs 0.25             |  |                                                         | 275,000   |                                                       |  | 4,216                                                   |  |                                                       | -         |                                                                                      |  | -                                                                                    |  |  | 2.92   |  |  | -      | 
|8.75                   |  |                                                         | 4,202     |                                                       |  | 29                                                      |  |                                                       | 4,202     |                                                                                      |  | 29                                                                                   |  |  | 0.33   |  |  | 0.33   | 
|10.00                  |  |                                                         | 146,216   |                                                       |  | 816                                                     |  |                                                       | 146,216   |                                                                                      |  | 816                                                                                  |  |  | 0.33   |  |  | 0.33   | 
|14.88                  |  |                                                         | 262,700   |                                                       |  | 185                                                     |  |                                                       | 262,700   |                                                                                      |  | 185                                                                                  |  |  | 0.33   |  |  | 0.33   | 
|15.55                  |  |                                                         | 528,333   |                                                       |  | 16                                                      |  |                                                       | 185,000   |                                                                                      |  | 6                                                                                    |  |  | 2.58   |  |  | 2.58   | 
|16.29                  |  |                                                         | 196,135   |                                                       |  | -                                                       |  |                                                       | -         |                                                                                      |  | -                                                                                    |  |  | 3.00   |  |  | -      | 
|18.54                  |  |                                                         | 200,000   |                                                       |  | -                                                       |  |                                                       | -         |                                                                                      |  | -                                                                                    |  |  | 3.91   |  |  | -      | 
|18.55                  |  |                                                         | 392,500   |                                                       |  | -                                                       |  |                                                       | 139,167   |                                                                                      |  | -                                                                                    |  |  | 2.58   |  |  | 2.58   | 
|18.56                  |  |                                                         | 707,469   |                                                       |  | -                                                       |  |                                                       | 707,469   |                                                                                      |  | -                                                                                    |  |  | 0.50   |  |  | 0.50   | 
|21.86                  |  |                                                         | 176,556   |                                                       |  | -                                                       |  |                                                       | 117,704   |                                                                                      |  | -                                                                                    |  |  | 1.00   |  |  | 1.00   | 
|23.02                  |  |                                                         | 170,137   |                                                       |  | -                                                       |  |                                                       | 154,475   |                                                                                      |  | -                                                                                    |  |  | 1.50   |  |  | 1.50   | 
|24.46                  |  |                                                         | 194,090   |                                                       |  | -                                                       |  |                                                       | 64,697    |                                                                                      |  | -                                                                                    |  |  | 2.00   |  |  | 2.00   | 
|26.00                  |  |                                                         | 26,000    |                                                       |  | -                                                       |  |                                                       | 17,333    |                                                                                      |  | -                                                                                    |  |  | 1.50   |  |  | 1.50   | 
|                       |  |                                                         |           |                                                       |  |                                                         |  |                                                       |           |                                                                                      |  |                                                                                      |  |  |        |  |  |        | 
|                       |  |                                                         | 3,279,338 |                                                       |  | 5,262                                                   |  |                                                       | 1,798,963 |                                                                                      |  | 1,036                                                                                |  |  | **1.80 |  |  | **1.02 | 
|                       |  |                                                         |           |                                                       |  |                                                         |  |                                                       |           |                                                                                      |  |                                                                                      |  |  |        |  |  |        | 

| |  |                                                                                                                                           
| |  | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | * Based on
 the Companys share last known closing price at the Nasdaq Global Select
 Market as at December 31, 2007, of $15.58 per share.
| |  |                                                                                                                                           
| |  | ** The
 weighted average in respect of all the options and RSUs.                                                                         

F  33

---

---

RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                                 
|---------- | --------------------------------
|NOTE 8    | SHAREHOLDERS EQUITY(continued):

| |  |    |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | -- | ----------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 2) | Stock option
 plan of subsidiaries:
| |  |    |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |    | a)                                  | On December
 4, 2000, a subsidiarys board of directors approved an employee stock option
 plan (the Subsidiary Plan). Pursuant to the Subsidiary Plan, 270,000
 Ordinary shares, of NIS 0.01 par value, of the subsidiary are reserved for
 issuance upon the exercise of 270,000 options to be granted to some of the
 Companys and of the subsidiarys employees. In addition, within the context
 of an investment agreement signed on December 31, 2000, an additional 90,000
 options to purchase 90,000 shares of NIS 0.01 par value each were granted to
 an investor. Virtually all of the above mentioned options except those
 granted to the investor vest as follows: 33.33% after the first year, another
 33.33% after the second year and another 33.33% after the third year, (in
 cases where the optionee is an employee of the Company or its subsidiary -
 provided that the employee is still the subsidiarys or the Companys
 employee). In addition, all the above options including those granted to the
 investor are not exercisable prior to: (1) the consummation of an IPO of the
 subsidiarys securities, (2) a merger of the subsidiary or (3) seven years
 from the date of grant. The rights conferred by Ordinary shares obtained upon
 exercise of the options will be identical to those of the other Ordinary
 shares of the subsidiary. Any option not exercised within 10 years of grant
 date, will expire.
| |  |    |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |    |                                     | Some of the
 options under the Subsidiary Plan are subject to the terms stipulated by
 Section 102 of the Israeli Income Tax Ordinance. Among other things, the
 Ordinance provides that the subsidiary will be allowed to claim as an expense
 for tax purposes the amounts credited to the employees as a benefit, when the
 related tax is payable by the employee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |    |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |    |                                     | During 2001,
 the subsidiary granted the said 270,000 options partly at an exercise price
 per share of NIS 0.01, and to two employees at an exercise price of $5.55.
 Through December 31, 2007, 112,101 of these options were forfeited and out of
 which 76,023 were regranted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |    |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |    |                                     | On November
 23, 2004, the above subsidiarys board of directors approved an additional
 employee stock option plan (the Subsidiary 2004 Plan). Pursuant to the
 Subsidiary 2004 Plan, options to purchase 36,000 ordinary shares, of NIS 0.01
 par value each, were granted on December 31 2004, to certain employees of the
 subsidiary all subject to the taxation route for grants under Section 102 of
 the Income Tax Ordinance [New Version], 1961. All options granted under the
 Subsidiary 2004 Plan bear an exercise price of $5.55 and vest as follows:
 33.33% after the first year, another 33.33% after the second year and another
 33.33% after the third year (in cases where the optionee is an employee of
 the Company or its subsidiary - provided that the employee is still employed
 by the subsidiary or the Company at the date of vesting). In addition, the options
 are not exercisable prior to: (1) the consummation of an IPO of the
 subsidiarys securities, (2) a merger of the subsidiary or (3) seven years
 from the date of grant.                                                                                                                                                                                                                                                                                                                                                                              

