---

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# UNITED STATESSECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, 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, 2008

# 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.COM10 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: 20,389,771 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 o NO 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 o NO 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 x NO o

Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files).

# YES o NO o

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

|                           |                      |                         
|-------------------------- | -------------------- | ------------------------
|
|
|
|
|Large Accelerated Filer  o | Accelerated Filer  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

2

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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                                             | 6-19 
| | A. Selected Financial Data                                          | 6-7  
| | B. Capitalization and Indebtedness                                  | 7    
| | C. Reasons for the Offer and Use of Proceeds                        | 7    
| | D. Risk Factors                                                     | 7-19 
| | Item 4. INFORMATION ON THE COMPANY                                  | 20-44
| | A. History and Development of the Company                           | 20   
| | B. Business Overview                                                | 20-42
| | C. Organizational Structure                                         | 43   
| | D. Property, Plants and Equipment                                   | 44   
| | Item 4A. UNRESOLVED STAFF COMMENTS                                  | 44   
| | Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                | 44-59
| | A. Operating Results                                                | 44-55
| | B. Liquidity and Capital Resources                                  | 55-57
| | C. Research and Development, Patents and Licenses, Etc.             | 58-59
| | D. Trend Information                                                | 59   
| | E. Off -Balance Sheet Arrangements                                  | 59   
| | F. Tabular Disclosure of Contractual Obligations                    | 59   
| |                                                                    
| | Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                  | 60-69
| | A. Directors and Senior Management                                  | 60-61
| | B. Compensation                                                     | 62   
| | C. Board Practices                                                  | 63-65
| | D. Employees                                                        | 65-66
| | E. Share Ownership                                                  | 66-69
| | Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS           | 69-71
| | A. Major Shareholders                                               | 69-70
| | B. Related Party Transactions                                       | 70   
| | C. Interests of Experts and Counsel                                 | 71   
| | Item 8. FINANCIAL INFORMATION                                       | 71   
| | Item 9. THE OFFER AND LISTING                                       | 72-74
| | A. Offer and Listing Details                                        | 72-73
| | B. Plan of Distribution                                             | 74   
| | C. Markets                                                          | 74   
| | D. Selling Shareholders                                             | 74   
| | E. Dilution                                                         | 74   
| | F. Expenses of the Issue                                            | 74   
| | Item 10. ADDITIONAL INFORMATION                                     | 74-86
| | A. Share Capital                                                    | 74   
| | B. Memorandum and Articles of Association                           | 74-78
| | C. Material Contracts                                               | 79   
| | D. Exchange Controls                                                | 79   
| | E. Taxation                                                         | 79-86
| | F. Dividends and Paying Agents                                      | 86   
| | G. Statement by Experts                                             | 86   
| | H. Documents on Display                                             | 86   
| | I. Subsidiary Information                                           | 86   
| |                                                                    
| | Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 87-88
| | Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES     | 88   

3

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|PART II
|-------

| |                                                                                       |   
| | ------------------------------------------------------------------------------------- | --
|
|
|
|
| | Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 88
| | Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 88
| | Item 15. CONTROLS AND PROCEDURES                                                      | 89
| | Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                            | 89
| | Item 16B. CODE OF ETHICS                                                              | 89
| | Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                      | 90
| | Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                  | 90
| | Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      | 90
| | Item 16F. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT                                | 90
| | Item 16G. CORPORATE GOVERNANCE                                                        | 90

|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 8, 2009, the exchange rate between the NIS and the dollar, as
quoted by the Bank of Israel, was NIS 4.005 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, 2004, 2006, 2007 and 2008 and the selected consolidated
balance sheet data set forth below as of December 31, 2004, 2006, 2007 and 2008 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 2006, 2007 and 2008
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                            |                        
|Impairment of goodwill                                 |                        
|                                                       |                        
|Total operating expenses                               |                        
|                                                       |                        
|Income (loss) from operations                          |                        
|Financial income (expenses) - net                      |                        
|Gain arising from issuance of shares by associated     |                        
|Companies                                              |                        
|                                                       |                        
|Income (loss) before taxes on income                   |                        
|Tax benefit (taxes on income)                          |                        
|Share in income (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
recent downturn in the global economy worldwide has materially adversely affected the
retail food industry, our primary target market, which has had a material adverse effect
on our results of operations. If adverse economic conditions continue or worsen, our
results of operations could worsen, as well.

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, fuel chains 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 global financial and credit markets has caused liquidity problems
for many financial institutions and adversely affected investor and consumer confidence
generally. This has resulted in a curtailment of capital investment by many of our
existing and potential customers, which has adversely affected our results of operations.
Conditions may continue to be depressed or may be subject to further deterioration, which
could lead to a further reduction in consumer and customer spending overall, which could
have an adverse impact on sales of our products. A significant adverse change in a
customers financial and/or credit position could also require us to assume greater
credit risk relating to that customers receivables or could limit our ability to
collect receivables related to previous purchases by that customer. As a result, our
reserves for doubtful accounts and write-offs of accounts receivable may increase. For
example, in the first quarter of 2009, we had to write off a $1.1 million receivable due
to the bankruptcy of one of our customers. In addition, if we require additional funds to
finance the growth of our business and are unable to raise them due to the prevailing
weakness in the global financial and credit markets, our results of operations and
financial condition may be adversely affected.

7

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# We had a loss in 2008
and may not return to profitability.

For the year ended December 31, 2008, we recorded a net loss of $52 million. Our 2008 results were
adversely impacted by an impairment of goodwill amounting to $58.2 million. Before this impairment
charge, we still would have had a net loss in 2008, were it not for a tax benefit. Our ability to return
to or sustain profitability in the future depends in part on the global economy, which has adversely
affected our industry. We have undertaken cost cutting initiatives in response to the worldwide economic
conditions, including a reduction in our worldwide workforce, which could lead to a deterioration of our
competitive position. In the future, we may have to undertake additional cost reduction initiatives to
achieve and sustain profitability, and to the extent we do not do so sufficiently, our cost structure
could negatively impact our results of operations and cash flow in the future. We cannot assure you that
we will not continue to report losses in future periods or that if we return to profitability, we will
remain profitable.

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

| |  | general
economic conditions;
| | - | ----------------------------

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

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

8

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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.

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

Our
expansion has placed a strain on our senior management team and other resources, such as
our management information systems and operating, administrative, financial and
accounting systems. From 2004 through most of 2008, we underwent 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 920 employees on December 31, 2004, and 1,350 employees on December 31, 2008. Any
failure to manage growth effectively could disrupt our business and harm operating
results. Recently we have undertaken a headcount reduction in response to the prevailing
adverse economic conditions. Reductions in personnel also entail risks of business
disruption and potential adverse effects on our sales and marketing efforts, customer
service, and research and development activities. These adverse effects could harm our
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.
| | - | ----------------------------------------------------

9

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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. Our recent
headcount reduction may also harm or delay our research and development efforts. 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.

We
are making significant investments in internal enterprise resource planning, which will
result in increased expenses and may not provide anticipated benefits.

We
are in the process of upgrading our enterprise resource management, or ERP, tools to
improve our internal management of our resources, licenses, training and operations. This
is intended to result in a more centralized, streamlined planning system featuring more
transparent and efficient use of real-time data. We will incur significant expenses in
implementing such system. Investments in new technology are speculative. Such a new system
may not achieve the anticipated improvements to our enterprise resource management and
could create problems with our planning, integration of data or compatibility with other
internal systems that we do not currently have.

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
2008, none of our customers accounted for 5% or more of our revenues. During 2007, one
customer accounted for 5% or more of our revenues. During 2006, two customers each
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 any
of our large customers could significantly reduce our revenues. This has already occurred
in 2008 and the first half of 2009, and it could continue or worsen. 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. We have found that this process is even longer
during periods of economic uncertainty. Even after the 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. 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 on products revenues 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.

10

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Our
acquisition of 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 2008, 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;
| | - | ---------------------------------------------------------------------------------------

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

| |  | potential
future write-offs of goodwill recorded as a result of the acquisitions.
| | - | ---------------------------------------------------------------------------------

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.

Our business will suffer to the extent that our products based on relatively new
platforms such as the .NET platform or the J2EE platform 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; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

11

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There
can be no assurances that our efforts to develop new products using the new platforms
will be successful. If the products we develop for 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 is in an early stage of implementation
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 a SaaS subscription fee pricing model. We offer our SaaS services under
a subscription fee model for reporting, analysis and merchandising services. We also
offer payment processing services as part of a Connected Payments program through a joint
venture with our payment processing software partner, MTXEPS Inc. In the future, we plan
to offer additional services for a fee. We cannot assure you that these users will accept
our pricing model. If we are unsuccessful in selling and marketing our SaaS services to
retailers and distributors, our revenue growth could be adversely affected.

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Our Retalix InSync products are in varying stages of development and, if unsuccessful, our
revenue growth could be adversely affected.

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
management systems on the new Retalix InSync platform. Development has taken longer than
expected and, while we have begun initial pilots of certain software modules, we cannot
assure you that this development will be successful or that many customers will purchase
these new products. If we continue to experience delays in developing our Retalix InSync
products or if we are unsuccessful in marketing and selling our Retalix InSync products
to retailers and distributors, our revenue growth could be adversely affected.

Some of our products contain open source software, and any failure to comply
with the terms of one or more associated open source licenses could negatively affect our
business.

Some
of our products are distributed with software licensed by its authors or other third
parties under so-called open source licenses, including, for example, the GNU
General Public License, or GPL, GNU Lesser General Public License, or LGPL, the Mozilla
Public License, the BSD License and the Apache License. Some of those licenses may require
as a condition of the license that we make available source code for modifications or
derivative works we create based upon, incorporating, or using such open source software,
that we provide various notices with our products, and/or that we license such
modifications or derivative works under the terms of a particular open source license or
other license granting third parties certain rights of further use. The terms of many open
source licenses have not been interpreted by any U.S. court or, to our knowledge, any
other court, and there is a risk that these licenses could be construed in a manner that
could impose unanticipated conditions or restrictions on our ability to market our
products. If an author or other third party that distributes such open source software
were to allege that we had not complied with the conditions of one or more of those open
source licenses, we could be required to incur legal expenses in defending against such
allegations, and if our defenses were not successful, we could be enjoined from
distribution of the products that contained the open source software and/or required to
either make the source code for the open source software available, to grant third parties
certain rights of further use of our software, or to remove the open source software from
our products, which could disrupt our distribution and sale of some of our products. In
addition, if we combine our proprietary software with open source software in a certain
manner, we could, under certain open source licenses, be required to release the source
code of our proprietary software, which could limit or eliminate our ability to
commercialize such software. If an author or other third party that distributes open
source software were to obtain a judgment against us based on allegations that we had not
complied with the terms of any such open source licenses, we could also be subject to
liability for copyright infringement damages and breach of contract for our past
distribution of such open source software. Although we take steps to ensure that our
programmers do not include open source software in products and technologies we intend to
keep proprietary, we do not exercise complete control over the development efforts of our
programmers and we cannot be certain that our programmers have not incorporated open
source software into products and technologies we intend to keep proprietary.

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.

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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 are rolling out
our SaaS-based offering, and we are in the process of adapting some of our software
products to a browser-based multi-tenant environment in order to reduce the costs
associated with our enterprise software solutions offered through a shared SaaS
environment. 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 and Chief
Executive Officer. 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 executive officers 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 conclude that we have
effective internal control over financial reporting. For example, our management
determined that we had ineffective internal control over financial reporting as of
December 31, 2007. While our management has determined that we had effective internal
control over financial reporting as of December 31, 2008, we cannot assure you that we
will able to conclude in future years that we have effective internal control over
financial reporting. Failure to maintain effective internal control over financial
reporting could result in investigations 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 which significantly reduces our profitability.

Statement
of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, or SFAS
123(R), requires all share-based payments to employees to be recognized as a compensation
expense based on their fair values. During 2006, 2007 and 2008, SFAS 123(R) had a
material impact on our results, lowering our reported net income by approximately $3.4
million, $3.8 million and $4.3 million, respectively. 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
the continuing adverse impact of SFAS 123(R) on our results, 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. Since then, thousands of missiles
have been fired from Gaza at population centers in southern Israel, leading to an armed
conflict between Israel and the Hamas in January 2009. 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 worldwide 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 2008, the dollar depreciated 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 have entered and may
continue to 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 and, even if they do protect us, involve financing costs we would not
otherwise incur.

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 2008, the value of the dollar decreased in relation to the NIS by 1.1%,
while inflation increased by 3.8%. 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 2006, 2007 and 2008, net of other tax effects, were
approximately $346,000, $0 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.

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, 2008, our total contingent liability to the OCS
in this respect amounted to $5,787,000. 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.

17

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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.

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

| |  | the
general state of the securities market; and
| | - | -----------------------------------------------

| |  | market
speculation about a possible acquisition of or investment in our company; see Item 4.A.
| | - | ----------------------------------------------------------------------------------------------

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.

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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. From 2006 through 2008, 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.

On
February 16, 2009 and March 31, 2009, we announced that we received several unsolicited
non-binding proposals to purchase all of the outstanding shares of the Company or to make
an investment in the Company, at prices ranging from $8.00 to $10.00 per share in cash,
none of which were from competitors or other companies operating in our field of business.
In accordance with our policy, we do not plan to make any further statements responding to
market rumors or speculation about these or any other proposals.

Principal
Capital Expenditures

We
had capital expenditures of  $2.6 million in 2006, $4.7 million in 2007 and $5.1 million
in 2008. Our capital expenditures in 2006 consisted primarily of the purchase of
computers and peripheral equipment. Our capital expenditures in 2007 and 2008 consisted
primarily of the purchase (in unfinished condition) and refurbishing of the 3rd floor of
the building in which our corporate headquarters are located in Raanana, Israel,
for $2.5 million and $3.4 million, respectively, and the purchase of computers and
peripheral equipment. In 2008, we also started the implementation of a new ERP system for
an aggregate amount of approximately $2.0 million, of which $0.1 million was invested in
2008. In 2009, we expect the purchase of software and related professional services,
computers and peripheral equipment related to the ERP system to amount to approximately
$1.8 million, and that our capital expenditures related to the 3rd floor refurbishment,
levies, improvements and furniture to amount to up to $0.6 million. We have financed, and
expect to continue to finance, these 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 each sector, the customers
are typically categorized into tiers based on various factors, such as
revenue levels, number of stores, industry and region, with Tier 1 referring to the
largest entities.

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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/grocery
chains and food service distributors such as Big Y, Food Lion, Food Services of America,
Hannaford Bros., Hy-Vee, Odom Beverage, Save-A-Lot and Save Mart in the United States,
Argos, AS Watsons, Carrefour, Delhaize, Intermarche, Morrisons, Sainsburys and Tesco
in Europe, large food distributors such as Metcash in Australia, and large convenience
stores and major fuel retailers such as BP in Australia, the United Kingdom and North
America, Caseys, Husky, Irving Oil, Loves, Pilot Travel Centers and The Pantry
in the United States and Canada. Our annual worldwide sales have grown from $36.1 million
in 2000 to $221.6 million in 2008.

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.

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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.

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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, 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. In late 2006, we started implementing our beta versions of the Retalix
loyalty system, which is comprised a central Microsoft .NET web-based application and a store promotion
and loyalty engine. In 2006, we also introduced a self-checkout application based on our core
application, StoreLine.  In 2007, we announced the POS Presentation Layer, which includes a user
interface editor to achieve, with no code changes, a customer tailor-made graphical user interface, or
GUI, layer for all POS formats. In 2008, we announced the Dynamic Receipt Engine product, which provides
innovative, flexible customer receipt editor and runtime executor to run next to the POS engine.  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 ability to support multiple enterprises from a single data center, we are
now able to offer enterprise level applications, such as electronic payments, sales analysis, product
and price management, promotions, loyalty, demand replenishment, loss prevention 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
more than 1,000 stores and StoreNext Israel has connected over 1,500 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.

25

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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, and 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 initiative has reached a
critical mass. We intend to provide similar collaboration services through our StoreNext USA initiative
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, focusing on
Russia. In 2007, we continued to build a market presence in China, Japan and Russia. In
2008, we started to build a presence in the Spanish market. 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.

26

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Supply
Chain 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 optimize and manage the flow of goods through a
complex supply chain network, which includes the suppliers, multi-facility warehouses and
distribution centers and down to the stores. These applications include warehouse
management, automated procurement for the stores and warehouses, 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, named ISS45 (which is
StoreLine packaged version for Tier 3/Tier 4), 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  |  ISS45 - packaged version of StoreLine for Tier 3/4
|                   |  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                  |                                            |                                                     

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|Retalix StorePoint   |  POS, front-office and back-office solution |                                           |  Convenience stores, QSRs, and fuel retailers
|-------------------- | -------------------------------------------- | ----------------------------------------- | ----------------------------------------------
|                     |                                              |  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                                    
|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                             

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|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 3 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
|Supply Chain Management  |                                     |                                   |                               
|(SCM)                   
|                        
|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         

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|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, forecasts demand |  Demand forecasting and replenishment optimization |  Tier 1 - Tier 3 supermarkets                         
|                         |                                                     |                                                     |  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                                  
|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                             
|                        

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|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                    

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

| |  | 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,
Retalix StoreLine provides retailers with a comprehensive set of supermarket operational
and management capabilities. Retalix StoreLine also offers interfaces to enterprise level
systems and to third-party applications as well as to payment service providers. The
Retalix StoreLine 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, Retalix StoreLine 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, Retalix StoreLine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.

32

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In
addition to its core POS and front-office and back-office functionality, the Retalix
StoreLine 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.

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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)

RPO is
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 Store functionalities, 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.

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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
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.

35

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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 a Java
based GUI;

Retalix Power Warehouse

Retalix
Power Warehouse is a 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 Buy is an 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 Sell is a 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.

36

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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.

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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 initiative 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.

Principal Markets and
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 table provides a breakdown by geographical area of our revenues and relative
percentages during the last three fiscal years (dollars in thousands):

|                  | 2006 | 2007 | 2008
|----------------- | ---- | ---- | ----
|
|
|
|
|Israel            |      |      | $   
|                  |      |     
|United States     |      |      | $   
|                  |      |     
|Europe            |      |      | $   
|                  |      |     
|Rest of the World |      |      | $   
|                  |      |     
|Total             |      |      | $   

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The following list is a
representative sample of companies that purchased an aggregate of at least $200,000 of our
products and services in 2007 and 2008 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)     
|Co-Op (Israel)                   | Husky Oil (Canada)                    | Odom Corp. (US)              
|Costco (US)                      | IKEA                                  | Rinpak Technology (China)    
|Dairy Farm (Hong Kong)           | Irving Oil (Canada)                   | Thomas & Howard (US)         
|Delhaize (Europe)                | Love's (US)                           | Wincor (Scandinavia)         
|Food Lion (US)                   | Paz (Israel)                          |                              
|Hannaford Bros. (US)             | Pilot Corporation (US)                |                              
|Hy-Vee (US)                      | PetroChina                            |                              
|Intermarche (Europe)             | Reliance Fuel                         |                              
|Morrisons (UK)                   | Rotakirija (Finland)                  |                              
|Overwaitea (Canada)              | Tesoro (US)                           |                              
|Reliance Retail (India)          | The Pantry (US)                       |                              
|Sainsbury's (UK)                 |                                       |                              
|SaveMart (US)                    |                                       |                              
|Shoprite Checkers (South Africa) |                                       |                              
|Shuphersal (Israel)              |                                       |                              
|Stater Brothers (US)             |                                       |                              
|SuperValu (US)                   |                                       |                              
|Super de Boer (Netherlands)      |                                       |                              
|Tesco (Global)                   |                                       |                              
|Woolworth's (Australia)          |                                       |                              
|Zen Nihon (Japan)                |                                       |                              

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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 certain intellectual property assets and related liabilities of BGI International, which provides
a suite of software products for food and consumer goods distributors. We paid $1.37
million upon closing and an additional $150,000 on the second anniversary of the
acquisition. We committed to pay an additional amount of up to approximately $1.4 million
as earn-out payments based on increased license sales in the three-year period following
the closing, of which we already paid $89,000 for the year ended December 31, 2007 and
$23,000 for the year ended December 31, 2008. We believe that 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 strengthened our position as a provider of
headquarters and in-store systems for retailers, broadened our customer base and expanded
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 final disposition of possible indemnification claims. 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 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, 2008, we estimate that StoreNext USA has
more than 1,000 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 1,500 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). In addition, approximately 270,000 ordinary shares of
StoreNext Israel, or approximately 7.7% of StoreNext Israels issued and outstanding
share capital, were reserved for issuance upon the exercise of options granted to our
StoreNext Israels employees. In November 2008, 65,000 options were exercised and,
as of December 31, 2008, all the unexercised options have been forfeited. An additional
90,000 ordinary shares of StoreNext Israel, or approximately 2.3% 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 7.9% of StoreNext Israels issued and
outstanding share capital, are reserved for issuance upon the exercise of an option
granted to Isracard. As of December 31, 2008, we owned directly and through one of our
wholly owned subsidiaries, approximately 50.5% of the issued share capital of StoreNext
Israel.

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.

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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, South Africa 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 and
Microsoft. 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, Italy, France, Australia, Japan, China 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.

We
also work closely with Microsoft, focusing on emerging markets such as China and Asia
Pacific in general.

Dealer Sales

We
have direct distribution agreements for the sale of some of our products with partners in
Australia, Bermuda, Canada, Chile, China, Finland, Greece, Japan, Mexico, New Zealand,
Norway, the Philippines, South Africa, Switzerland, Russia, the United Kingdom, the
United States and Venezuela. 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 management markets,
our competition includes Manhattan Associates, Oracle, Red Prairie and SAP on the high
end and companies such as AFS Technologies Inc., Vermont Information Processors and
Vormittag Associates Inc. on the low end. Some competitors, such as Wincor-Nixdorf and
IBM, are also our marketing partners in several market sectors or locations.

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

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

# Suppliers

We
sell to some of our 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. We buy these hardware component from various
suppliers including DataLogic, Fujitsu, IBM, LXE, Motorola and Vocollect.

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---

---

# C. Organizational
Structure

We have the following subsidiaries
and related companies:

|Subsidiary                                        | Country of
Residence | Proportion
of voting
power held
(%) | Proportion
of ownership
interest
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. (2)(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                                      
|Retalix France SARL                               | France               | 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.
|--- | --------------------------------------------------------------------------------------------------

43

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D. Property,
Plants and Equipment

Our Israeli corporate headquarters are located in Ra'anana, Israel, where we occupy approximately 10,400
square meters of office space, of which approximately 8,000 square meters represent ownership rights
under a long-term lease from the Israel Lands Administration and approximately 2,400 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, Kansas, Michigan, Nebraska, Ohio,
Oklahoma, Pennsylvania and Texas, as well as in Gatwick, England, Bolengo, Italy, Paris,
France, 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, complementary
computer and other hardware equipment, 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 (recently also referred to as SaaS), as well as Connected
Payments programs, which are payment processing services through a joint venture with our
payment processing software partner, MTXEPS Inc. We receive subscription fees for these
Connected Services and Connected Payments programs. We anticipate that revenues relating
to these Connected Services will account for a growing portion of our overall revenues in
future periods.

44

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During
2008, we continued our strategy of focusing on Tier 1 and Tier 2 supermarkets, large
convenience store chains and major fuel retailers. In addition, we continued 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.

Recent
turmoil in global financial and credit markets has caused liquidity problems for many
financial institutions and adversely affected investor and consumer confidence generally.
This has resulted in a curtailment of capital investment by many of our existing and
potential customers, which has adversely affected our results of operations. Conditions
may continue to be depressed or may be subject to further deterioration, which could lead
to a further reduction in consumer and customer spending overall, which could have an
adverse impact on sales of our products. A disruption in the ability of our significant
customers to access liquidity could cause serious disruptions or an overall deterioration
of their businesses, which could lead to a significant reduction in their orders of our
products and the inability or failure on their part to meet their payment obligations to
us, any of which could have a material adverse effect on our results of operations and
liquidity. A significant adverse change in a customers financial and/or credit
position could also require us to assume greater credit risk relating to that customers
receivables or could limit our ability to collect receivables related to previous
purchases by that customer. As a result, our reserves for doubtful accounts and
write-offs of accounts receivable may increase.

As
a result of the uncertain economic climate around the world, in 2008 we implemented
cost-cutting measures. These measures include a decrease in our head count by 219
employees, primarily in the areas of research and development and marketing.

Highlights
since the beginning of 2005 include:

| |  | In
March 2008, we acquired an 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 an 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 certain intellectual property assets and related liabilities of BGI
International, which provides a suite of software products for food and consumer goods distributors. We
paid $1.37 million upon closing and an additional $150,000 on the second anniversary of the acquisition.
We committed to pay an additional amount of up to $1.4 million as earn-out payments based on increased
license sales in the three-year period following the closing, of which we already paid $89,000 for the
year ended December 31, 2007 and $23,000 for the year ended December 31, 2008. We believe that 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.

45

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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, 2008, 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) Vendor Specific Objective Evidence, or 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 statistical renewal percentage derived from the majority of
maintenance renewals. 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, or SEC.

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 Financial Accounting Standards, or FAS, Statement No. 48 Revenue
Recognition When Right of Return Exists. In specific cases where resellers have
right of return or we are required to repurchase the products or in case we guarantees
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).

46

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Goodwill and Intangible
Assets

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. Goodwill impairment testing is a two-step process. The first step involves
comparing the fair value of a companys reporting units to their carrying amount. If
the fair value of the reporting unit is determined to be greater than its carrying
amount, there is no impairment. If the reporting units carrying amount is
determined to be greater than the fair value, the second step must be completed to
measure the amount of impairment, if any. Step two calculates the implied fair value of
goodwill by deducting the fair value of all tangible and intangible assets, excluding
goodwill, of the reporting unit from the fair value of the reporting unit as determined
in step one. The implied fair value of the goodwill in this step is compared to the
carrying value of goodwill. If the implied fair value of the goodwill is less than the
carrying value of the goodwill, an impairment loss equivalent to the difference is
recorded.

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.

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.

As a result of the decrease in the
Companys market capitalization in the latter part of 2008 and the global economic
downturn that negatively affected the computer software market, in December 2008 the
Company conducted a goodwill impairment test on the goodwill acquired in its various
reporting units. Following a determination by the Company that the carrying value of the
goodwill exceeded its fair value, the Company concluded in its goodwill impairment test
that the goodwill acquired in the US reporting unit had been impaired and therefore, in
the fourth quarter of 2008, it recorded an impairment charge of $58.2 million. As a result
of the goodwill impairment, a temporary difference was created for the goodwill portion on
which tax amortization is applied, resulting in an approximately $4 million increase in
deferred tax assets.

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

Stock based compensation

Effective
January 1, 2006, we adopted SFAS 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).

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.

47

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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, 2007 and 2008
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.

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 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.

48

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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 of
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
2008, none of our customers accounted for 5% or more of our revenues. During 2007, one
customer accounted for 5% or more of our revenues. During 2006, two customers each
accounted for 5% or more of 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 were not significant in 2008 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, 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, 2007 and 2008, expenses under
SFAS 123(R) resulted in annual compensation expenses of $3.9 million, $3.9 million and
$4.8 million, respectively, 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, if any, 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. See   Liquidity and Capital Resources 
Grants from the Office of the Chief Scientist below.

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
Expenses  consist 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,
Net  consists primarily of gains or losses with respect to ordinary course
dispositions of fixed assets. In addition, $0.2 million gains of sale of product line are
included in 2008 Other Income, Net. 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 for 2007.

Impairment of
Goodwill.  We conducted a goodwill impairment test on the goodwill acquired
in our various reporting units. Following a determination that the carrying value of the
goodwill exceeded its fair value, we concluded in our goodwill impairment test that the
goodwill acquired in our U.S. reporting unit had been impaired and therefore, in the
fourth quarter of 2008, we recorded an impairment charge of $58.2 million, before taxes.

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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 (in
2006 and 2007), net losses or gains on forward contacts and net losses or gains from the
conversion into dollars of monetary balance sheet items denominated in non-dollar
currencies.

Share in Income (Losses)
of an Associated Company

Share
in income (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 (income) expenses, net                |                        
| | Impairment of goodwill                      |                        
| |                                             |                        
| | Total operating expenses                    |                        
| |                                             |                        
| | Income (loss) from operations               |                        
| | Financial income (expense), net             |                        
| |                                             |                        
| | Income (loss) before taxes on income        |                        
| | Tax benefit                                 |                        
| | Minority interests in gains of subsidiaries |                        
| |                                             |                        
| | Net income (loss)                           |                        
| |                                             |                        

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Comparison of 2006, 2007
and 2008

Revenues

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

During
2008, our revenue level was similar to that of 2007 but reflected an increase in services
and a reduction in product sales, particularly in the second half of the year due to
adverse economic conditions. Our services business was less affected by such conditions
because they stem from long-term contracts with existing customers. If the economic
crisis continues, our service revenues could decline, as well. The product revenues in
2008 consisted of 37% license sales and 63% hardware sales, compared to 54% and 46%,
respectively, in 2007. During 2008, our revenues from license sales declined 38% to $26.9
million, compared to $43.3 million in 2007. In 2008, hardware sales grew 24% to $46.0
million, compared to $37.2 million in 2007.

The
increase in services in 2008 was mainly due to contracts with new customers. 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 2008 consisted of 38% from maintenance and 62% 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 2008, our U.S. revenues constituted 57% of total revenues, our
international revenues constituted 33% of total revenues, and our Israeli revenues
constituted 10% of total revenues, compared to 56%, 36% and 8% in 2007, and 59%, 33% and
8% in 2006, respectively.

During
2008, our U.S. region revenues increased by 2% to $126 million, as compared to $123
million in 2007. The increase is mainly due to an increase in service revenues, including
maintenance, as well as an increase in hardware revenues, offset in part by a decrease in
license revenues.