F  34

---

---

RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                                  
|---------- | ---------------------------------
|NOTE 8    | SHAREHOLDERS EQUITY (continued):

| |    |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | ---------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |            | b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | On
 December 1, 2004, the board of directors of another Subsidiary approved an
 employee stock option plan (the Additional Subsidiary Plan). Pursuant to
 the Additional Subsidiary Plan, up to 1,500,000 options to purchase up to
 1,500,000 shares of the Additional Subsidiary can be granted to its
 employees, officers and other service provider providing services to the
 Company or any affiliate. In addition, the Additional Subsidiary Plan
 stipulates that options granted pursuant to it, are not to be exercised prior
 to: (1) the conversion of the corporate entity of the Additional Subsidiary
 from a Limited Liability Company, to a C corporation or (2) the consummation
 of an IPO of the Additional Subsidiarys securities, (3) a merger or a
 significant change of control in the Additional Subsidiary or (4) five years
 from the date of grant. Accordingly, on December 14, 2004, the Additional
 Subsidiary granted options to acquire 1,169,000 of its shares, of which 639,000
 options were granted to its employees, and 530,000 options were granted to
 employees of affiliates. The options granted bear an exercise price of
 $0.3748, which reflects the market value per share according to an
 independent valuation. Through December 31, 2007, 14,000 of these options
 were forfeited. In addition, on July 31, 2006 additional options to acquire
 84,000 of the Additional Subsidiarys shares were granted to its employees at
 an exercise price of $0.9422 a share, which reflects the market value per
 share according to the management valuation. All of these Additional
 Subsidiary options vest seven years from grant and have full vesting upon an
 Initial Public Offering or change of control or upon the administrating
 committee discretion, accelerated vesting in the event of merger, sale,
 disposition, or initial public offering of the majority interest of the
 subsidiary. Through December 31, 2007, 7,500 of these options were forfeited.
 The plan shall terminate ten years from the grant date.
| |    |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | c. | Dividends:
| |    |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | 1)         | In the event
 that cash dividends are declared by the Company, such dividends will be paid
 in Israeli currency. Under current Israeli regulations, any cash dividend in
 Israeli currency paid in respect of ordinary shares purchased by
 non-residents of Israel with non-Israeli currency may be freely repatriated
 in such non-Israeli currency, at the rate of exchange prevailing at the time
 of conversion.                                                                                                                                                                                                                                                                                                          
| |    |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |            | The
 Companys board of directors is authorized to declare dividends, subject to
 applicable law. Dividends may be paid only out of profits and other surplus,
 as defined in the Israeli Companies Law, as of the end of the most recent
 financial statements or as accrued over a period of two years, which ever is
 higher. Alternatively, if the Company does not have sufficient profits or
 other surplus, then permission to effect a distribution can be granted by
 order of an Israeli court. In any event, a distribution is permitted only if
 there is no reasonable concern that the dividend will prevent the Company
 from satisfying the Companys existing and foreseeable obligations as they
 become due.
| |    |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F  35

---

---

RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                                 
|---------- | --------------------------------
|NOTE 8    | SHAREHOLDERS EQUITY(continued):

|           |                  |                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---------- | ---------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           |                  | 2)                                                                                                                                                                                                    | Out of the Companys retained
earnings as of December 31, 2007 and 2006, approximately $17,365,000 and $15,800,000 are
tax-exempt respectively, due to Approved or Beneficiary Enterprise status
granted to some of the Companys facilities  see note 9b. If such tax-exempt
income is distributed in a manner other than upon the complete liquidation of the Company,
it would be taxed at the reduced corporate tax rate applicable to such profits (25%) and
an income tax liability of up to approximately $4,340,000 and $3,950,000 would be incurred
as of December 31, 2007 and 2006, respectively. The Companys board of directors has
determined that it will not distribute any amounts of its undistributed tax exempt income
as dividend. The Company intends to reinvest the amount of its tax-exempt income.
Accordingly, no deferred income taxes have been provided on income attributable to the
Companys Approved Enterprise as the undistributed tax exempt income is
essentially permanent in duration. See also notes 9b and 9g(5).
|           |                  |                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|NOTE 9    | TAXES ON INCOME:
|           |                  |                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           | a.               | Corporate taxation in Israel:                                                                                                                                                                        
|           |                  |                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                  | Tax rates:                                                                                                                                                                                           
|           |                  |                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                  | 1)                                                                                                                                                                                                    | The income
 of the company and its Israeli subsidiaries (other than income from approved
 enterprises, see c. below) is taxed at the regular rate. In August 2005, an
 amendment (No. 147) was published, which makes a further revision to the
 corporate tax rates prescribed by Amendment No. 140. As a result of the
 aforementioned amendments, the corporate tax rates for 2004 and thereafter
 are as follows: 2005  34%, 2006  31%, 2007  29%, 2008  27%, 2009  26%
 and for 2010 and thereafter  25%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |                  |                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                  |                                                                                                                                                                                                       | As a result of the changes in the tax
rates, the Company adjusted  in 2005 at the time the aforementioned amendments was
made, its deferred tax balances, in accordance with the tax rates expected to be in effect
in the coming years; the effect of the change has been carried to income on a current
basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                  |                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                  | 2)                                                                                                                                                                                                    | Subsidiaries
 outside Israel:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                  |                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                  |                                                                                                                                                                                                       | Subsidiaries
 that are incorporated outside of Israel are assessed for tax under the tax
 laws in their countries of residence. Our U.S. subsidiaries are taxed on a
 consolidated basis. The inacted statutory tax rates applicable to our primary
 subsidiaries outside Israel are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                  |                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                  |                                                                                                                                                                                                       | Company
 incorporated in the U.S.  tax rate of 40%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                  |                                                                                                                                                                                                       | Company
 incorporated in Italy  tax rate of 33%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                  |                                                                                                                                                                                                       | Companies
 incorporated in Australia, France and U.K.  tax rate of 30%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                  |                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           | b.               | Tax benefits under the Law for the Encouragement of Capital
 Investments, 1959 (the law)                                                                                                           
|           |                  |                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                  | Some
 production facilities of the Company have been granted approved enterprise
 status under the above law including its amendment that came into effect in
 April, 2005, which is discussed below.
|           |                  |                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                  | The Company
 is entitled to additional tax benefits as companies of foreign investors,
 as defined by the law.                                                                                     