During
2008, our international revenues decreased by 7% to $73 million, as compared to $79
million in 2007, primarily due to lower license 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
2008, our Israeli revenues increased by 19% to $22.2 million, as compared to $18.7
million in 2007. The increase was primarily due to growth in service 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 constituted 56% of total revenues, our
international revenues constituted 36% of total revenues, and our Israeli revenues
constituted 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.

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During
2007, our international 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, our Israeli 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.

Cost of Revenues

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

Our
total cost of revenues as a percentage of revenues increased from 2007 to 2008 due to
higher hardware sales.

During
2008, the cost of product sales increased by 15.6% to $45.2 million, compared to $39.1
million in 2007, primarily due to the increase in the cost of sale of hardware, which was
derived from the 24% increase in hardware sales. 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.

During
2008, the cost of services increased by 34.9% to $88.1 million, compared to $65.3 million
in 2007, primarily due to an increase in headcount, compensation and subcontractors costs
and the increase in services revenues that required additional resources. The increase in
headcount resulted mainly from a reassignment of employees from research and development
to professional services as new products matured in the development cycle and fewer
employees needed to be dedicated to their generic development. In addition, 13% of the
increase in cost of services in 2008 was attributable to the strengthening of the NIS
currency versus the USD, since most of our professional services resources are located in
Israel. 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 (as explained above), compensation and subcontractors costs. In
addition, 16% of the increase in cost of services in 2007 was attributable to the
strengthening of the NIS currency versus the USD.

In
2008, the cost of product sales as a percentage of product sales was 62%, compared to 49%
in 2007 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 2008 in comparison to 2007. In 2008, the cost of services as a percentage of service
sales increased to 59% from 46%. The increase is attributable mainly to increase in
salary expenses due to an increase in headcount and strengthening of the NIS currency
versus the USD. The cost of product sales as a percentage of product sales in 2007 was
49%, similar to 50% 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.

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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      |                         |          | $       
|                              |                         |          |         

Our total operating expenses
decreased as a percentage in revenues from 2007 to 2008 due to reduction of headcount.

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 and 2008, 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 2008 were lower
compared to 2007, which in turn were lower compared to 2006. Although we believe that in
2006, in 2007 and in 2008 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 2% or $0.4
million of the decrease in research and development expenses in 2008, compared to 2007 is
attributable to the expense effect of stock-based compensation. Approximately 47% or $0.8
million of the decrease in research and development expenses in 2007, compared to 2006 is
attributable to the expense effect of stock-based compensation.

Selling and Marketing
Expenses.  During 2008, we reduced many sales and marketing positions.
During 2006 and 2007, 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, but we did
not significantly widen our marketing staff or efforts. Approximately $0.4 million of
expenses in 2008 and $0.5 million of expenses in 2007 and 2006 were attributable to the
expense effect stock-based compensation. 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 2008, our general and administrative expenses decreased
in comparison to 2007 and 2006, when such expenses were consistent as a percentage of
sales, mainly due to a headcount reduction. Approximately $1.4 million of expenses in
2008, approximately $1.3 million of expenses in 2007 and $0.4 million of expenses in 2006
were attributable to the expense effect stock-based compensation. 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
United States.

Financial Income
(Expenses), Net

Financial income (expenses), net,
totaled approximately $2.0 million of expenses in 2008, compared to approximately $1.0
million of income in 2007, and $79,000 of income in 2006. During 2008, we recorded higher
non-dollar currency losses, higher forward contract net losses and a loss on our auction
rate security, offset by higher interest income compared to 2007, in spite of lower
interest rates, due to an increase in our cash reserves. 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.

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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 14.9% in 2008,
primarily due to a significant non-deductible portion of the goodwill impairment charge,
offset by a non-recurring tax benefit arising from an amendment to Israels Law for
Encouragement of Capital Investments, 1959, or the Investments Law, which increased our
Approved Enterprise tax-exempt income in 2005 and 2006. In 2007 our effective consolidated
tax rate was 103%, 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. In 2006, our effective consolidated tax rate was minus 40% (or plus
30% excluding the effect of a release of a valuation allowance attributable to an
acquisition, in one of our subsidiaries). We enjoy these lower effective tax rates
primarily because of tax reductions to which we are entitled under 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 2014. The period of tax benefits for each capital
investment plan expires upon the earlier of 12 years from completion of the investment
under the approved plan, or 14 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 our taxable income has been tax exempt in recent years due to the Approved Enterprise
status granted to most of our production facilities. We have 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, 2008, been distributed as dividends is approximately $10.0
million.

Out
of our retained earnings as of December 31, 2008, approximately $40.1 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 $10.0 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 (including amendment no. 60 thereof, which was
adopted in 2008 with retroactive 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 of
Subsidiaries.  These amounts consisted in 2006, 2007 and 2008 of the
minority interests in the gains of StoreNext Israel.

# B. Liquidity and Capital
Resources

We
had cash and cash equivalents of approximately $55.2 million, $22.5 million and $33.5
million, as of December 31, 2006, 2007 and 2008, 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 increased to approximately $37.6
million as of December 31, 2008, compared to $27.6 million as of December 31, 2007,
and $56.2 million as of December 31, 2006. During 2007 and 2008, our financial
resources decreased primarily due to the result of our decision to discontinue the
factoring of receivables and focus on the collection of receivables; the discontinuance
of factoring also saved us financing expenses. Our financing expenses for 2007 relating
to factoring of receivables had increased by nearly $400,000 from $1,482,000 in 2006 to
$1,862,000 in 2007. We concluded that we could decrease and eventually eliminate these
expenses while still maintaining enough liquidity. Though our cash balance decreased in
the near term as a result of our decision to discontinue factoring, the impact on our
working capital initially was relatively neutral when made, since our accounts receivable
increased as a result of our collecting receivables directly and we were able to collect
on receivables to a sufficient degree to offset any prior benefits from factoring.
Rather, changes to our cash flows were impacted to a much greater degree by the
performance of our underlying operations. In 2008, our cash balance increased from 2007
as a result of increased efforts to collect receivables and the elimination of factoring
expenses, as well as due to headcount and cost reductions, in addition to our underlying
operations. Our cash balance continued to increase in the first quarter of 2009.

As
of December 31, 2008, 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, 2008 was $0.3 million, a decline of
$0.7 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 2009, in addition to the
impairment charges that we recorded in 2008 (as described above).

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Net
cash provided by operating activities in 2008 was $13.2 million primarily due to
reduction in receivables as a result of our extensive collection efforts, compared to net
cash used in operating activities of $23.7 million and net cash provided by operating
activities of $3 million in 2007 and 2006, respectively.

Net
cash used in investing activities in 2008, 2007 and 2006 of approximately $5.8 million,
$6.4 million and $6.9 million, respectively, was primarily attributable to cash
spent on business acquisitions, which amounted to approximately $0.1 million in 2008,
$1.4 million in 2007, and $2.7 million in 2006. In addition, we increased our holdings in
subsidiaries by investments in an aggregate amounts of $0.7 million, $0 and $5.8 million
in 2008, 2007 and 2006, respectively.

Our
capital expenditures (consisting of the purchase of fixed assets) were $5.1 million, $4.7
million and $2.6 million in 2008, 2007 and 2006, respectively, mostly attributable
to investment in the 3rd floor of our headquarters building in 2008 and purchasing
computer and peripheral equipment including software systems and licenses in all three
years.

Net
cash provided by financing activities in 2008 amounted to approximately $3.8 million,
primarily due to issuance of share capital to employees resulting from exercise of
options. Net cash used in financing activities in 2007 amounted to approximately $2.7 million,
primarily attributable to a decrease in short term bank credit, offset by cash provided
by issuance of share capital to employee resulting from exercise of options. Net cash
provided by financing activities in 2006 amounted to $3.3 million, primarily attributable
to proceeds from issuance of share capital to employees resulting from the exercise of
options.

Bank Debt

As
of December 31, 2008, we had outstanding bank loans in the principal amount of $0.8
million. These loans are primarily in EUROs and accrue interest at the rate of 2.0% per
year and mature through July 2011. These loans are unsecured.

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, mainly
Bank Hapoalim and Bank Leumi in Israel and Wells Fargo in the United States. 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 had formerly
factored receivables, but as discussed above, have ceased to do so and instead increased
our efforts on direct collection of receivables. 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 our future cash flows from foreign
exchange fluctuations. In 2008, we began to increase our use of currency hedging, which
has resulted in related increased financing expenses.

We
have historically had only limited involvement with derivative financial instruments but
have begun to increase our currency hedging. 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
hedging and other market risks, please see Item 11 Quantitative and Qualitative
Disclosures About Market Risk below.

As
of December 31, 2008, we held an auction rate security, or ARS, 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 this security based on a valuation model. The
revaluation of this security resulted in a net realized loss of $0.7 million, which has
been recorded in our statement of income, as it is considered other-than temporary.

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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. Although our cash balance has been increasing in
recent quarters, 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. Such funds may
not be available on reasonable terms, if at all, especially if the current uncertainty in
the global markets continues.

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 %
|----------------------- | ------------------------ | ------------------------------------------------------------ | ----------------------------------------------------------------------------------
|
|
|
|
|2004                    |                          |                                                              |                                                                                   
|2005                    |                          |                                                              |                                                                                   
|2006                    |                          |                                                              |                                                                                   
|2007                    |                          |                                                              |                                                                                   
|2008                    |                          |                                                              |                                                                                   

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.

Principal Capital
Expenditures

See Item 4.A History and
Development of the Company Principal Capital Expenditures.

57

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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, 2008, our
research and development staff consisted of 281 employees, of whom 117 were located in
Israel, 2 in Italy and the remaining 162 were located primarily in the United States. See
also Item 5.A. Research and Development Expenses, Net.

# 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 2006, 2007 and 2008, we received grants from the OCS of $195,000, $453,000 and
$263,000, respectively. We currently do not expect to receive material grants from the
OCS in the near future. 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. 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.

58

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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 global 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 short term and help them manage
through this unpredictable environment. At the same time some existing and potential
customers have decided 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 few 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, 2008:

|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) |       |                  | $         | 0.8       |                  
|Operating Lease Obligations (with regard to offices and   |       |                 
|facilities and vehicles)                                  |       |                  |           | 12.2      |                  
|Severance pay **                                          |       |                  |           | 5.2       |                  
|                                                          |       |                  |           |           |                  
|Total                                                     |       |                  |           | 18.2      |                  
|                                                          |       |                  |           |           |                  

|* | See
also the notes to our audited consolidated financial statements for the year ended
December 31, 2008 included elsewhere in this annual report, and in particular, Notes 5 and
8 thereto.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Severance
pay relates to accrued obligation to employees as required under the labor laws. These
obligation are payable only upon termination, retirement or death of the respective
employee.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

59

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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 8, 2009.

|Name                | Year of Birth | Year Joined | Retalix Position                                     
|------------------- | ------------- | ----------- | -----------------------------------------------------
|
|
|
|
|Ishay Davidi        | 1962          | 2008        | Chairman of the Board                                
|Gillon Beck         | 1962          | 2008        | Director                                             
|Brian Cooper        | 1956          | 1984        | Director                                             
|Neomi Enoch         | 1958          | 2008        | Director                                             
|Dr. Zvi Lieber      | 1943          | 2008        | External Director                                    
|Amnon Lipkin-Shahak | 1944          | 2002        | Director                                             
|Ian O'Reilly        | 1948          | 2000        | Director                                             
|Itschak Shrem       | 1947          | 2008        | Director                                             
|Barry Shaked        | 1957          | 1982        | President, Chief Executive Officer and Director      
|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        | President, Supply Chain Management                   
|Roy Simrell         | 1965          | 2009        | President, U.S. Retail Division                      
|Isaac Shefer        | 1957          | 2008        | Executive Vice President, Product Development        

Ishay Davidi has served as a director since March 2008 and as our Chairman of the
Board since August 2008. Mr. Davidi is the Founder and Chief Executive Officer 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. (TASE), Inrom Industries Ltd., MDT Micro Diamond Technologies Ltd, Orian S.M.
Ltd. (TASE), Ophir Optronics Ltd. (TASE), Merhav-Ceramic and Building Materials Center
Ltd. (TASE), 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.

Gillon Beck has 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 Chairman of
Inrom Industries Ltd., a director in Ytong Industries Ltd, Nirlat Paints Ltd, MDT Micro
Diamond Technologies Ltd, Metro Motor Marketing Ltd, TANA Industries (1991) Ltd., Orian
S.M. Ltd. (TASE), Gamatronic Electronic Industries Ltd. (TASE), Givon H.R. Ltd, and
Merhave-Ceramic and Building Materials Center Ltd (TASE) Previously he was director at TAT
Technologies LTD (NASDAQ) and Chairman of Medtechnica Ltd (TASE). He holds a B.Sc. in
Industrial Engineering from the Technion, Israel Institute of Technology, and an MBA in
Finance from Bar Ilan University.

Brian Cooper has 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, a director of Redmatch International Ltd. since October 2007 and a director of
GenomeDx Biosciences, Inc. since December 16, 2008. Mr. Cooper holds a B.A. in Economics from Haifa
University.

Neomi
Enoch has served as a director since August 2008. Ms. Enoch is a consultant in the
field of company betterment and recovery. From 2003 to 2006, she served as Vice President
of Finance of Shufersal Ltd. (TASE: SAE), a leading supermarket chain in Israel. From
1998 to 2003, she served as Vice President of Finance of Partner Communications Company
Ltd. (NASDAQ, TASE: PTNR). From 1983 to 1998, she served as Controller and Vice President
of Finance of Mul-T-Lock Ltd. Ms. Enoch is a member of the Board of Directors of Blue
Square Real Estate Ltd. (TASE: BLSR), Solbar Industries Ltd. (TASE: SLBR), Keter
Publishing House Ltd. (TASE: KETR) and Arim Urban Development Ltd. From 2001 to 2003, she
served as a member of the Estates Committee, a public committee appointed by Ministry of
Justice. From 1999 to 2003, she served as a member of the Advisory Committee and Council
to the Bank of Israel. Ms. Enoch holds an M.B.A. from Bradford University and a B.A. in
Accounting and Economics from the Tel Aviv University.

Dr. Zvi
Lieber has served as an external director
since October 2008. He has been a business and financial consultant to companies for over
30 years. He is also a senior lecturer in the M.B.A. program at the Peres Academic Center
in Rehovot, where he teaches accounting and financing. Dr. Lieber serves as a member of
the Board of Directors of Ampa Capital Ltd and of Baran Ltd. From 2002 to 2006, he served
as a member of the Board of Directors of the Tel Aviv Stock Exchange Ltd. From 1976 to
2002, he was a senior lecturer of business administration in the Faculty of Management of
Tel Aviv University. Dr. Lieber has also served as a director of several other companies
and as a member of several public advisory committees appointed by the Government of
Israel. Dr. Lieber holds a Ph.D. in Business Administration from the University of Chicago
and an M.B.A. from the Hebrew University in Jerusalem.

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Amnon
Lipkin-Shahak has 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Reilly has 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
Shrem has 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
Industries and Investments 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.

Barry
Shaked is one of our founders and has served as our President and Chief Executive
Officer since our inception in April 1982 and as our Chairman of the Board from 1982
to 2008. 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.