F  36

---

---

| |  |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | ------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The main tax
 benefits available to the Companies are:
| |  |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | 1)                                                     | Reduced tax
 rates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |                                                        | In respect
 of income derived from the approved enterprises, the Company are entitled to
 benefits under the laws reduced tax rates during a period of ten years from
 the year in which such enterprises first earn taxable income (limited to
 twelve years from commencement of production or fourteen years from the date
 of approval, whichever is earlier).                                                                                                                                                                                                        
| |  |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |                                                        | The Company
 has seven approved enterprises.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |                                                        | Income
 derived from the approved enterprises is tax exempt during the first two
 years of the ten-year tax benefit period as above, and is subject to a
 reduced tax rate of 25% during the remaining eight years of benefits.                                                                                                                                                                                                                                                                                                                                            
| |  |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |                                                        | As of
 December 31, 2007, the periods of benefits relating to five of the approved
 enterprises of the Company have already expired. The periods of benefits
 relating to other two approved enterprise programs will expire in 2008 and
 2012.                                                                                                                                                                                                                                                                                                                            
| |  |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |                                                        | In the event of distribution of cash
dividends (and for beneficiated enterprise  also liquidation dividend) out of income
which was tax exempt as above, the company would have to pay the 25% income taxes in
respect of the amount distributed (the amount distributed for this purpose includes the
amount of the income taxes that applies as a result of the distribution (see 9g(5)
below and note 8c(2)).                                                                                                                                                          
| |  |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | 2)                                                     | Accelerated
 depreciation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |                                                        | The Company
 is entitled to claim accelerated depreciation in respect of equipment used
 by approved enterprises during the first five tax years of the operation of
 these assets.                                                                                                                                                                                                                                                                                                                                                                                        
| |  |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |                                                        | The
 entitlement to the above benefits is conditional upon the companys
 fulfillment of the conditions stipulated by the above law, the regulations
 published thereunder and the certificates of approval for the specific investments
 in approved enterprises. In the event that the Company fails to comply with
 these conditions, the benefits may be cancelled and the company may be
 required to refund the amount of the benefits, in whole or in part, with
 interest and adjustments for inflation based on the Israeli Consumer Price
 Index (Israeli CPI).
| |  |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F  37

---

---

RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---------- | --------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 9    | TAXES ON INCOME(continued):
|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           | c.                          | Measurement of results for tax purposes under the Income Tax
 (Inflationary Adjustments) Law, 1985 (the Inflationary Adjustments Law)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                             | Under the
 Inflationary Adjustments law, results for tax purposes are measured in real
 terms, having regard to the changes in the Israeli CPI. The Israeli companies
 in the Group are taxed under this law. These financial statements are
 presented in dollars. The difference between the changes in the Israeli CPI
 and the exchange rate of the dollar, both on an annual and a cumulative basis
 causes a difference between taxable income and income reflected in these
 financial statements. Paragraph 9(f) of FASB Statement No. 109, Accounting
 for Income Taxes, prohibits the recognition of deferred tax liabilities or
 assets that arise from differences between the financial reporting and tax
 bases of assets and liabilities that are remeasured from the local currency
 into dollars using historical exchange rates, and that result from changes in
 exchange rates or indexing for tax purposes. Consequently, the abovementioned
 differences were not reflected in the computation of deferred tax assets and
 liabilities. In
February 2008, the Knesset (the Israeli parliament) passed a law according to which the
provisions of Inflationary adjustments law will no longer apply to the Company in 2008 and
thereafter.
|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           | d.                          | Tax benefits under the Law for the Encouragement of Industry (Taxes),
 1969:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                             | The Company
 is an industrial company as defined by this law and as such is entitled to
 certain tax benefits, consisting mainly of accelerated depreciation and the
 right to claim expenses in connection with issuance of its shares to the
 public, as well as the amortization of patents and certain other intangible
 property rights, as a deduction for tax purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F  38

---

---

RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|        |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------- | --------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 9 | TAXES ON INCOME(continued):
|        |                            
|        | e.                          | Carryforward tax losses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        |                             | Carryforward
 tax losses of the Company as of December 31, 2007 aggregate approximately
 $5,724,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        |                             | Carryforward
 tax losses of certain subsidiaries as of December 31, 2007 and 2006 aggregate
 approximately $53,150,000 and $48,642,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        |                             | Under the
 Inflationary Adjustments Law, carryforward tax losses related to the Company and the Israeli
 subsidiaries are linked to the  Israeli CPI and may be utilized indefinitely.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        |                             | As of
 December 31, 2007, the Companys U.S. subsidiaries (which are taxed on a
 consolidated basis) have U.S. federal net operating loss carryforwards of
 approximately $43,400,000, which includes approximately $5,600,000 relating
 to excess stock option deductions. Federal net operating loss carryforwards
 of the U.S. subsidiaries expire at various dates from 2008 through 2026. The
 U.S. subsidiaries have state net operating loss carryforwards of
 approximately $33,200,000, which includes approximately $5,600,000 relating
 to excess stock option deductions discussed above. State net operating loss
 carryforwards of the U.S. subsidiaries expire at various dates from 2008
 through 2026. Utilization of the U.S. subsidiaries federal and state net
 operating losses attributable to acquired subsidiaries, of approximately
 $35,700,000 and $15,800,000, respectively, are subject to an annual
 limitation under Internal Revenue Code (IRC) section 382 determined by
 multiplying the value of the acquired entitys stock at the time of
 acquisition by the applicable long-term tax exempt rate.                                                                                                 
|        |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        |                             | As of
 December 31, 2006, the Companys U.S. subsidiaries (which are taxed on a
 consolidated basis) have U.S. federal net operating loss carryforwards of
 approximately $40,300,000, which includes approximately $5,600,000 relating
 to excess stock option deductions received upon option exercise that when
 realized will be recorded in additional paid-in capital. Federal net
 operating loss carryforwards of the U.S. subsidiaries expire at various dates
 from 2008 through 2025. The U.S. subsidiaries have state net operating loss
 carryforwards of approximately $43,600,000, which includes approximately
 $5,600,000 relating to excess stock option deductions discussed above. State
 net operating loss carryforwards of the U.S. subsidiaries expire at various
 dates from 2008 through 2025. Utilization of the U.S. subsidiaries federal
 and state net operating losses attributable to acquired subsidiaries, of
 approximately $30,900,000 and $14,800,000, respectively, are subject to an
 annual limitation under Internal Revenue Code (IRC) section 382 determined
 by multiplying the value of the acquired entitys stock at the time of
 acquisition by the applicable long-term tax exempt rate.
|        |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        |                             | During the year ended December
31, 2007 the Companys U.S. subsidiaries utilized in federal and state
jurisdictions approximately $4,100,000 of US net operating loss carryforwards to offset
current taxable income in the US tax jurisdiction of which $1,400,000 was acquired
net operating loss carryforwards that resulted in a release of the related
valuation allowance of $550,000 with an offsetting reduction to goodwill.Approximately $13 million of the
valuation allowance at December 31, 2007 relates to acquired U.S. net operating loss
carryforwards for which subsequently recognized tax benefits will be recorded as a
reduction of goodwill.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F  39