Roy
Simrell has served as President of our U.S. Retail Division since January 2009. From
2000 to 2009, Mr. Simrell worked at Catalina Marketing in various executive roles, most
recently as Corporate Senior Vice President of Information Technology and Research &
Development. From 1998 to 2000 he served as Director of ISS45 Point of Sale Systems
Application Development for Fujitsu  ICL Retail Systems.  Previously he worked
at RS Technologies Inc. as Founder / CEO, serving the grocery, hospitality, and
convenience store industries.  Mr. Simrell is a graduate of DeVry Institute of
Technology, 1986 and attended William Rainey Harper College from 1986 to 1990.

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.

Reuben
Halevi has served as President of our Supply Chain Management since January 2009. He
served as our Chief Operating Officer for U.S. operations from August 2006 to December
2008. 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.

61

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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, 2008, was
approximately $1.7 million. This amount includes pension, retirement and similar benefits
accrued in the aggregate amount of $135,000. 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 $14,400 each and, in addition, $540 per board meeting or board committee
meeting in which they participate, and $320 per such meeting in which they participate by
telephone.

As
compensation for his services to us, Mr. Barry Shaked, our President and Chief Executive
Officer, is entitled to receive a monthly fee of $26,586, linked to the representative
exchange rate of the NIS published by the Bank of Israel on the date of each payment. In
addition, Mr. Shaked 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. If this formula would result in no bonus
or a bonus of less than $50,000, our compensation committee is authorized to approve a
bonus in the amount of up to $50,000.

Mr. Shaked
is also 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.
Commencing in 2010, such grants will be subject to shareholder approval, to the extent
required under applicable law. These options are vested at the grant date, but are
blocked, in thirds for one year, two years and three years, and become exercisable
immediately upon a change of control of the Company or an agreement regarding a change of
control. According to this arrangement, in January of 2006, January 2007, January
2008 and January 2009, Mr. Shaked was granted options to purchase a total of up to
194,090, 196,135, 200,014 and 203,155 of our ordinary shares, respectively, at exercise
prices of $24.46, $16.29, $15.58 and $6.00 per share, respectively. The options have a
term of four years from the date of grant.

According
to our agreement with Mr. Shaked, he is entitled to severance pay equal to one months
salary for every year of employment. In addition, Mr. Shaked 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. The term of the management agreement
expires on December 31, 2011.

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 2008 under these
arrangements for all executive officers as a group was approximately $135,000. During
2008, our directors and executive officers were granted options to purchase an aggregate
of 200,014 shares under our stock option plans and 54,750 RSUs. The exercise price of
these options is $15.58 per share and their expiration date is December 31, 2011. The RSUsexercise
price is $0.25 per share. Of these options 66,671 options became exercisable on January
1, 2009, 66,671 will become exercisable on January 1, 2010, 66,672 will become
exercisable on January 1, 2011. 18,250 of the RSUs will become exercisable during 2009,
18,250 will become exercisable during 2010, and 18,250 will become exercisable during
2011. These options granted include the options granted to Mr. Shaked under his
employment agreement as described above.

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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 external 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. For further information, see Item 16G  Corporate Governance.

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 major shareholders are party to a
Shareholders Agreement, dated March 3, 2008, which contains arrangements with respect to
voting for director nominees of the various parties; this agreement is summarized in a
footnote to the ownership table in Item 7.A Major Shareholders and Related Party
TransactionsMajor Shareholders below. 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). Currently we have a separate
chairman and chief executive officer.

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 Messrs. Gillon Beck, Brian Cooper, Ishay Davidi and Itschak
Shrem 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. The audit committee,
the compensation committee and the investment committee are our regular board committees.
Our board of directors also creates other committees from time to time on an ad hoc
basis.

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 us,
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.

63

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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 us. 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. One of our
external directors, Dr. Zvi Lieber, was elected to a three-year term in October 2008. The
three-year term of our other external director, Mr. David Bresler, expired in June 2009,
and we are currently in discussions with a candidate for this position, who would be
nominated for election at our 2009 annual meeting of shareholders.

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 deficiencies 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.

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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 Dr. Zvi Lieber, Amnon Lipkin-Shahak and Ian OReilly,
all of whom qualify for such membership pursuant to the applicable rules of the SEC and
Nasdaq.

The
three-year term as an external director of Mr. David Bresler, who served as our
audit committee financial expert as defined in Item 16A of Form 20-F, expired
in June 2009. We will ensure that the individual who is nominated in his place for
election at our 2009 annual meeting of shareholders qualifies as an audit committee
financial expert and as an independent director.

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) and Ishay Davidi.

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 Fahn
Kanne Management and Control Ltd. (an affiliate of Grant Thornton).

# D. Employees

Set
forth are tables presenting breakdowns of the total number of 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             |                   
| |                   |                   

65

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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 and Chief Executive Officer, beneficially owns, as
          of June 8, 2009, 1,424,997 of our ordinary shares (including 391,518 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
          June 8, 2009, 751,485 of our ordinary shares, which equals approximately 3.6%
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
3,253,367 ordinary shares held by Ronex Holdings, Limited Partnership, or Ronex, as of
June 8, 2009 representing approximately 15.9% 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 5,429,849 ordinary shares held, as of June 8, 2009, by all the parties to
such Shareholders Agreement, representing approximately 26.1% 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.

In
addition, as of June 8, 2009, Mr. Shaked held options to purchase a total of up to
794,137 of our ordinary shares granted to him on January 1, 2006, January 1, 2007,
January 1, 2008 and January 1, 2009 pursuant to shareholder resolutions dated May 28,
1998, and October 7, 2008 authorizing the grant to him, on January 1 of each year, of
options to purchase one percent of our issued capital. Commencing in 2010, such grants
will subject to shareholder approval, to the extent required under applicable law. 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. They become
exercisable immediately upon a change of control of the Company or an agreement regarding
a change of control.

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
|------------------------------------------------------ | ------------------------------ | ---------------
|
|
|
|
|194,090                                                | 24.46                          | January 1, 2010
|196,135                                                | 16.29                          | January 1, 2011
|200,014                                                | 15.58                          | January 1, 2012
|203,898                                                | 6.00                           | January 1, 2013

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As
of June 8, 2009, other directors and executive officers held options and RSUs to purchase
a total of up to 400,336 of our ordinary shares under our Second 1998 Share Option Plan
and the 2004 Israeli Share Option Plan (which are described below), as follows:

Options
to purchase 42,000 of our ordinary shares at an exercise price of $23.02 per share.
Options to purchase 42,000 shares of these options are fully vested. 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 103,333 shares of these options are fully vested, and the remaining
amount will vest on 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.
Options to purchase 33,333 shares of these options are fully vested, and the remaining
amount will vest in two equal portions on November 20, 2009 and November 20, 2010. The
expiration date of these options is November 20, 2011.

Options
to purchase 75,000 of our ordinary shares at an exercise price of $5.77 per share. These
will vest in three equal portions on January 18, 2010, January 18, 2011 and January 18,
2012. The expiration date of these options is January 18, 2013.

RSUs
to purchase 20,002 of our ordinary shares at an exercise price of $0.25 per share. These
RSUs will vest in two equal portions on November 20, 2009 and November 20, 2010.

RSUs
to purchase 8,334 of our ordinary shares at an exercise price of $0.25 per share. These
will vest in two equal portions on 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 8, 2009, options to purchase
6,633,022 ordinary shares have been granted under the Second 1998 Plan, of which
3,621,708 options have been exercised, 1,883,837 options were forfeited and expired and
1,127,477 options shares were outstanding. The options generally vest over a period of
three years and have exercise prices ranging from $5.77 to $24.46.

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 external 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, 2008, RSUs that may vest into 329,750 ordinary shares have been granted
under the Second 1998 Plan, out of which to date 199,578 remain outstanding. The RSUs
generally vest over a period of three years.

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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, 2008, 2,370,213 ordinary 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 June 8, 2009, options and RSUs to purchase 1,988,750 ordinary shares
were granted under the 2004 Israeli Share Option Plan, of which 159,454 have been
exercised, 953,709 were forfeited and expired and 875,587 remained outstanding. The
options and RSUs generally vest over a period of three years and have exercise prices
ranging from $0.25 (nominal RSU 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. 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 June 8, 2009, 964,959 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, 2008, all stock options were forfeited. 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.

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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, 2008, options to purchase 27,033 ordinary shares of the subsidiary were
outstanding under the above subsidiary employee plans, at exercise price  of $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 June 8, 2009, 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, unless such arrangements are for
the compensation of directors, in which case they also require audit committee and
shareholder approval.

# ITEM 7  MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

# A. Major Shareholders

The
following table sets forth, as of June 8, 2009, 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 8, 2009, 20,406,363 of our
ordinary shares were outstanding.

|Name                                                        | Number of ordinary shares held | Percentage of outstanding ordinary shares (1)(2)
|----------------------------------------------------------- | ------------------------------ | ------------------------------------------------
|
|
|
|
|Ronex Holdings, Limited Partnership (3)(4)                  |                                |                                                 
|Migdal Insurance & Financial Holdings Ltd. (5)              |                                |                                                 
|Prisma Investment House Ltd. (6)                            |                                |                                                 
|Barry Shaked (4)(7)                                         |                                |                                                 
|Clal Insurance Enterprises Holdings Ltd. and affiliates (8) |                                |                                                 
|Brian Cooper (4)                                            |                                |                                                 

|(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 8, 2009, 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 13D/A filed with the SEC by Ronex
               Holdings, Limited partnership, and various affiliated FIMI private equity
funds                on February 12, 2009, and relates to their holdings of our shares as
of December                31, 2008. In their initial Schedule 13D filed with the SEC on
February 11, 2008,                these parties reported beneficial ownership of
2,330,696 shares, constituting                11.7% of our outstanding shares. Based on
the information provided in such                Schedule 13D/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, Limited
Partnership, 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., Ishay Davidi Management Ltd., Ishay Davidi
               Holdings Ltd. and Ishay Davidi. 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: 5,429,849 shares.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

69

---

---



|(4) | 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 5,429,849 ordinary shares
held, as of June                8, 2009, by all such parties, representing approximately
26.1% of our                outstanding shares (assuming the exercise of Mr. Shakeds
options                referenced in footnote 7 below). Each party to the Shareholders
Agreement has                disclaimed beneficial ownership of shares held by any other
party.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Consists
of ordinary shares held for members of the public through, among                others,
provident funds, mutual funds, pension funds and insurance policies,                which
are managed by subsidiaries of Migdal, according to the following
               allocation: 833,405 ordinary shares are held by profit participating life
               assurance accounts; 1,191,349 ordinary shares are held by provident funds
and                companies that manage provident funds; and 28,232 ordinary shares are
held by                companies for the management of funds for joint investments in
trusteeship, each                of which subsidiaries operates under independent
management and makes                independent voting and investment decisions.
Consequently, Migdal does not admit                that it is the beneficial owner of any
such shares. Migdal is an Israeli public                company, with a principal
business address at 4 Efal Street, Petach Tikva,                Israel. This information
is based solely on a Schedule 13G filed with the SEC by                Migdal on December
3, 2008, as updated by a letter sent to us by Migdal dated                June 7, 2009.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | This
information is based solely on Schedule 13/D filed with the SEC by Prisma
               Investment House Ltd., on February 9, 2009, and relates to their holdings
of our                shares as of February 3, 2009. In its Schedule 13D filed with the
SEC on                February 14, 2008, Prisma reported beneficial ownership of
1,832,543 shares,                constituting 9.1% of our outstanding shares.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Includes
options to purchase up to 391,518 shares, held by Mr. Shaked, directly                or
indirectly, that were exercisable on June 8, 2009 or within 60 days
               thereafter.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Consists
of (i) 992,523 ordinary shares held for members of the public through,
               among others, provident funds, mutual funds, pension funds, exchange
traded                funds and insurance policies, which are managed by subsidiaries of
Clal, each of                which subsidiaries operates under independent management and
makes independent                voting and investment decisions and (ii) 281,969
ordinary shares beneficially                held for Clals own account.
Consequently, Clal does not admit that it                beneficially owns such 992,523
ordinary shares and none of its affiliates admits                that it is the
beneficial owner of any of the foregoing shares. Clal, an Israeli                public
company, is a majority owned subsidiary of IDB Development Corporation
               Ltd., an Israeli public company, which in turn is a majority owned
subsidiary of                IDB Holding Corporation Ltd., an Israeli public company.
These companies may be                deemed to be controlled by Mr. Nochi Dankner, Mr.s
Shelly Bergman, Mrs. Ruth                Manor and Mr. Avraham Livnat. Clals
principal business address is 48                Menachem Begin Street, Tel Aviv, Israel.
This information is based solely on a                Schedule 13G filed with the SEC by
Clal and affiliates thereof, on February 26,                2009.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Except
as set forth in footnote 4 above, no major shareholders have any different voting rights.

As
of June 8, 2009, 7,686,396 of our ordinary shares were held in the United States, by four
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.

70

---

---



# C. Interests of Experts
and Counsel

Not
Applicable.

# ITEM 8  FINANCIAL INFORMATION

See
Item 18.

Legal Proceedings

Retalix USA Inc. and
Affiliated Foods Midwest Cooperative, Inc. and Integrated Distribution Solutions, LLC,
No. 57 117 Y 00012 07.

In March 2004, Affiliated Foods Midwest Cooperative, Inc., or AFM and IDS entered a contract under which
AFM purchased goods and services from IDS.  IDS assigned the contract to our subsidiary Retalix SCM,
Inc., in accordance with an April 1, 2005 asset purchase agreement.  In June 2006, AFM terminated the
contract and 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 AFM 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
2007 the arbitrators approved a preliminary hearing scheduling order, according to which the parties
exchanged discovery requests, written responses and documents. In November 2007 the customer filed a
statement of damages alleging total damages in excess of $22 million.

In March 2009, the Arbitrators awarded Retalix USA $2.5 million in compensatory damages  In April 2009,
the customer paid the arbitration award amount in full and will be included in the Company's statement
of income. In April 2009, the Nebraska federal court affirmed the arbitration award, entered judgment in
favor of Retalix USA and against the customer, and dismissed, with prejudice, the customer's claim
against Retalix USA and IDS.

In re Commissary Operations, Inc.,
Chapter 11 Case No. 08-06279 (Bankr. M.D. Tenn.).

Retalix
USA is a creditor in the Chapter 11 bankruptcy case of Commissary Operations, Inc., or
COI, presently pending in the United States Bankruptcy Court for the Middle District of
Tennessee (Nashville Division), Case No. 08-06279, filed in July 2008. Retalix USA holds
claims against COI in amounts totaling approximately $345,000 (inclusive of the
administrative claim, as defined below), consisting of charges for hardware and software
and related services sold by Retalix USA to COI. Retalix USA has filed a proof of claim in
the bankruptcy case, as well as a request seeking allowance of an administrative expense
claim in the amount of $134,380 and related relief, or the administrative claim. In March
2009, COI and the Official Committee of Unsecured Creditors filed objections to the
administrative claim. A hearing before the Bankruptcy Court with respect to the
administrative claim that was originally scheduled for April 2009 has been continued until
June 2009, when the parties submitted a joint request to continue it until September 2009
to allow additional time for fact discovery. The Bankruptcy Court has not yet ruled on
that request.