---

---

RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|        |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------- | --------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 9 | TAXES ON INCOME(continued):
|        |                            
|        | f.                          | Uncertain tax positions:                                                                                                                                                                                                                                                                                                                                                                                                                                
|        |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        |                             | As stated in
 note 1k5, effective January 1, 2007, the Company adopted FIN 48, Accounting
 for Uncertainty in Income Taxes-an interpretation of FAS 109, which was
 issued in July 2006. FIN 48 clarifies the accounting for uncertainty in
 income taxes and prescribes a recognition threshold and measurement
 attributes for the financial statement recognition and measurement of a tax
 position taken or expected to be taken in a tax return.
|        |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        |                             | The
 following table summarizes the activity of our unrecognized tax benefits:                                                                                                                                                                                                                                                                                                                                                                          

|                                           |  |                                 |       | 
|------------------------------------------ |  | ------------------------------- | ----- | 
|                                           |  | Year
 ended December 
 31, 2007 |      
|                                           |  |                                 |      
|                                           |  | U.S. $
 in thousands            |      
|                                           |  |                                 |      
|                                           |  |                                 |       | 
|Balance at
 January 1, 2007                |  |                                 | 2,273 | 
|Increase in
 tax positions for prior year  |  |                                 | 189   | 
|Increase in tax positions for current year |  |                                 | 538   | 
|                                           |  |                                 |       | 
|Balance at
 December 31, 2007              |  |                                 | 3,000 | 
|                                           |  |                                 |       | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | The
total amount of net unrecognized tax benefits that, if recognized, would affect the
effective tax rate was $ 3,000,000 at December 31, 2007. The liability in respect of
unrecognized tax benefits included accrued potential penalties and interest of $ 371,000.
We do not expect unrecognized tax expenses to change significantly over the next 12
months.As a result of the adoption of FIN
48, the company recorded cumulative effect of a change in accounting principle that is
reflected in the financial statements as a decrease of $2,495,000 in the balance of
retained earnings as of January 1, 2007.In 2007 the Company recognized
interest and penalties expense, related to unrecognized tax benefits in the amounts of
$149,000. As of December 31, 2007, the amounts of interest and penalties accrued on the
balance sheet are $371,000.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | g. | Deferred income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | The deferred
 tax asset in respect of the balances of temporary differences (mostly in
 respect of carryforward losses) and the related valuation allowance are as
 follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|   |                                        |  |                      |         |      |  |         |  
|-- | -------------------------------------- |  | -------------------- | ------- | ---- |  | ------- | -
|   |                                        |  | December
 31         |        
|   |                                        |  |                      |        
|   |                                        |  | 2007                 |         | 2006 | 
|   |                                        |  |                      |         |      | 
|   |                                        |  | U.S. $
 in thousands |        
|   |                                        |  |                      |        
|1) | Provided in
 respect of the following: |  |                      |         |      |  |         |  
|   | Provisions for employee rights         |  |                      | 1,766   |      |  | 1,583   |  
|   | Deferred revenues                      |  |                      | 2,792   |      |  | -       |  
|   | Carryforward tax losses                |  |                      | 18,810  |      |  | 16,485  |  
|   | Doubtful accounts                      |  |                      | 1,680   |      |  | 1,712   |  
|   | Research and development               |  |                      | 7,645   |      |  | 6,415   |  
|   | Employee stock options                 |  |                      | 1,023   |      |  | 529     |  
|   | Non employee stock options             |  |                      | 439     |      |  | 407     |  
|   | Depreciable fixed assets               |  |                      | 104     |      |  | 134     |  
|   | Other                                  |  |                      | 643     |      |  | 516     |  
|   |                                        |  |                      |         |      |  |         |  
|   |                                        |  |                      | 34,902  |      |  | 27,781  |  
|   | Goodwill  and other intangible assets  |  |                      | (3,675  | )    |  | (4,434  | )
|   |                                        |  |                      |         |      |  |         |  
|   |                                        |  |                      | 31,227  |      |  | 23,347  |  
|   | L e s s- valuation allowance           |  |                      | (16,110 | )    |  | (14,398 | )
|   |                                        |  |                      |         |      |  |         |  
|   |                                        |  |                      | 15,117  |      |  | 8,949   |  
|   |                                        |  |                      |         |      |  |         |  

F  40

---

---

RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|        |                              |    |                                                                    
|------- | ---------------------------- | -- | -------------------------------------------------------------------
|NOTE 9 | TAXES ON INCOME (continued):
|        |                              |    |                                                                    
|        |                              | 2) | The deferred
 taxes are presented in the balance sheets as follows:

|                            |  |                      |        |      |  |        |  
|--------------------------- |  | -------------------- | ------ | ---- |  | ------ | -
|                            |  | December
 31         |       
|                            |  |                      |       
|                            |  | 2007                 |        | 2006 | 
|                            |  |                      |        |      | 
|                            |  | U.S. $
 in thousands |       
|                            |  |                      |       
|                           
|As a current
 asset         |  |                      | 8,286  |      |  | 5,930  |  
|As a
 non-current asset     |  |                      | 7,050  |      |  | 4,035  |  
|                            |  |                      |        |      |  |        |  
|                            |  |                      | 15,336 |      |  | 9,965  |  
|                            |  |                      |        |      |  |        |  
|As a
 non-current liability |  |                      | (219   | )    |  | (1,016 | )
|                            |  |                      |        |      |  |        |  
|                            |  |                      | 15,117 |      |  | 8,949  |  
|                            |  |                      |        |      |  |        |  

| |    |                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | ----------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 3)                                                                                        | Realization
 of the deferred tax assets is conditional upon earning a sufficient amount of
 taxable income in the coming years. The value of the deferred tax assets,
 however, could decrease in future years if estimates of future taxable income
 are reduced.                                                                                                                                          
| |    |                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | 4)                                                                                        | The deferred
 taxes are computed at the tax rates of 21%- 40%.                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | 5)                                                                                        | As stated in b. above, part of
the income of the Companys income is tax exempt due to the approved enterprise
status granted to most of their production facilities. The Company has decided to
permanently reinvest the amount of such tax exempt income and not to distribute it as
dividends. Accordingly, no deferred taxes have been provided in respect of
such income in these financial statements.
| |    |                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                             
| | h. | Income (loss) before taxes on income and income taxes included in the
 income statements:

|   |                                                  |  |                         |        |      |  |        |   |  |        |  
|-- | ------------------------------------------------ |  | ----------------------- | ------ | ---- |  | ------ | - |  | ------ | -
|   |                                                  |  | Year
 ended December 31 |       
|   |                                                  |  |                         |       
|   |                                                  |  | 2007                    |        | 2006 |  | 2005   |  
|   |                                                  |  |                         |        |      |  |        |  
|   |                                                  |  | U.S. $
 in thousands    |       
|   |                                                  |  |                         |       
|1) | Income
 (loss) before taxes on income:           |  |                         |        |      |  |        |   |  |        |  
|   | Israeli                                          |  |                         | (972   | )    |  | (2,025 | ) |  | 21,874 |  
|   | Non-Israeli                                      |  |                         | 550    |      |  | 3,278  |   |  | (1,400 | )
|   |                                                  |  |                         |        |      |  |        |   |  |        |  
|   |                                                  |  |                         | (422   | )    |  | 1,253  |   |  | 20,474 |  
|   |                                                  |  |                         |        |      |  |        |   |  |        |  
|2) | Income taxes
 included in the income statements: |  |                         |        |      |  |        |   |  |        |  
|   | Current:                                         |  |                         |        |      |  |        |   |  |        |  
|   | Israeli                                          |  |                         | 1,461  |      |  | 1,583  |   |  | 7,019  |  
|   | Non-Israeli                                      |  |                         | 957    |      |  | 502    |   |  | 354    |  
|   |                                                  |  |                         |        |      |  |        |   |  |        |  
|   |                                                  |  |                         | 2,418  |      |  | 2,085  |   |  | 7,373  |  
|   |                                                  |  |                         |        |      |  |        |   |  |        |  
|   | Deferred:                                        |  |                         |        |      |  |        |   |  |        |  
|   | Israeli                                          |  |                         | (3,454 | )    |  | (3,139 | ) |  | (1,348 | )
|   | Non-Israeli                                      |  |                         | 601    |      |  | 547    |   |  | (113   | )
|   |                                                  |  |                         |        |      |  |        |   |  |        |  
|   |                                                  |  |                         | (2,853 | )    |  | (2,592 | ) |  | (1,461 | )
|   |                                                  |  |                         |        |      |  |        |   |  |        |  
|   |                                                  |  |                         | (435   | )    |  | (507   | ) |  | 5,912  |  
|   |                                                  |  |                         |        |      |  |        |   |  |        |  

F  41

---

---

RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|        |                              |                                                                                                                                                                                                                         
|------- | ---------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 9 | TAXES ON INCOME (continued):
|        |                              |                                                                                                                                                                                                                         
|        | 3)                           | Following is
  a reconciliation of the theoretical tax expense, assuming all income is taxed
  at the regular tax rate applicable to companies in Israel (2007-29%, 2006-31%
  and 2005-34%) and the actual tax expense:

|                                                                                                                                                                            |  |                          |        |      |  |        |   |  |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ------ | - |  | ------ | -
|                                                                                                                                                                            |  | Year
  ended December 31 |       
|                                                                                                                                                                            |  |                          |       
|                                                                                                                                                                            |  | 2007                     |        | 2006 |  | 2005   |  
|                                                                                                                                                                            |  |                          |        |      |  |        |  
|                                                                                                                                                                            |  | U.S. $
  in thousands    |       
|Income before taxes on income, as reported
  in the income statements                                                                                                       |  |                          | (422   | )    |  | 1,253  |   |  | 20,474 |  
|                                                                                                                                                                            |  |                          |        |      |  |        |   |  |        |  
|Theoretical tax expense  (tax benefit)                                                                                                                                      |  |                          | (122   | )    |  | 388    |   |  | 6,961  |  
|                                                                                                                                                                           
|L e s s - tax benefits arising from
  approved enterprise status                                                                                                            |  |                          | -      |      |  | 346    |   |  | 2,518  |  
|                                                                                                                                                                            |  |                          |        |      |  |        |   |  |        |  
|                                                                                                                                                                            |  |                          | (122   | )    |  | 42     |   |  | 4,443  |  
|                                                                                                                                                                            |  |                          |        |      |  |        |  
|Increase (decrease) in taxes resulting from
  permanent differences:                                                                                                        |  |                          |        |      |  |        |   |  |        |  
|Disallowable deductions                                                                                                                                                     |  |                          | 1,292  |      |  | 1,266  |   |  | 697    |  
|Tax exempt income                                                                                                                                                           |  |                          |        |      |  |        |   |  | (28    | )
|Increase (decrease) in taxes resulting from
  different tax rates applicable to non - Israeli subsidiaries                                                                  |  |                          | 178    |      |  | 95     |   |  | (16    | )
|Changes in valuation allowance                                                                                                                                              |  |                          | 661    |      |  | (1,325 | ) |  | (903   | )
|Differences between the basis of
  measurement of income reported for tax purposes and the basis of measurement
  of income for financial reporting purposes - see c. above |  |                          | (3,013 | )    |  | (1,184 | ) |  | 1,230  |  
|Increase in taxes on income resulting from
  the computation of deferred taxes at a rate which is different from the
  theoretical rate                                     |  |                          | 609    |      |  | 591    |   |  | 467    |  
|Other                                                                                                                                                                       |  |                          | (40    | )    |  | 8      |   |  | 22     |  
|                                                                                                                                                                            |  |                          |        |      |  |        |   |  |        |  
|Taxes on income (tax benefit) for the
  reported years                                                                                                                      |  |                          | (435   | )    |  | (507   | ) |  | 5,912  |  
|                                                                                                                                                                            |  |                          |        |      |  |        |   |  |        |  

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | i. | Tax assessments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The Company
  has received final tax assessments through the year ended December 31, 2002.
  Tamar Industries M.R Electronics 1985 Ltd. received a final assessment
  through the year ended December 31, 2005. Kochav Orion Advertising and
  Information Ltd, Orlan Orion Systems Ltd and PRS received final assessments
  through the year ended December 31, 2003. Retalix Italia received final
  assessments through the year ended December 31, 2002. Retalix Holdings, Inc.
  received final tax assessments through the year ended December 31, 2003. The
  other subsidiaries have not been assessed since incorporation.

F  42

---

---

RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|         |                                            
|-------- | -------------------------------------------
|NOTE 10 | MONETARY BALANCES IN NON-DOLLAR CURRENCIES:

|            |  |                             |        |                                 |  |         |   |  |         |  
|----------- |  | --------------------------- | ------ | ------------------------------- |  | ------- | - |  | ------- | -
|            |  | December 31, 2007           |       
|            |  |                             |       
|            |  | Israeli currency            |        |                                 |  |        
|            |  |                             |        | Other
  non-dollar
  currencies | 
|            |  | Linked to the
  Israeli CPI |        | Unlinked                        |  |        
|            |  |                             |        |                                 |  |         |  
|            |  | U.S. $ in thousands         |       
|            |  |                             |       
|            |  |                             |        |                                 |  |         |   |  |         |  
|Assets      |  |                             | 2,793  |                                 |  | 22,566  |   |  | 35,930  |  
|            |  |                             |        |                                 |  |         |   |  |         |  
|Liabilities |  |                             | (2,301 | )                               |  | (30,500 | ) |  | (16,070 | )
|            |  |                             |        |                                 |  |         |   |  |         |  

|         |                                         
|-------- | ----------------------------------------
|NOTE 11 | SUPPLEMENTARY BALANCE SHEET INFORMATION:

| |    |                      |                                             |  |                       |        |      |  |        | 
| | -- | -------------------- | ------------------------------------------- |  | --------------------- | ------ | ---- |  | ------ | 
| |    |                      |                                             |  |                       |        |      |  |        | 
| |    |                      |                                             |  | December
  31         |       
| |    |                      |                                             |  |                       |       
| |    |                      |                                             |  | 2007                  |        | 2006 | 
| |    |                      |                                             |  |                       |        |      | 
| |    |                      |                                             |  | U.S. $
  in thousands |       
| |    |                      |                                             |  |                       |       
| |    |                      |                                             |  |                       |       
| | a. | Accounts receivable: |                                             |  |                       |        |      |  |       
| |    |                      |                                             |  |                       |        |      |  |        | 
| |    | 1)                   | Trade:                                      |  |                       |        |      |  |        | 
| |    |                      |                                             |  |                       |        |      |  |        | 
| |    |                      | Open accounts                               |  |                       | 90,293 |      |  | 53,444 | 
| |    |                      | Less - allowance for doubtful accounts      |  |                       | 8,864  |      |  | 4,975  | 
| |    |                      |                                             |  |                       |        |      |  |        | 
| |    |                      |                                             |  |                       | 81,429 |      |  | 48,469 | 
| |    |                      |                                             |  |                       |        |      |  |        | 
| |    |                      |                                             |  |                       |        |      |  |        | 
| |    | 2)                   | Other:                                      |  |                       |        |      |  |        | 
| |    |                      |                                             |  |                       |        |      |  |        | 
| |    |                      | Israeli Government departments and
agencies |  |                       | 1,080  |      |  | 1,749  | 
| |    |                      | Employees                                   |  |                       | 128    |      |  | 327    | 
| |    |                      | Prepaid expenses                            |  |                       | 3,775  |      |  | 3,088  | 
| |    |                      | other                                       |  |                       | 502    |      |  | 360    | 
| |    |                      |                                             |  |                       |        |      |  |        | 
| |    |                      |                                             |  |                       | 5,485  |      |  | 5,524  | 
| |    |                      |                                             |  |                       |        |      |  |        | 

| |    |                        |                                                                                                                                                                               
| | -- | ---------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | Marketable securities:
| |    |                       
| |    | 1)                     | Held to maturity
  and available for sale bond securities - the amortized cost basis, aggregate
  fair value and the gross unrealized holding gains and losses are as follows:

|                  |  |                                 |       |                    |  |                     |  |                        |     |   |  |       | 
|----------------- |  | ------------------------------- | ----- | ------------------ |  | ------------------- |  | ---------------------- | --- | - |  | ----- | 
|                  |  | Amortized
  cost                |       | Unrealized
  gains |  | Unrealized
  Losses |  | Aggregate
  fair value |    
|                  |  |                                 |       |                    |  |                     |  |                        |    
|                  |  | U. S. $
  i n t h o u s a n d s |      
|                  |  |                                 |      
|At December
  31: |  |                                 |       |                    |  |                     |  |                        |     |   |  |       | 
|2007              |  |                                 | 1,227 |                    |  | 235                 |  |                        | (57 | ) |  | 1,405 | 
|                  |  |                                 |       |                    |  |                     |  |                        |     |   |  |       | 
|2006              |  |                                 | 2,990 |                    |  | 20                  |  |                        | (55 | ) |  | 2,955 | 
|                  |  |                                 |       |                    |  |                     |  |                        |     |   |  |       | 

The
bonds mature as follows:

|     |  |                         |       | 
|---- |  | ----------------------- | ----- | 
|     |  | U.S.
  $ in
  thousands |      
|     |  |                         |      
|2008 |  |                         | 370   | 
|2009 |  |                         | 490   | 
|2010 |  |                         | 180   | 
|2020 |  |                         | 187   | 
|     |  |                         |       | 
|     |  |                         | 1,227 | 
|     |  |                         |       | 

F  43

---

---

RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|         |                                                     |    |                                                                                                                                                                              
|-------- | --------------------------------------------------- | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 11 | SUPPLEMENTARY BALANCE SHEET INFORMATION(continued):
|         |                                                    
|         |                                                     | 2) | As of December 31, 2007, the
Companys investment in an available for sale bond security (an action rate security)
is recorded net of unrealized loss in amount of $ 200,000.
|         |                                                    
|         |                                                     | 3) | The
 marketable securities are presented in the balance sheets as follows:                                                                                                   

|                                 |  |                      |       |      |  |       | 
|-------------------------------- |  | -------------------- | ----- | ---- |  | ----- | 
|                                 |  | December
 31         |      
|                                 |  |                      |      
|                                 |  | 2007                 |       | 2006 | 
|                                 |  |                      |       |      | 
|                                 |  | U.S. $
 in thousands |      
|                                 |  |                      |      
|                                
|Among
 current assets:           |  |                      |       |      |  |       | 
|Trading                          |  |                      | 3,085 |      |  | 2,800 | 
|Held to maturity bond securities |  |                      | 370   |      |  | 1,754 | 
|                                 |  |                      |       |      |  |       | 
|                                 |  |                      | 3,455 |      |  | 4,554 | 
|As a
 non-current asset          |  |                      |       |      |  |       | 
|Available for sale security      |  |                      | 800   |      |  | -     | 
|Held to maturity bond securities |  |                      | 857   |      |  | 1,237 | 
|                                 |  |                      |       |      |  |       | 
|                                 |  |                      | 5,112 |      |  | 5,791 | 
|                                 |  |                      |       |      |  |       | 

| |    |                        |                                                
| | -- | ---------------------- | -----------------------------------------------
| |    | 4)                     | As to
 pledges on securities, see note 7c.     
| |    |                        |                                                
| | c. | Long-term receivables:
| |    |                        |                                                
| |    | 1)                     | Long-term
 receivables are composed as follows:

|                                |  |                       |       |  
|------------------------------- |  | --------------------- | ----- | -
|                                |  | December
 31,
 2007   |      
|                                |  |                       |      
|                                |  | U.S.
 $ in
 thousands |      
|                                |  |                       |      
|                                |  |                       |       |  
|Long-term
 loans to employees * |  |                       | 50    |  
|Long-term
 trade receivables    |  |                       | 5,991 |  
|Less -
 Unamortized discount**  |  |                       | (360  | )
|                                |  |                       |       |  
|                                |  |                       | 5,681 |  
|                                |  |                       |       |  

|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                             
|---------- | -------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           |                                              | *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Long-term
 loans to employees granted by the Company are linked to the Israeli CPI and
 bear interest at an annual rate of 4%. Repayment dates are up to four years
 from the date of grant.
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                             
|           |                                              | **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | The discount
 is based on imputed interest of 4%.                                                                                                                                           
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                             
|NOTE 12   | DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS:
|           |                                             
|           | a.                                           | Concentrations of credit risks - allowance for doubtful accounts:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                             
|           |                                              | Financial instruments, which
potentially subject the Company to credit risk, consist principally of cash and cash
equivalent, trade receivables and interest bearing investments. The cash and cash
equivalents as of December 31, 2007 and 2006 are deposited mainly with leading Israeli and
U.S. banks. Therefore, in the opinion of the Company, the credit risk inherent in these
balances is remote. As to trade receivables, most of the Groups revenues are derived
from a large number of customers. Consequently, the exposure to credit risks relating to
trade receivables is limited. The Group performs ongoing credit evaluations of its
customers and generally does not require collateral. An appropriate allowance for doubtful
accounts is included in accounts receivable. As to investment in available for sale
security  see note 11b(2). Securities invested in by the Group represent mainly
highly rated corporations. The Group is of the opinion that the credit risk in respect of
these balances is remote.