Tamar

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 $368,000. In January
2007, Tamar's insurance company confirmed that Tamar is covered for any damages resulting from this
claim. 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, 2008.

Other Claims and Disputes

The Company and its subsidiaries are also parties to several other claims filed against them
totaling approximately $172,000. 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
$514,000, 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.

71

---

---



# 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.

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
|--------------------------------- | ---- | ---
|
|
|
|
|2004                              |      |    
|                                  |      |    
|2005                              |      |    
|                                  |      |    
|2006                              |      |    
|                                  |      |    
|2007                              |      |    
|                                  |      |    
|2008                              |      |    
|                                  |      |    
|2007:                             |      |    
|                                  |      |    
|First Quarter                     |      |    
|                                  |      |    
|Second Quarter                    |      |    
|                                  |      |    
|Third Quarter                     |      |    
|                                  |      |    
|Fourth Quarter                    |      |    
|                                  |      |    
|2008:                             |      |    
|                                  |      |    
|First Quarter                     |      |    
|                                  |      |    
|Second Quarter                    |      |    
|                                  |      |    
|Third Quarter                     |      |    
|                                  |      |    
|Fourth Quarter                    |      |    
|                                  |      |    
|2009:                             |      |    
|                                  |      |    
|First Quarter                     |      |    
|                                  |      |    
|Most recent six months:           |      |    
|                                  |      |    
|December 2008                     |      |    
|                                  |      |    
|January 2009                      |      |    
|                                  |      |    
|February 2009                     |      |    
|                                  |      |    
|March 2009                        |      |    
|                                  |      |    
|April 2009                        |      |    
|                                  |      |    
|May 2009                          |      |    
|                                  |      |    
|June 2009 (through June 10, 2009) |      |    

72

---

---



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   
|--------------------------------- | ---- | ------
|
|
|
|
|2004                              | NIS  | 110.00
|                                 
|2005                              |      | 122.40
|                                 
|2006                              |      | 123.40
|                                 
|2007                              |      | 93.75 
|                                 
|2008                              | NIS  | 60.90 
|                                 
|2007:                            
|                                 
|First Quarter                     | NIS  | 90.12 
|                                 
|Second Quarter                    |      | 93.75 
|                                 
|Third Quarter                     |      | 84.49 
|                                 
|Fourth Quarter                    |      | 83.80 
|                                 
|2008:                            
|                                 
|First Quarter                     |      | 60.90 
|                                 
|Second Quarter                    |      | 58.21 
|                                 
|Third Quarter                     |      | 45.00 
|                                 
|Fourth Quarter                    |      | 41.00 
|                                 
|2009:                            
|                                 
|First Quarter                     | NIS  | 37.50 
|                                 
|Most recent six months:          
|                                 
|December 2008                     | NIS  | 25.80 
|                                 
|January 2009                      |      | 25.44 
|                                 
|February 2009                     |      | 31.55 
|                                 
|March 2009                        |      | 37.50 
|                                 
|April 2009                        |      | 38.98 
|                                 
|May 2009                          |      | 36.85 
|                                 
|June 2009 (through June 10, 2009) |      | 35.98 

73

---

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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 October 7, 2008.
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 also authorized to donate reasonable sums to
charity.

We
are authorized to issue 30,000,000 ordinary shares par value NIS 1.0 per share, of which
20,406,363 ordinary shares were outstanding as of June 8, 2009.

# 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.

74

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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.

75

---

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

Rather
than follow the Nasdaq rules requiring shareholder approval for the issuance of
securities in certain circumstances, we follow the Israeli laws set forth above.

# 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.

76

---

---



# 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. Our articles of association do
not authorize us to so exempt our office holders.

# 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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 and have issued indemnification
letters to our directors and officers in accordance with the foregoing provisions.

# 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 shares.

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.

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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 summarizes
the material U.S. federal income tax consequences to a U.S. Holder arising
from the purchase, ownership and sale of the ordinary shares. For this purpose, a U.S.
Holder is a holder of ordinary shares that is: (1) an individual citizen or
resident of the United States, including an alien individual who is a lawful permanent
resident of the United States or meets the substantial presence residency test under U.S.
federal income tax laws; (2) a corporation (or entity treated as a corporation for U.S.
federal tax purposes) or a partnership (other than a partnership that is not treated as a
U.S. person under any applicable U.S. 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 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 authority to control all substantial decisions of
the trust; (5) a trust that has a valid election in effect to be treated as a U.S. person
to the extent provided in U.S. Treasury regulations, or (6) any person otherwise subject
to U.S. federal income tax on a net income basis in respect of the 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
tax consequences to a person that is not a U.S. Holder, not does it describe the rules
applicable to determine a taxpayers status as a U.S. Holder. This summary is based
on the provisions of the Internal Revenue Code of 1986, as amended (the Code),
final, temporary and proposed U.S. Treasury Regulations promulgated thereunder,
administrative and judicial interpretations thereof, and the U.S./Israel Income Tax
Treaty, all as in effect as of the date hereof and all of which are subject to change,
possibly on a retroactive basis, and all of which are open to differing interpretations.
We will not seek a ruling from the U.S. Internal Revenue Service (IRS) with
regard to the U.S. federal income tax treatment of an investment in our ordinary shares
by U.S. Holders and, therefore, can provide no assurances that the IRS will agree with
the conclusions set forth below.

This
discussion does not address all of the aspects of U.S. federal income taxation that may
be relevant to a particular shareholder based on such shareholders particular
circumstances and in particular does not discuss any estate, gift, generation-skipping,
transfer, state, local or foreign tax considerations. 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, regulated investment company, or other financial institution or
financial services entity; (2) a broker or dealer in securities or foreign
currency; (3) a person who acquired our ordinary shares in connection with employment or
other performance of services; (4) a U.S. Holder that is subject to the U.S. alternative
minimum tax; (5) a U.S. Holder that holds our ordinary shares as a hedge or as part of a
hedging, straddle, conversion or constructive sale transaction or other risk-reduction
transaction for U.S. federal income tax purposes; (6) a tax-exempt entity; (7) real
estate investment trusts; (8) a U.S. Holder that expatriates out of the United States or
a former long-term resident of the United States; or (9) a person having a functional
currency other then the 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,
ordinary 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. Each prospective investor is advised to
consult his or her own U.S. tax advisor with respect to the specific U.S. federal and
state income tax consequences to such person of purchasing, holding or disposing of
ordinary shares.

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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 our 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 of 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 earnings and profits will be treated first as a
non-taxable return of capital, reducing the U.S. Holders tax basis for the ordinary
shares to the extent thereof, and then 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 (these preferential
rates are scheduled to expire for taxable years beginning after December 31, 2010, after
which time dividends are scheduled to be taxed at ordinary income rates and long-term
capital gains are scheduled to be taxed at rates not exceeding 20%). 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 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.

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 discuIf 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 the holding period and other requirements. A U.S. Holder will not be entitled
to the preferential rate: (i) if the U.S. Holder has not held our ordinary shares or ADRs
for at leash 61 days of the 121 day period beginning on the date which is 60 days before
the ex-dividend date, or (ii) 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 ordinary 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.

The
amount of a distribution with respect to our ordinary shares will be measured by the
amount of the 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 above
under Taxation of Non-Resident Holders of Shares.) 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.

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 the 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 taxable 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 leash 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 his or
her risk of loss with respect to the ordinary shares will not count toward meeting the
16-day holding period. A U.S. Holder will also be denied a foreign tax credit if the U.S.
Holder holds the 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 with their own tax
advisors to determine whether, and to what extent, the are 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 taxes withheld, provided such U.S. Holders itemize their deductions.

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Disposition of Shares

Except
as provided under the PFIC rules described below, upon the sale, exchange or other
disposition of our ordinary shares, a U.S. Holder 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 or 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 the
disposition.

In
general, gain realized by a U.S. Holder on a sale, exchange or other disposition of
ordinary shares will generally 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,
U.S. Treasury Regulations require such 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 either:

| | 75%
or more of our gross income (including our pro rata share of 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 (the "Income Test"); or
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

As
noted above, under certain look-through rules, the assets and income of
certain subsidiaries are taken into account in determining whether a foreign company
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 by making a 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 our ordinary shares at a gain, be liable to pay U.S. federal
income tax at the then prevailing highest tax rates on ordinary income plus interest on
such 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 was a U.S. Holder, the tax basis of such shares
would 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
were recognized by the decedent. Indirect investments in a PFIC may also be subject to
special U.S. federal income tax rules.

The
PFIC rules would not apply to a U.S. Holder who makes a QEF election for all taxable
years that such U.S. Holder has held the ordinary shares while were 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 such U.S. Holders pro rata share of our ordinary earnings as
ordinary income and such U.S. Holders pro rata share of our net capital
gains 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 comply with the applicable information reporting
requirements for U.S. Holders to make a QEF election.

A
U.S. Holder of PFIC shares which are traded on certain public markets, including the
NASDAQ, 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
basis in the PFIC shares. Loses are allowed only to the extent of net mark-to-market gain
previously included income by the U.S. Holder under the election for prior taxable years.

We
believe that we were not a PFIC for 2008 and do not anticipate being a PFIC in 2009. The
tests for determining PFIC status, however, are applied annually, and it is difficult to
make accurate predictions of futures 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%, but
scheduled to increase to 31% for taxable years beginning after December 31, 2010) with
respect to cash dividends and proceed from a disposition of ordinary shares. In general,
back-up 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, our ordinary shares.

A
non-U.S. Holder may be subject to U.S. federal income or withholding tax on a dividend
paid on our ordinary shares or the proceeds from the disposition of our ordinary shares
if: (i) if such item is effectively connected with the conduct by the non-U.S. Holder of
a trade or business in the United States or, in the case of a non-U.S. Holder that is a
resident of a country which has an income tax treaty with the United States, 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.; (ii) in the case of a
disposition of our ordinary shares, 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; (iii) 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 our 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 on an applicable Form W-8 (or a
substantially similar form) 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 our 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 non-U.S. 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 and state
income taxes are imposed on the taxable income of the U.S. consolidated group. The
statutory tax rates applicable to the U.S. subsidiaries are 37%-40%.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 U.S. federal tax benefit of
deducting those 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.

82

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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. Israeli companies are generally subject to capital gains tax at a rate of
25% for capital gains (other than gains deriving from the sale of listed securities)
derived after January 1, 2003. However, the effective tax rate payable by a company that
derives income from an Approved Enterprise may be considerably less, as further discussed
below.

Following
a temporary order, which came into effect on January 1, 2009 and will expire at the end
of one year, an Israeli company may elect a 5% rate of corporate tax (instead of 25%) for
dividends received in 2009 from a foreign subsidiary and used in Israel either in 2009 or
within one year after actual receipt of the dividend, whichever is later. The 5% tax rate
is subject to various conditions, which include conditions with regard to the identity of
the corporation that distributes the dividends, the source of the dividend, the nature of
the use of the dividend income, and the period during which the dividend income will be
used in Israel.

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 of
Foreign Ownership | Rate of
Reduced 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
2014.

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.

83

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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. 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.

84

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

| |  | Deduction
of costs related to the issuance of shares on 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.

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 Income Tax Law (Inflationary Adjustments), 1985,
or 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).

85

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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 applicable 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. 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.

# I. Subsidiary Information

Not
applicable.

86

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# 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.

In
2008, due to the increased volatility of the US Dollar, we increased our use of foreign
currency forward contracts. We continue to actively utilize currency hedging transactions
to manage our exposure. As the value of the US Dollar has risen to a greater degree than
expected, we have recently incurred significant expenses under accounting rules relating
to the total value of our open contracts. As of December 31, 2008, we had the following
open foreign currency forward contracts all of up to six months in term and maturing
between January to June 2009:

|Sell                    | Buy      |                         |                    
|----------------------- | -------- | ----------------------- | -------------------
|
|
|
|
|US Dollar $8            | NIS 29.4 | September -October 2008 | January- June 2009 
|Euro 1.3                | $1.9     | July 2008               | January- March 2009
|New Israeli Shekel 13.5 | $3.6     | September 2008          | February-June 2009 

The
fair value of these outstanding contracts as of December 31, 2008 reflects an asset in
the amount of $103,000, which was credited to financial income.

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,
2008.

(In thousands, except percentages)

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

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

|** | Weighted
average yield as per the performance of 2008
|-- | -----------------------------------------------------

|*** | 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
|--- | ----------------------------------------------------------------------------------------------------------

87

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# 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, 2008:

(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 term
interest-bearing deposits. The interest rates on these deposits are based on various factors, such as
currency and region. The interest rate on our borrowings is linked to LIBOR, which fluctuates.

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 on a timely basis and revising our strategy as the need
arises.

# 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.

88

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# ITEM 15  CONTROLS
AND PROCEDURES

# Disclosure controls and procedures

As
of December 31, 2008, 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 effective at
a reasonable level of assurance as of December 31, 2008.

# 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, 2008 based on the
framework for Internal Control-Integrated Framework set forth by The Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our
management concluded that as of December 31, 2008, our internal control over financial
reporting was effective.

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 2008 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

Except for organizational changes in the
accounting department of our U.S. office and the implementation of further internal
controls that strengthen the governance over our U.S. office activity 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 is independentas
defined in Nasdaq rules. Since Mr. Breslers three-year term as an external director
expired in June 2009, we will ensure that the individual who is nominated in his place
for election at our 2009 annual meeting of shareholders qualifies as an audit committee
financial expert and as an independent director.

# 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.

89

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# ITEM 16C. PRINCIPAL
ACCOUNTANT FEES AND SERVICES

Kesselman
& Kesselman, a member of PricewaterhouseCoopers International Limited, serves as our
principal independent registered public accounting firm. The following table presents the
aggregate fees for professional audit services and other services rendered by our
principal independent registered public accounting firm in 2007 and 2008:

|                   | Year Ended December 31,(U.S. $ in thousands)
|------------------ | --------------------------------------------
|
|
|
|
|Audit Fees         |                                             
|Audit Related Fees |                                             
|Tax Fees           |                                             
|Other 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 16F. CHANGE IN
REGISTRANTS CERTIFYING ACCOUNTANT

Not
applicable.

# ITEM 16G. CORPORATE
GOVERNANCE

We
follow the Companies Law, the relevant provisions of which are summarized in this Annual
Report, rather than comply with the Nasdaq requirements relating to: (i) shareholder
approval with respect to issuance of securities under certain circumstances, as described
in Item 6E  Share Ownership  Our Share Option Plans and Item
10B  Memorandum and Articles of Association  Approval of Certain Transactions
Under Israeli Law; and (ii) the quorum for shareholder meetings, as described in
Item 10B  Memorandum and Articles of Association  Shareholder Meetings.