F  44

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---

RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                
|---------- | ------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12   | DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS(continued):
|           |                                                        
|           | b.                                                      | Fair value of financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                                         | The fair
 value of the financial instruments included in the working capital of the
 Group is usually identical or close to their carrying value. The fair value
 of long-term receivables, long-term loans and other long-term liabilities
 also approximates the carrying value, since they bear interest at rates close
 to the prevailing market rates. The amounts funded in respect of employee
 rights are stated at fair value.                                                                                                                                                                                                        
|          
|           |                                                         | The following methods and assumptions were
 used by the Company in estimating its fair value disclosures for financial
 instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                                         | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | The carrying
 amount of cash and cash equivalents, trade receivables and trade payables
 approximates their fair values due to the short-term maturities of these
 instruments.
|           |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                
|           |                                                         | 2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | The fair
 value of short and long-term marketable securities and bank deposits with
 quoted market prices is based on quoted market prices.                                    
|           |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                
|           |                                                         | 3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | The fair
 value of derivative instruments is estimated by obtaining quotes from
 brokers.                                                                                      
|          
|           |                                                         | As to the fair value of derivatives, see c. below. As to the fair
 value of marketable debt securities, see note11b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                
|           | c.                                                      | Derivative financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                
|           |                                                         | The Company
 has only limited involvement with derivative financial instruments. The
 Company carries out transactions involving foreign exchange derivative
 financial instruments (forward exchange contracts). These transactions do not
 qualify for hedge accounting under FASB Statement No. 133 - Accounting for
 Derivative Instruments and Hedging Activities.                                                                                                                                                                                                                                                                      
|           |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                                         | During 2007,
 the Company entered into several foreign currencies forward contracts for
 conversion of Pounds Sterling, Euro, Australian dollar and Israeli currency
 into a notional amount in dollars, all short term contracts of up to three
 months. Most of these contracts were rolled over a few times since their
 original closure in recent years.                                                                                                                                                                                                                                                                                  
|           |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                                         | As of
 December 31, 2007, the Company had nine open contracts of this nature for the
 conversion of such foreign currencies into a total of approximately $15.2
 million, the fair value of which as of December 31, 2007 is $(147,000), which
 reflects the estimated amounts that the Group would pay to terminate the
 contracts at the reporting date and which was charged to financial expenses.
 As of December 31, 2006, the Company had ten open contracts of this nature
 for the conversion of such foreign currencies into a total of approximately
 $14.6 million, the fair value of which as of December 31, 2006 was $(336,000).

F  45

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---

RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                      |                                                                                                                                                                                                                                                                                                                                     
|---------- | -------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 13   | SEGMENT INFORMATION:
|           |                     
|           | a.                   | The Company
 conducts business globally and is managed geographically. The Company and its
 subsidiaries reportable segments are strategic business units, which are
 distinguished by the geographical areas in which they generate revenues,
 based on the location of customers.                                                 
|           |                      |                                                                                                                                                                                                                                                                                                                                     
|           |                      | The Company
 evaluates performance based on the revenues presented for each geographical
 segment. Segment assets information is not given, since the Company does not
 evaluate performance based on such assets. Based on the criteria above, the
 Company has the following reportable segments: Israel, U.S. and
 International.
|           |                      |                                                                                                                                                                                                                                                                                                                                     
|           |                      | Geographic
 segments:                                                                                                                                                                                                                                                                                                               
|           |                      |                                                                                                                                                                                                                                                                                                                                     
|           |                      | Summarized
 financial information by geographic segment, for 2007, 2006 and 2005 is as
 follows:                                                                                                                                                                                                                                    

|                                                                        |  |                         |         |      |  |         |  |  |         | 
|----------------------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ------- |  |  | ------- | 
|                                                                        |  | Year
 ended December 31 |        
|                                                                        |  |                         |        
|                                                                        |  | 2007                    |         | 2006 |  | 2005    | 
|                                                                        |  |                         |         |      |  |         | 
|                                                                        |  | U.S. $
 in thousands    |        
|                                                                        |  |                         |        
|                                                                        |  |                         |        
|Revenues:                                                               |  |                         |         |      |  |         |  |  |         | 
|U.S                                                                     |  |                         | 123,266 |      |  | 119,821 |  |  | 98,385  | 
|Israel                                                                  |  |                         | 18,738  |      |  | 17,083  |  |  | 13,800  | 
|International*                                                          |  |                         | 79,407  |      |  | 66,840  |  |  | 75,186  | 
|                                                                        |  |                         |         |      |  |         |  |  |         | 
|Total revenues                                                          |  |                         | 221,411 |      |  | 203,744 |  |  | 187,371 | 
|                                                                        |  |                         |         |      |  |         |  |  |         | 
|                                                                        |  |                         |         |      |  |         |  |  |         | 
|* The international segment includes
 revenues from customers in Europe |  |                         | 46,838  |      |  | 41,961  |  |  | 50,532  | 
|                                                                        |  |                         |         |      |  |         |  |  |         | 

| |    |                                                                                                                               
| | -- | ------------------------------------------------------------------------------------------------------------------------------
| | b. | Enterprise-wide disclosure:                                                                                                   
| |    |                                                                                                                               
| |    | The
 composition of the Groups property, plant and equipment according to the
 physical location of the assets is as follows:

|              |  |                                      |        |      |  |        | 
|------------- |  | ------------------------------------ | ------ | ---- |  | ------ | 
|              |  | Depreciated
 balance at
 December 31 |       
|              |  |                                      |       
|              |  | 2007                                 |        | 2006 | 
|              |  |                                      |        |      | 
|              |  | U.S. $
 in thousands                 |       
|              |  |                                      |       
|              |  |                                      |       
|Israel        |  |                                      | 10,230 |      |  | 7,883  | 
|U.S.          |  |                                      | 1,906  |      |  | 2,841  | 
|International |  |                                      | 432    |      |  | 456    | 
|              |  |                                      |        |      |  |        | 
|              |  |                                      | 12,568 |      |  | 11,180 | 
|              |  |                                      |        |      |  |        | 

| |    |                                                                                                                                                                                                                                                                              
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | As for
 goodwill, see note 4a.                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                              
| | c. | Revenues from customer exceeding 10% of total revenues:                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                              
| |    | In the years
 ended December 31, 2007 and December 31, 2006, no customer generated revenues
 in excess of 10% of the Groups total revenues.                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                              
| |    | In the year
 ended December 31, 2005, one customer in the international geographic segment
 generated revenues in excess of 10% of the Groups total revenues. This
 customer generated revenues of 10.2% of the Groups total revenues in the
 year ended December 31, 2005.

F  46

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---

RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                                 |                                                                        
|---------- | ------------------------------- | -----------------------------------------------------------------------
|NOTE 14   | SELECTED INCOME STATEMENT DATA:
|           |                                
|           | a.                              | General and administrative expenses - allowance for doubtful
 accounts:

| |  |  |                                                                          |  |                         |        |      |  |        |   |  |       |  
| |  |  | ------------------------------------------------------------------------ |  | ----------------------- | ------ | ---- |  | ------ | - |  | ----- | -
| |  |  |                                                                          |  | Year
 ended December 31 |       
| |  |  |                                                                          |  |                         |       
| |  |  |                                                                          |  | 2007                    |        | 2006 |  | 2005   |  
| |  |  |                                                                          |  |                         |        |      |  |        |  
| |  |  |                                                                          |  | U.S. $
 in thousands    |       
| |  |  |                                                                          |  |                         |       
| |  |  |                                                                          |  |                         |        |      |  |        |   |  |       |  
| |  |  | The changes in allowance for doubtful
 accounts are composed as follows: |  |                         |        |      |  |        |   |  |       |  
| |  |  | Balance at beginning of year                                             |  |                         | 4,975  |      |  | 4,404  |   |  | 3,154 |  
| |  |  | Increase during the year                                                 |  |                         | 5,278  |      |  | 2,676  |   |  | 2,237 |  
| |  |  | Bad debt written off                                                     |  |                         | (1,389 | )    |  | (2,431 | ) |  | (987  | )
| |  |  | Adjustments resulting from the adoption of
 SAB 108                      |  |                         | -      |      |  | 326    |   |  | -     |  
| |  |  |                                                                          |  |                         |        |      |  |        |   |  |       |  
| |  |  | Balance at end of year                                                   |  |                         | 8,864  |      |  | 4,975  |   |  | 4,404 |  
| |  |  |                                                                          |  |                         |        |      |  |        |   |  |       |  

| |    |                              |                                               |  |                         |        |      |  |        |   |  |        |  
| | -- | ---------------------------- | --------------------------------------------- |  | ----------------------- | ------ | ---- |  | ------ | - |  | ------ | -
| |    |                              |                                               |  | Year
 ended December 31 |       
| |    |                              |                                               |  |                         |       
| |    |                              |                                               |  | 2007                    |        | 2006 |  | 2005   |  
| |    |                              |                                               |  |                         |        |      |  |        |  
| |    |                              |                                               |  | U.S. $
 in thousands    |       
| |    |                              |                                               |  |                         |       
| | b. | Financial income (expenses): |                                               |  |                         |        |      |  |        |   |  |       
| |    |                              | Realized
 gain on marketable securities - net |  |                         | 95     |      |  | 111    |   |  | 308    |  
| |    |                              | Non-dollar
 currency gains (losses) - net     |  |                         | 1,227  |      |  | (209   | ) |  | (637   | )
| |    |                              | Interest
 income                              |  |                         | 1,950  |      |  | 2,163  |   |  | 3,011  |  
| |    |                              | Interest and
 bank commissions expense        |  |                         | (2,240 | )    |  | (1,986 | ) |  | (2,480 | )
| |    |                              |                                               |  |                         |        |      |  |        |   |  |        |  
| |    |                              |                                               |  |                         | 1,032  |      |  | 79     |   |  | 202    |  
| |    |                              |                                               |  |                         |        |      |  |        |   |  |        |  

| |    |                               |                                         |  |  |      |   |  |    |  |  |   | 
| | -- | ----------------------------- | --------------------------------------- |  |  | ---- | - |  | -- |  |  | - | 
| | c. | Other general expenses - net: |                                         |  |  |      |   |  |    |  |  |  
| |    |                               | Loss
 on sale of property and equipment |  |  | 57   |   |  | 22 |  |  | - | 
| |    |                               | Due
 Diligence Costs                    |  |  | (700 | ) |  |    |  |  | - | 
| |    |                               |                                         |  |  |      |   |  |    |  |  |   | 
| |    |                               |                                         |  |  | 643  |   |  | 22 |  |  | - | 
| |    |                               |                                         |  |  |      |   |  |    |  |  |   | 

| |    |                                                                                                                            
| | -- | ---------------------------------------------------------------------------------------------------------------------------
| | d. | Earnings per share (EPS):                                                                                                
| |    |                                                                                                                            
| |    | Following
 are data relating to the nominal value of shares - basic and diluted used in
 the purpose of computation of EPS:

| |  |  |                                                                                                            |  |                                |        |      |  |        |  |  |        | 
| |  |  | ---------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | ---- |  | ------ |  |  | ------ | 
| |  |  |                                                                                                            |  | Year
 ended December 31        |       
| |  |  |                                                                                                            |  |                                |       
| |  |  |                                                                                                            |  | 2007                           |        | 2006 |  | 2005   | 
| |  |  |                                                                                                            |  |                                |        |      |  |        | 
| |  |  |                                                                                                            |  | Number
 of shares in thousands |       
| |  |  |                                                                                                            |  |                                |       
| |  |  |                                                                                                            |  |                                |       
| |  |  | Weighted average number of shares issued
 and outstanding- used in computation of basic earnings per share |  |                                | 19,851 |      |  | 19,491 |  |  | 18,710 | 
| |  |  |                                                                                                            |  |                                |        |      |  |        |  |  |        | 
| |  |  | Add incremental shares from assumed
 exercise of options                                                   |  |                                | -      |      |  | 636    |  |  | 949    | 
| |  |  |                                                                                                            |  |                                |        |      |  |        |  |  |        | 
| |  |  | Weighted average number of shares used in
 computation of diluted earnings per share                       |  |                                | 19,851 |      |  | 20,127 |  |  | 19,659 | 
| |  |  |                                                                                                            |  |                                |        |      |  |        |  |  |        | 

For the years ended December 31,
2007 and 2006 options in the total amount of 3,279,338 and 1,953,063, respectively, were
not taken into account in computation of diluted earnings (loss) per share, because of
their anti dilutive effect. In the year 2005 there were no such unti-dilution options.

F  47

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---