# PART III

# 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.

90

---

---



# 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
| | -- | ------------------------------------------

| | (b) | Exhibits
| | --- | --------

|Exhibit No. |  | Exhibit
|----------- |  | -------

|1.1 |  | Memorandum
of Association of Registrant, as amended (previously filed November 2, 2005 as an exhibit
to Retalixs report on Form 6-K 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 (previously filed on July 2, 2008 as an exhibit to
Retalixs annual report on Form 20-F for the fiscal year ended December 31, 2007 and
incorporated herein by reference).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | 2004
Israeli Share Option Plan, as amended (previously filed on July 2, 2008 as an exhibit to
Retalixs annual report on Form 20-F for the fiscal year ended December 31, 2007 and
incorporated herein by reference).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 on June 2, 2005 as exhibit 2.1 to Retalixs
registration statement on Form F-3 and incorporated herein by reference).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8 |  | Principal
Subsidiaries of Retalix Ltd. (previously filed on June 21, 2007 as an exhibit to
Retalix's annual report on                   Form 20-F for the fiscal year ended December
31, 2006 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.
|---- |  | -------------------------------------------------------------------------------------------

91

---

---



# 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: June 22, 2009 |  | RETALIX LTD.By: /s/ Barry Shaked
Barry Shaked, President and Chief Executive Officer
|------------------- |  | --------------------------------------------------------------------------------------------------

|Date: June 22, 2009 |  | By: /s/ Hugo Goldman
Hugo Goldman, Chief Financial Officer
|------------------- |  | ------------------------------------------------------------------------

92

---

---

RETALIX LTD. 2008 ANNUAL REPORT

INDEX TO THE FINANCIAL
STATEMENTS

|                                                        | Page       
|------------------------------------------------------- | -----------
|
|
|
|
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | F-2 - F-3  
|CONSOLIDATED FINANCIAL STATEMENTS:                     
|Balance sheets                                          | F-4 - F-5  
|Statements of income (loss)                             | F-6        
|Statements of changes in shareholders' equity           | F-7        
|Statements of cash flows                                | F-8 - F-10 
|Notes to consolidated financial statements              | F-11 - F-47

The amounts are stated in U.S. dollars ($) in thousands.

F - 1

---

---



|
|
|

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders of
RETALIX LTD.

We have audited the accompanying
consolidated balance sheets of Retalix Ltd. (the Company) and its subsidiaries
as of December 31, 2008 and 2007, and the related consolidated statements of income,
changes in shareholders equity and cash flows for each of the years in the three
year period ended December 31, 2008. We also have audited the Companys internal
control over financial reporting as of December 31, 2008, 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 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.

F - 2

---

---



In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of the Company and its subsidiaries as of December 31, 2008 and 2007,
and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2008, based on criteria established in Internal Control 
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).

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.

/s/ Kesselman & Kesselman
A member of PricewaterhouseCoopers International Limited
Tel Aviv, Israel
June 22, 2009

F - 3

---

---



RETALIX LTD.
CONSOLIDATED BALANCE SHEETS

|                                                             | December 31
|------------------------------------------------------------ | -----------
|
|
|
|
|A s s e t s                                                  |            
|CURRENT ASSETS                                               |            
|Cash and cash equivalents                                    |            
|Marketable securities                                        |            
|Accounts receivable                                          |            
|Trade                                                        |            
|Other                                                        |            
|Prepaid expenses                                             |            
|Inventories                                                  |            
|Deferred income taxes                                        |            
|                                                             |            
|Total current assets                                         |            
|                                                             |            
|NON-CURRENT ASSETS                                           |            
|Long-term receivables                                        |            
|Long term prepaid expenses                                   |            
|Long term investments                                        |            
|Amounts funded in respect of employee rights upon retirement |            
|Deferred income taxes                                        |            
|Other                                                        |            
|                                                             |            
|Total non - current assets                                   |            
|                                                             |            
|PROPERTY, PLANT AND EQUIPMENT, net                           |            
|                                                             |            
|GOODWILL                                                     |            
|                                                             |            
|OTHER INTANGIBLE ASSETS, net of accumulated amortization     |            
|Customer relationship                                        |            
|Other                                                        |            
|                                                             |            
|                                                             |            
|                                                             |            
|Total assets                                                 |            
|                                                             |            

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

F - 4

---

---



RETALIX LTD.
CONSOLIDATED BALANCE SHEETS

|                                                                            | December 31
|--------------------------------------------------------------------------- | -----------
|
|
|
|
|Liabilities and shareholders' equity                                        |            
|CURRENT LIABILITIES                                                         |            
|Short-term bank credit                                                      |            
|Current maturities of long-term bank loans                                  |            
|Accounts payable and accruals:                                              |            
|Trade                                                                       |            
|Employees and employee institutions                                         |            
|Accrued expenses                                                            |            
|Other                                                                       |            
|Deferred revenues                                                           |            
|                                                                            |            
|Total current liabilities                                                   |            
|                                                                            |            
|LONG-TERM LIABILITIES                                                       |            
|Long-term loans, net of current maturities                                  |            
|Employee rights upon retirement                                             |            
|Deferred tax liability                                                      |            
|Other tax payables                                                          |            
|                                                                            |            
|Total long-term liabilities                                                 |            
|                                                                            |            
|Total liabilities                                                           |            
|                                                                            |            
|COMMITMENTS AND CONTINGENT LIABILITIES  (Note 8)                            |            
|                                                                            |            
|MINORITY INTERESTS                                                          |            
|                                                                            |            
|                                                                            |            
|SHAREHOLDERS' EQUITY                                                        |            
|Share capital - Ordinary shares of NIS 1.00 par value (authorized: December |            
|31, 2008 and December 31, 2007 - 30,000,000 shares; issued and outstanding: |            
|December 31, 2008 - 20,389,771 shares and December 31, 2007 - 20,001,382    |            
|shares, respectively)                                                       |            
|Additional paid in capital                                                  |            
|Retained earnings (accumulated deficit)                                     |            
|Accumulated other comprehensive income                                      |            
|                                                                            |            
|Total shareholders' equity                                                  |            
|                                                                            |            
|Total liabilities and shareholders' equity                                  |            
|                                                                            |            

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

F - 5

---

---



RETALIX LTD.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)

|                                                         | Year ended
December 31
|-------------------------------------------------------- | ----------------------
|
|
|
|
|REVENUES:                                                |                       
|Product sales                                            |                       
|Services and projects                                    |                       
|                                                         |                       
|Total revenues                                           |                       
|                                                         |                       
|COST OF REVENUES:                                        |                       
|Cost of product sales                                    |                       
|Cost of services and projects                            |                       
|                                                         |                       
|Total cost of revenues                                   |                       
|                                                         |                       
|GROSS PROFIT                                             |                       
|                                                         |                       
|                                                         |                       
|OPERATING EXPENSES:                                      |                       
|Research and development - net                           |                       
|Selling and marketing                                    |                       
|General and administrative                               |                       
|Other (income) expenses - net                            |                       
|Impairment of goodwill                                   |                       
|                                                         |                       
|Total operating expenses                                 |                       
|                                                         |                       
|INCOME (LOSS) FROM OPERATIONS                            |                       
|FINANCIAL INCOME (EXPENSES), net                         |                       
|                                                         |                       
|INCOME (LOSS) BEFORE TAXES ON INCOME                     |                       
|TAX BENEFIT                                              |                       
|                                                         |                       
|INCOME (LOSS) AFTER TAXES ON INCOME                      |                       
|SHARE IN INCOME (LOSS) OF AN ASSOCIATED COMPANY          |                       
|MINORITY INTERESTS IN PROFITS OF SUBSIDIARIES            |                       
|                                                         |                       
|NET INCOME (LOSS)                                        |                       
|                                                         |                       
|EARNINGS (LOSS) PER SHARE - in U.S. $:                   |                       
|Basic                                                    |                       
|                                                         |                       
|Diluted                                                  |                       
|                                                         |                       
|WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATION OF |                       
|EARNINGS (LOSS) PER SHARE - in thousands:                |                       
|Basic                                                    |                       
|                                                         |                       
|Diluted                                                  |                       
|                                                         |                       

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

F - 6

---

---



RETALIX LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

|                                    | Share capital |  |  |        | 
|----------------------------------- | ------------- |  |  | ------ | 
|
|
|
|
|BALANCE AT JANUARY 1, 2006          |               |  |  | 19,409 | 
|Effect of SAB 108 adjustments       |               |  |  |        | 
|                                    |               |  |  |        | 
|                                    |               |  |  |        | 
|                                    |               |  |  |        | 
|CHANGES DURING 2006:                |               | 
|Net income                          |               |  |  |        | 
|Differences from translation of non |               | 
|dollar currency financial           |               | 
|statements of a subsidiary and      |               | 
|associated company                  |               |  |  |        | 
|                                    |               |  |  |        | 
|Comprehensive income                |               |  |  |        | 
|                                    |               |  |  |        | 
|Stock based compensation expenses   |               |  |  |        | 
|Issuance of share capital to        |               | 
|employees and non-employee          |               | 
|resulting from exercise of options  |               |  |  | 204    | 
|BALANCE AT DECEMBER 31, 2006        |               |  |  | 19,613 | 
|                                    |               |  |  |        | 
|Effect of FIN 48 adjustments        |               |  |  |        | 
|                                    |               |  |  |        | 
|                                    |               |  |  |        | 
|                                    |               |  |  |        | 
|CHANGES DURING 2007:                |               | 
|Loss                                |               |  |  |        | 
|Unrealized losses on investments    |               |  |  |        | 
|Differences from translation of non |               | 
|dollar currency financial           |               | 
|statements of a subsidiary and      |               | 
|associated company                  |               |  |  |        | 
|                                    |               |  |  |        | 
|Comprehensive loss                  |               |  |  |        | 
|                                    |               |  |  |        | 
|Stock based compensation expenses   |               |  |  |        | 
|Additional consideration in respect |               | 
|of acquisition of a subsidiary      |               |  |  | 207    | 
|Issuance of share capital to        |               | 
|employees and non-employee          |               | 
|resulting from exercise of options  |               |  |  | 181    | 
|                                    |               |  |  |        | 
|BALANCE AT DECEMBER 31, 2007        |               |  |  | 20,001 | 
|CHANGES DURING 2008:                |               | 
|Loss                                |               |  |  |        | 
|Unrealized gains on investments     |               |  |  |        | 
|Differences from translation of non |               | 
|dollar currency financial           |               | 
|statements of a subsidiary and      |               | 
|associated company                  |               |  |  |        | 
|                                    |               |  |  |        | 
|Comprehensive loss                  |               |  |  |        | 
|                                    |               |  |  |        | 
|Stock based compensation expenses   |               |  |  |        | 
|Issuance of share capital to        |               | 
|employees and non-employee          |               | 
|resulting from exercise of options  |               |  |  | 388    | 
|                                    |               |  |  |        | 
|BALANCE AT DECEMBER 31, 2008        |               |  |  | 20,389 | 
|                                    |               |  |  |        | 

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

F - 7

---

---



(Continued)  1

RETALIX LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                              | Year ended
December 31
|------------------------------------------------------------- | ----------------------
|
|
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                         |                       
|Net income (loss)                                             |                       
|Adjustments required to reconcile net income to net cash      |                       
|provided by (used in) operating activities:                   |                       
|Minority interests in gains of subsidiaries                   |                       
|Depreciation and amortization                                 |                       
|Losses (gains) from sale of property, plant and equipment     |                       
|Share in loss (income)  of an associated company              |                       
|Stock based compensation expenses                             |                       
|Changes in accrued liability for employee rights upon         |                       
|retirement                                                    |                       
|Losses (gains) on amounts funded in respect of employee       |                       
|rights upon retirement                                        |                       
|Deferred income taxes - net                                   |                       
|Net decrease (increase) in trading securities                 |                       
|Impairment of available for sale  securities                  |                       
|Amortization of discount on marketable debt securities        |                       
|Impairment of goodwill                                        |                       
|Other                                                         |                       
|Changes in operating assets and liabilities:                  |                       
|Decrease (increase)  in accounts receivable:                  |                       
|Trade (including the non-current portion)                     |                       
|Other (including long term other tax receivable)              |                       
|Increase (decrease) in accounts payable and accruals:         |                       
|Trade                                                         |                       
|Employees, employee institutions and other                    |                       
|Decrease (increase) in inventories                            |                       
|Increase (decrease) in deferred revenues                      |                       
|                                                              |                       
|                                                              |                       
|Net cash provided by (used in) operating activities - forward |                       
|                                                              |                       

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

F - 8

---

---



(Continued)  2

RETALIX LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                  | Year ended December 31
|----------------------------------------------------------------- | ----------------------
|
|
|
|
|Net cash provided by (used in) operating activities - brought     |                       
|forward                                                           |                       
|                                                                  |                       
|CASH FLOWS FROM INVESTING ACTIVITIES:                             |                       
|Maturity of marketable debt securities held to maturity           |                       
|Investment in marketable debt securities held to maturity         |                       
|Acquisition of subsidiaries and business consolidated for the     |                       
|first time (a)                                                    |                       
|Additional investments in subsidiaries                            |                       
|Refund in respect of cost of investment                           |                       
|Purchase of property, plant, equipment and other assets           |                       
|Proceeds from sale of property, plant and equipment               |                       
|Amounts funded in respect of employee rights upon retirement, net |                       
|Long-term loans collected from (granted to) employees             |                       
|                                                                  |                       
|Net cash used in investing activities                             |                       
|                                                                  |                       
|CASH FLOWS FROM FINANCING ACTIVITIES:                             |                       
|Repayment of long-term bank loans                                 |                       
|Issuance of share capital to employees and non-employees          |                       
|resulting from exercise of options                                |                       
|Short-term bank credit - net                                      |                       
|                                                                  |                       
|Net cash provided by (used in) financing activities               |                       
|                                                                  |                       
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                           |                       
|                                                                  |                       
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS              |                       
|BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR         |                       
|                                                                  |                       
|BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR               |                       
|                                                                  |                       
|                                                                  |                       

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

F - 9

---

---



(Continued) - 3

RETALIX LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS

SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:

|    |                                                               | Year ended December 31
|--- | ------------------------------------------------------------- | ----------------------
|
|
|
|
|(a) | Supplementary disclosure of cash flow information -           |                       
|    | Fair value of assets acquired and liabilities assumed of      |                       
|    | subsidiaries and businesses acquired at the date of           |                       
|    | acquisition:                                                  |                       
|    | Working capital (excluding cash and cash equivalents)         |                       
|    | Property plant and equipment                                  |                       
|    | Goodwill and other intangible assets arising from acquisition |                       
|    | Increase in account payable- other                            |                       
|    |                                                               |                       
|    |                                                               |                       
|    |                                                               |                       
|    |                                                               |                       
|(b) | Supplementary disclosure of cash flow information -           |                       
|    | cash paid during the year for:                                |                       
|    |                                                               |                       
|    | Interest                                                      |                       
|    |                                                               |                       
|    | Income tax                                                    |                       
|    |                                                               |                       
|    |                                                               |                       

|(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 290,128 ordinary
shares. In addition,                     shareholders of IDS were issued an additional
207,236 shares valued at                     $3,973,129 that were released from escrow as
certain customer retention                     milestones agreed upon were met as of
April 1, 2007. 69,481 shares and                     approximately $1.1 million in cash
are still being held in escrow pending                     resolution of an indemnity
claim by the Company with respect to a third party.                     Claim against the
Company that the Company successfully defended.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | The
Company, through its subsidiary StoreAlliance.com Ltd. acquired the
                    Suppliers Portal activity. An amount of approximately $176,000
acquired in                     credit and will be presented as investing activity when
actually paid. See also                     note 2a.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 10

---

---



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           14.
| | -- | ---------------------------------------------------------------------------------------

| | 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 significant 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accounting
principle and estimates used in the preparation of these financial statements were
applied on a consistent manner.
| | -----------------------------------------------------------------------------------------------------------------------------

| | 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 (Euro
and New Israeli Shekel (NIS), respectively). 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 of Financial Accounting Standards (FAS) No. 52 Foreign
Currency Translation (FAS 52):
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---



RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE
1  SIGNIFICANT ACCOUNTING POLICIES (continued):

| | 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 and long term investments
| | -- | -----------------------------------------------

| | Marketable
securities consist mainly of debt securities. The Company accounts for investments in
marketable securities in accordance with FAS 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company invests in an Action Rate
Security (ARS) with a par value of $1 million and maturity in 2036, which is classified as
available-for-sale and is recorded at fair value in its books. Since this ARS does not
have an active market, fair value is determined using a valuation model that considers
references to other instruments with similar characteristics, in performance of a
Trinominal Discount Model relying as little as possible on entity-specific inputs. Changes
in fair value are reflected in other comprehensive income (loss). Unrealized losses
considered to be other than temporary are charged to income as an impairment charge.
During 2008, other than temporary impairment of $ 700,000 was recorded, see note 6.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---



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)
|Buildings                          | 4              
|Land lease 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. See
note 4, for disclosure on impairment of goodwill in the amount of $ 58,182,000 recorded
during 2008.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
intangible assets are amortized over a period of one to fifteen years, except trademark
(see note 2b).
| | ------------------------------------------------------------------------------------------------------------

| | 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 ordinary shares of the Company, which
were reserved for that purpose. The measurement and recognition of contingent
consideration are accounted in accordance with FAS No. 141, Business Combinations (FAS
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 performance goal is met. For additional
consideration paid in shares, the Company calculates the amount of
additional consideration using the closing price of its shares on the date the
performance goal is satisfied.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---



RETALIX LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | k. | Income
taxes:
| | -- | -------------

| | 1) | 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 10g
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 9c(2) and 10g(5)), 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) | Effective
January 1, 2007, the Company adopted FIN 48, Accounting           for
Uncertainty in Income Taxesan interpretation of FAS 109          (FIN 48).
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 Companys accounting policy,           pursuant to the adoption of
FIN 48, is to classify interest and penalties           recognized in the financial
statements relating to uncertain tax positions under           the provision for income
taxes.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 - 14

---

---



# 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, 2008, 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 statistical renewal percentage derived
from the majority of maintenance renewals. 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 FAS 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 - 15

---

---



# RETALIX LTD 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
1  SIGNIFICANT ACCOUNTING POLICIES (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 income as incurred. Participations and grants in
respect of research and development expenses are recognized as a reduction of research
and development expenses as the related costs are incurred, or as the related milestone
is met. Upfront fees received in connection with cooperation agreements are deferred and
recognized over the period of the applicable agreements as a reduction of research and
development expenses.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection with a business combination, amounts assigned to tangible and intangible
assets to be used in a particular research and development project that have not reached
technological feasibility and have no alternative future use are charged to acquisition
of research and development in process at the acquisition date
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n. | Concentration
of credit risk
| | -- | ----------------------------

| | Financial
instruments, which potentially subject the Company to credit risk, consist principally of
marketable securities, trade receivables (including allowance for doubtful accounts) and
interest bearing investments. The cash and cash equivalents as of December 31, 2008 are
deposited mainly with leading Israeli and U.S. banks. As of December 31, 2008, the
Company had an investment of $0.3 million of a security held in ARS  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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o. | 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 - 16

---

---



# RETALIX LTD 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
1  SIGNIFICANT ACCOUNTING POLICIES (continued):

| | p. | 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 FAS No. 128, Earnings
Per Share (FAS 128). The options of certain subsidiaries (see note
9b(2)) 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 15d.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | q. | Other
comprehensive income (loss)
| | -- | ---------------------------------

| | Other
comprehensive income (loss), presented in shareholders equity, represents currency
translation adjustments of non-dollar currency financial statements of a subsidiary, of
an associated company and in 2007 and 2008 the unrealized losses of investment in
available for sale security (accumulated balance at December 31, 2008, 2007 and 2006, is
$328,000, $298,000 and $102,000, respectively).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | r. | Stock
based compensation
| | -- | ------------------------

| | The
Company accounts for stock based compensation to employees in accordance with FAS No. 123
(revised 2004), Share-Based Payment (FAS No. 123(R)), which
was adopted effectively commencing January 2006.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 is based on
awards ultimately expected to vest, such expense has been reduced for estimated
forfeitures. FAS 123(R) requires future forfeitures to be estimated at grant date and at
each balance sheet date thereafter.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 to employees and third party services 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, 2008, 2007 and 2006
income statement for stock-based employee compensation awards were $3,846,000, $3,017,000
and $2,923,000, respectively, net of the tax effect of $393,000, $40,000 and $45,000,
respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total compensation costs recognized in the year ended December 31, 2008, 2007 and 2006
income statement for stock-based non employee compensation awards were $475,000, $799,000
and $516,000, respectively, net of the tax effect of $63,000, $33,000 and $237,000,
respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---



# RETALIX LTD 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
1  SIGNIFICANT ACCOUNTING POLICIES (continued):

| | s. | Advertising
expenses
| | -- | --------------------

| | These
costs are charged to selling and marketing expenses as incurred. Advertising expenses
totaled $2,175,000, $2,820,000 and $2,095,000 in the years ended December 31, 2008, 2007
and 2006, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | t. | 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 FASB
Statement No. 133 Accounting for Derivative Instruments and Hedging Activities(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 income (expenses)
 net.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | u. | Sale
of receivables
| | -- | -------------------

| | The
Group factored 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 income (expenses)  net, as incurred.
The balance of factored receivables amounted approximately $1,094,000 and $10,448,000 as
of December 31, 2008 and 2007, respectively. The expenses resulting from the sales of
trade receivables in the years ended December 31, 2008, 2007 and 2006 amounted to $0,
$1,862,000 and $1,482,000, respectively, and are included in financial expenses. In the
fourth quarter of 2007 the company decided to discontinue the factoring of receivables.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | v. | Fair
Value Measurement
| | -- | ----------------------

| | Effective
January 1, 2008, the Company adopted FAS 157, Fair Value Measurementsand,
effective October 10, 2008, adopted FSP No. FAS 157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active, except as
it applies to the nonfinancial assets and nonfinancial liabilities subject to FSP 157-2.
FAS 157 clarifies that fair value is an exit price, representing the amount that would be
received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in pricing
an asset or a liability. As a basis for considering such assumptions, FAS 157 establishes
a three-tier value hierarchy, which prioritizes the inputs used in the valuation
methodologies in measuring fair value:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Level 1  | Observable inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
| | --------- | ----------------------------------------------------------------------------------------------------------------

| | Level 2
 | Include other inputs that are directly or indirectly observable in the
marketplace.
| | --------- | -----------------------------------------------------------------------------------

| | Level 3
 | Unobservable inputs which are supported by little or no market activity.
| | --------- | ------------------------------------------------------------------------

| | The
fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. For further
disclosure, see note 6  and 13.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---



# RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
1  SIGNIFICANT ACCOUNTING POLICIES (continued):

| | w. | Staff
Accounting Bulletin No. 108 (SAB 108)
| | -- | ---------------------------------------------

| | In
September 2006, the SEC staff issued SAB 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements.
SAB 108, 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | x. | Recently
Adopted Standards
| | -- | --------------------------

| | 1) | In
February 2007, the FASB issued FAS No. 159, The Fair Value Option for
               Financial Assets and Financial Liabilities (FAS 159).
               FAS 159 permits entities to choose to measure many financial instruments
and                certain other items at fair value that are not currently required to
be measured                at fair value, and establishes presentation and disclosure
requirements designed                to facilitate comparisons between entities that
choose different measurement                attributes for similar types of assets and
liabilities. FAS 159 is                effective for financial statements issued for
fiscal years beginning after                November 15, 2007. We adopted the
provisions of FAS 159 on                January 1, 2008, and have elected not
to measure any of our current                eligible financial assets or liabilities at
fair value.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | y. | Newly
issued accounting pronouncements:
| | -- | ---------------------------------------

| | 1) | In
December 2007, the FASB issued FAS No. 141(R), Business
               Combinations (FAS 141(R)). FAS  141(R)
               establishes principles and requirements for how the acquirer of a business
               recognizes and measures in its financial statements the identifiable
assets                acquired, the liabilities assumed, and any noncontrolling interest
in the                acquiree. FAS  141(R) also provides guidance for
recognizing and                measuring the goodwill acquired in the business
combination and determines what                information to disclose to enable users of
the financial statements to evaluate                the nature and financial effects of
the business combination. The Company will                be required to adopt SFAS
141(R) on January 1, 2009, and currently assessing the                impact that it will
have on the Consolidated Financial Statements.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | In
December 2007, the FASB issued FAS No. 160, Noncontrolling Interests
               in Consolidated Financial Statements an amendment ofAccounting
Research                Bulletin ARB No. 51, Consolidated Financial Statements               (FAS 160).
FAS 160 requires (1) that non-controlling                (minority) interests
be reported as a component of stockholders equity,                (2) that net
income attributable to the parent and to the non-controlling                interest be
separately identified in the consolidated statement of operations,                (3) that
changes in a parents ownership interest while the parent                retains its
controlling interest be accounted for as equity transactions,                (4) that
any retained non-controlling equity investment upon the                deconsolidation of
a subsidiary be initially measured at fair value and                (5) that
sufficient disclosures are provided that clearly identify and                distinguish
between the interests of the parent and the interests of the
               non-controlling owners. FAS 160 is effective for financial statements
issued for                fiscal years beginning after December 15, 2008, and
interim periods within                those fiscal years. The Company will be required to
adopt SFAS 160 on January 1,                2009 and it does not expect the adoption of
this Statement to have a material                effect on the Consolidated Financial
Statements.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---



# RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
1  SIGNIFICANT ACCOUNTING POLICIES (continued):

| | 3) | In
March 2008, the FASB issued FAS No. 161, Disclosures About
               Derivative Instruments and Hedging Activities  an amendment ofFASB Statement No. 133 (FAS 161), which
               requires additional disclosures about the objectives of using derivative
               instruments; the method by which the derivative instruments and related
hedged                items are accounted for under FASB Statement No.133 and its related
               interpretations; and the effect of derivative instruments and related
hedged                items on financial position, financial performance, and cash flows.
SFAS 161                also requires disclosure of the fair values of derivative
instruments and their                gains and losses in a tabular format. SFAS 161 is
effective for financial                statements issued for fiscal years and interim
periods beginning after                November 15, 2008, with early adoption
encouraged. The Company will be                required to adopt SFAS 161 on January 1,
2009. This Statement will not impact                the consolidated financial results as
it is disclosure-only in nature.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | In
April 2008, the FASB issued FAS No.142-3, Determination of the
               Useful Life of Intangible Assets (FAS 142-3). FAS
142-3                amends the factors that should be considered in developing renewal
or extension                assumptions used to determine the useful life of a recognized
intangible asset                under FAS 142, Goodwill and Other Intangible
Asset (FAS                142). More specifically, FAS 142-3
removes the requirement  under
paragraph 11 of FAS 142 to consider whether an intangible asset can be renewed without
substantial cost or material modifications to the existing terms and conditions and
instead, requires an entity to consider its own historical experience in renewing similar
arrangements.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FAS 142-3
requires an entity to consider its own historical experience in renewing or extending
similar arrangements, regardless of whether those arrangements have explicit renewal or
extension provisions, when determining the useful life of an intangible asset. In the
absence of such experience, an entity shall consider the assumptions that market
participants would use about renewal or extension, adjusted for entity-specific factors.
FAS 142-3 also requires expanded disclosure related to the determination of intangible
asset useful lives. FAS 142-3 is effective for financial statements issued for fiscal
years beginning after December 15, 2008. The adoption of this pronouncement will not
have a material impact on the financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5) | In
April 2009, the FASB issued FAS No. 157-4, Determining Fair
               Value When the Volume and Level of Activity for the Asset or Liability
Have                Significantly Decreased and Identifying Transactions That Are Not
Orderly               (FAS 157-4). FAS 157-4 provides
additional guidance for                estimating fair value when the volume and level of
activity for the asset or                liability have significantly decreased. It also
includes guidance on identifying                circumstances that indicate a transaction
is not orderly. FAS 157-4 is                effective for interim and annual
reporting periods ending after June 15,                2009 on a prospective basis
and will be adopted by the Company in the third                quarter of fiscal 2009.
The Company does not expect that the adoption of                FAS 157-4 will have a
material effect on its consolidated results of                operations and financial
condition.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---



# RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | 6) | In
April 2009, the FASB issued FAS No. 115-2 and FAS 124-2,                Recognition
and Presentation of Other-Than-Temporary Impairments               (FAS 115-2
and FAS 124-2). FAS 115-2 and                FAS 124-2 amends the
other-than-temporary impairment guidance in                U.S. GAAP for debt
securities to make the guidance more operational and to                improve the
presentation and disclosure of other-than-temporary impairments on                debt
and equity securities in the financial statements. FAS 115-2 and                FAS 124-2
is effective for interim and annual reporting periods ending                after June 15,
2009 and will be adopted by the Company in the third quarter                of fiscal
2009. The Company does not expect that the adoption of FAS 115-2 and                FAS 124-2
will have a material effect on its consolidated results of                operations and
financial condition.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 7) | In
May 2009, the FASB issued FAS No. 165, Subsequent Events               (FAS
165). FAS 165 is intended to establish general standards of
               accounting for and disclosure of events that occur after the balance sheet
date                but before financial statements are issued or are available to be
issued. It                requires the disclosure of the date through which an entity has
evaluated                subsequent events and the basis for selecting that date, that
is, whether that                date represents the date the financial statements were
issued or were available                to be issued. FAS 165 is effective for interim or
annual financial periods                ending after June 15, 2009 and will be adopted by
the Company in the third                quarter of fiscal 2009. The Company does not
expect the adoption of FAS 165 will                have a material effect on its
consolidated results of operations and financial                condition.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | z. | Reclassification
| | -- | ----------------

| | Certain
comparative figures have been reclassified to conform to the current year presentation.
| | -----------------------------------------------------------------------------------------------

# 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 income (loss) as of the date of the acquisition of each company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | On
On August 15, 2008, the Company,
through its subsidiary StoreAlliance.com Ltd. acquired the Suppliers Portal
activity, an online inter business trading system, from Bezeq International Ltd for net
consideration of NIS 1,025,000 ($286,000). The identified intangible assets acquired
included customer relationships of NIS 891,000 ($247,000) to be amortized over an
estimated useful life of 20 years. Goodwill arising on the acquisition amounted to NIS
134,000 ($39,000)
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | In March 2008, the Company through
its subsidiary Retalix Holdings Inc. acquired an additional 5% of StoreNext USA and
increased its holdings to 100%. The consideration the Company paid for this acquisition
was $625,000 in cash. The identified intangible assets acquired included customer
relationships of approximately $106,000 to be amortized over an estimated useful life of
15 years and trademark of approximately $93,000 that is not being amortized. Goodwill
arising on the additional acquisition amounted to approximately $426,000.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---



# RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
2  ACQUISITIONS  (continued):

| | c. | On
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 were paid on the two year anniversary of
          the acquisition. In addition, up to an additional $1.4 million will be payable
          by the Company over a three years period from the acquisition 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 till December 31, 2008 amounted to
          approximately $1,032,000 following an earn-out payment of $89,000 during the
          year 2008. The goodwill is amortized for tax purposes over a period of 15
years.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | e. | 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. Goodwill arising on the acquisition amounted to
approximately $3,323,000.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | 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 is
amortized for tax purposes over a                period of 15 years.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Following
is the allocation of the purchase price of the 2008 acquisitions:
| | ---------------------------------------------------------------------------

| |            | Year ended December 31, 2008
| | ---------- | ----------------------------
|
|
|
|
| | Bezeq Int. |                             
| | BGI        |                             
| | SN USA     |                             
| |            |                             
| |            |                             
| |            |                             
| |            |                             

F - 22

---

---



# 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
| | ---------------------------------- | -----------
|
|
|
|
| | Computers and peripheral equipment |            
| | Land lease rights and buildings    |            
| | Vehicles                           |            
| | Office furniture and equipment     |            
| | Leasehold improvements             |            
| |                                    |            
| |                                    |            
| |                                    |            
| | Less - accumulated depreciation    |            
| |                                    |            
| |                                    |            
| |                                    |            
| |                                    |            

| | b. | As
to geographical locations, see note 14b.
| | -- | -------------------------------------------

| | c. | Depreciation
expenses totaled $2,941,000 $3,352,000 and $3,431,000, in the years                ended
December 31, 2008, 2007 and 2006, 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  
| | --------------------------------------- | ---- | ------ | --------------------- | -------
|
|
|
|
| | Balance as of January 1, 2007           |      |        |                       | 99,529 
| | Goodwill attributed to new subsidiaries |      |       
| | acquired during 2007 and                |      |       
| | additional investments in               |      |       
| | subsidiaries                            |      |        |                       | 4,916  
| | Differences from translation of non     |      |       
| | dollar currencies                       |      |        |                       | -      
| | Other adjustments*                      |      |        |                       | (3,883 
| |                                         |      |        |                       |        
| | Balance as of December 31, 2007         |      |        |                       | 100,562
| | Goodwill attributed to new business     |      |       
| | acquired during 2008 and                |      |       
| | additional investments in               |      |       
| | subsidiaries                            |      |        |                       | 515    
| | Differences from translation of non     |      |       
| | dollar currencies                       |      |        |                       |        
| | Other adjustments*                      |      |        |                       | (442   
| | Impairment of goodwill                  |      |        |                       | (58,182
| |                                         |      |        |                       |        
| | Balance as of December 31, 2008         |      |        |                       | 42,453 
| |                                         |      |        |                       |        
| |                                         |      |        |                       |        

| | *
Mainly from changes in deferred tax assets resulting from business combinations.
| | ----------------------------------------------------------------------------------

F - 23

---

---



# 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2008 the company performed it annual goodwill impairment test on the goodwill
acquired in its various reporting units. As a result of the decrease in the Companys
market capitalization in the latter part of 2008 and the global economic downturn that
negatively affected the computer software market, in December 2008 the Company determined
that the carrying value of the goodwill exceeded its fair value. The Company further
concluded in its goodwill impairment test that the goodwill acquired in the US reporting
unit had been impaired and therefore, in the fourth quarter of 2008, an impairment charge
of $58.2 million was recorded.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Intangible
assets:
| | -- | ------------------

| | 1) | The
following table presents the components of the Companys acquired
          intangible assets with definite lives:
| | -- | ----------------------------------------------------------------------------------------------------------------------

| |                       | Weighted average
amortization
period
Years | Original amount
December 31 | Amortized balance
December 31 |     
| | --------------------- | ------------------------------------------ | --------------------------- | ----------------------------- | ----
|
|
|
|
| | Customer relationship |                                            |                             |                               | 14.8
| | Acquired technology   |                                            |                             |                               | 4.4 
| | Distribution rights   |                                            |                             |                               | -   
| | Other identified      |                                            |                            
| | intangible assets     |                                            |                             |                               | 3.9 
| |                       |                                            |                             |                               |     
| | Total                 |                                            |                             |                               |     
| |                       |                                            |                             |                               |     
| |                       |                                            |                             |                               |     

| | 2) | Intangible
assets amortization expenses totaled $3,310,000, $3,595,000 and           $5,130,000 in
the years ended December 31, 2008, 2007 and 2006, respectively.           Future annual
amortization expenses are approximately $2,750,000, $1,756,000,           $1,354,000,
$1,318,000 and $1,318,000 in 2009, 2010, 2011, 2012 and 2013,           respectively.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---



# RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

# 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, 2008 | December 31
| | --------------------------- | ------------------------------------- | -----------
|
|
|
|
| | Bank loan -                 |                                       |            
| | In EURO                     |                                       |            
| | Other:                      |                                       |            
| | Loan from shareholders of a |                                       |            
| | subsidiary                  |                                       |            
| |                             |                                       |            
| |                             |                                       |            
| | Less - current maturities   |                                       |            
| |                             |                                       |            
| |                             |                                       |            
| |                             |                                       |            
| |                             |                                       |            

| | * | The
$ LIBOR rate as of December 31, 2008  1.425%.
| | - | --------------------------------------------------

| | b. | The
loans (net of current maturities) mature in the following years after the
          balance sheet date:
| | -- | -----------------------------------------------------------------------------------------------------------

| |                                    | December 31
| | ---------------------------------- | -----------
|
|
|
|
| | 2009                               |            
| | 2010                               |            
| | 2011                               |            
| | 2012 and thereafter (through 2013) |            
| |                                    |            
| |                                    |            
| |                                    |            
| |                                    |            

# NOTE 6  FAIR VALUE
OF FINANCIAL INSTRUMENTS:

| | As
described in Note 1, the provisions of FAS 157 were adopted by the Company on
January 1, 2008 for financial assets and liabilities.
| | --------------------------------------------------------------------------------------------------------------------------------------

| | The
following table sets forth the Companys financial assets and liabilities measured
at fair value by level within the fair value hierarchy. As required by FAS 157,
assets and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurement.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                        | Fair Value at December 31, 2008
| | ---------------------- | -------------------------------
|
|
|
|
| | Marketable securities* |                                
| | Derivatives**          |                                
| | ARS, see below         |                                
| |                        |                                

| | * | Marketable
securities consist mainly of debt securities classified as trading and are recorded at
fair value.
| | - | -------------------------------------------------------------------------------------------------------------

| | ** | Derivatives
represent foreign currency forward contracts and cylinders which are valued primarily
based on observable inputs including forward and spot prices for currencies.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

---

---



# RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 6  FAIR VALUE OF
FINANCIAL INSTRUMENTS  (continued):

| | The
Companys marketable debt securities at December 31, 2008 include investments
in ARS. Those securities, except for illiquid ARS, are classified within Level 1 of
the fair value hierarchy because they are valued using quoted market prices in an active
market.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table summarizes the activity for the ARS where fair value measurements are
estimated utilizing Level 3 inputs:
| | -----------------------------------------------------------------------------------------------------------------------------

|                                        | U.S. $
in thousands
|--------------------------------------- | -------------------
|
|
|
|
|Carrying value as of January 1, 2008    |                    
|Changes to fair value:                  |                    
|Included in earnings-financial expenses |                    
|                                        |                    
|Carrying value as of December 31, 2008  |                    
|                                        |                    

| | As of December 31, 2008 and 2007, the
Company held ARS which failed auctions, in an amount of $1 million at par value. Fair value
for this ARS, as explained in note 1d, was determined using a valuation model. Factors
considered in determining whether a loss is temporary include the length of time and
extent to which fair value has been less than the cost basis, the financial condition and
near-term prospects of the investee based on the credit rating, and our intent and ability
to hold the investment for a period of time sufficient to allow for any anticipated
recovery in market value. As of December 31 2007 $ 200,000 were reflected in other
comprehensive loss. As of December 31 2008, unrealized losses considered to be other than
temporary in the amount of $ 700,000 (including $200,000 in other comprehensive loss) are
reflected in financial expenses.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE
7  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 $ 2,195,000, $3,417,000 and $2,469,000 in the
               years ended December 31, 2008, 2007 and 2006, respectively. The 401(k)
plans                expenses as mentioned in b. above amounted to $725,000 $985,000 and
$1,029,000                in the years ended December 31, 2008, 2007 and 2006,
respectively.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

---

---



# RETALIX LTD. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 7  EMPLOYEE
RIGHTS UPON RETIREMENT  (continued):

| | d. | The
profits (loss) on the amounts funded totaled $ (312,000), $950,000 and
               $580,000 in the years ended December 31, 2008, 2007 and 2006,
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, 2009,           $3,148,000 to
the insurance companies and severance pay funds in respect of its           severance pay
obligation.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | The
Company expects to pay $490,000 future benefits to its employees during           2009 to
2018 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.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          | U.S. $
in thousands
|------------------------- | -------------------
|
|
|
|
|Year ending December 31:  |                    
|2009                      |                    
|2010                      |                    
|2011                      |                    
|2012                      |                    
|2013                      |                    
|Thereafter (through 2014) |                    
|                          |                    
|                          |                    
|                          |                    
|                          |                    

# NOTE
8  COMMITMENTS 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 2013. 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, 2008, as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------

|                         | U.S. $
in thousands
|------------------------ | -------------------
|
|
|
|
|Year ending December 31: |                    
|2009                     |                    
|2010                     |                    
|2011                     |                    
|2012                     |                    
|2013                     |                    
|                         |                    
|                         |                    
|                         |                    
|                         |                    

| | Office
and vehicles lease expenses totaled $7,748,000, $4,639,000 and $4,735,000 in the years
ended December 31, 2008, 2007 and 2006, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

F - 27

---

---



# RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
8  COMMITMENTS AND CONTINGENT LIABILITIES  (continued):

| | 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 the event that the           bonus is
less than $50,000 or the Company encored a loss for any particular           financial
year, the compensation committee shall be entitled to determine that           the CEO
shall receive a bonus of up to $50,000, without further authorization by           the
board of the shareholding.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. Options granted starting January 1, 2009 are subject to
shareholders approval. 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 shares are 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, 2008, maximum royalty the company might be required to pay in the future
on account of projects funded under the Office of the Chief Scientist is $5,787,000,
including interest.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 28

---

---



# RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
8  COMMITMENTS AND CONTINGENT LIABILITIES (continued):

| | 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 uncertain and the Company
does           not foresee any material effect on the financial statements.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 court recently set this matter for trial to begin on November
9, 2009. 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, 2008.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | 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 2007 the arbitrators
approved a preliminary hearing scheduling order, according to which the parties exchanged
discovery requests, written responses and documents. In November 2007 the customer filed a
statement of damages alleging total damages in excess of $22 million. In March 2009, the
arbitrators awarded Retalix USA $2.5 million in compensatory damages. In April 2009, the
customer paid the arbitration award amount in full and will be included in the
Companys statement of income. In April 2009, the Nebraska federal court affirmed the
arbitration award, entered judgment in favor of Retalix USA and against the customer, and
dismissed, with prejudice, the customers claim against Retalix USA and IDS.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---



# RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
8  COMMITMENTS AND CONTINGENT LIABILITIES (continued):

| | 3) | In
March 2007, a customer in the U.S., filed in the District Court of El Paso
          County, Texas, a complaint against Retalix USA, 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. In April 2009 this matter was           settled, the customer signed for a
long term maintenance agreement with no           impact on the financial statements.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | 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 $368,000. In January 2007, Tamars insurance company
          confirmed that Tamar is covered for any damages resulting from this claim. 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, 2008.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5) | In
January 2007 as part of the liquidation of Pantin Group Ltd           (Pantin),
the liquidator of Pantin submitted in the district court a           claim against the
Company, according to which the Company needed to provide           sales reports as of
December 2006 for certain customers of the Company. Retalix           submitted audited
sales reports as requested. Settlement has been reached and           approved on March
2009 in the amount of 25,000 Euro that have been accrued.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6) | The
Company and its subsidiaries are also parties to several other claims filed
          against them totaling approximately $172,000. 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 $514,000, have
          not materialized to court claims and some of them are in mediation. 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 these claims as of December 31,
          2008.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE
9  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
9  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 or the US 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 Second 1998
plan 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 an
increase of the pool of authorized and unissued Ordinary Shares for the purpose of grant
of awards under the Second 1998 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, 2008 and 2007, 2,370,213 and 1,990,597 options, respectively remained
available for grant under the Second 1998 Plan.
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | Through
December 31, 2008 and 2007, 3,614,603 and 3,300,470 options, respectively, have been
exercised under the Second 1998 Plan at exercise prices ranging between $8.75 and $14.875
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 Plan so as to enable to grant of Restricted Stock Units pursuant to such
Israeli Plan.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008 and 2007, 1,065,293 and 353,884 options, respectively remained
available for grant under the Israeli Plan.
| | ----------------------------------------------------------------------------------------------------------------------------------

| | Through
December 31, 2008 and 2007, 149,967 and 75,711 options, respectively have been exercised
under the Israeli Plan.
| | ------------------------------------------------------------------------------------------------------------------------

| | During
2007 and 2008 the Companys Board of Directors approved to grant up to an aggregate
of 329,750 Restricted Stock Units (RSUs), 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,
2008, 199,578 RSUs are nonvested and 55,916 are forfeited.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---



# RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
9  SHAREHOLDERS EQUITY  (continued):

| | The
options and the RSUs 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. 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. Total expenses in the years ended
December 31, 2008, 2007 and 2006 in respect of these options, before the tax effect, were
$538,000, $832,000 and $923,000, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Following
is a summary of the status of the option plans:
| | ---------------------------------------------------------

| |                                          | 2008 | 2007 | 2006
| | ---------------------------------------- | ---- | ---- | ----
|
|
|
|
| | Options and RSUs outstanding at          |      |      |     
| | beginning of year                        |      |      |     
| | Changes during the year:                 |      |     
| | Granted                                  |      |      |     
| | Exercised*                               |      |      |     
| | Forfeited or expired                     |      |      |     
| |                                          |      |      |     
| | Options and RSUs outstanding at end of   |      |     
| | year**                                   |      |      |     
| |                                          |      |      |     
| | Options and RSUs exercisable at year-end |      |      |     
| |                                          |      |      |     
| | Weighted average grant date fair value   |      |     
| | of options and RSUs granted during       |      |     
| | the year                                 |      |      |     
| |                                          |      |      |     

| | * | The
total intrinsic value of options exercised during the years ended December 31 2008, 2007
and 2006 is $1,124,083, $1,163,741 and $1,492,000, respectively.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ** | As
of December 31, 2008, there was $2,430,687 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 1.37 years.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---



# RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
9  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
|---------------------------------- | ----------------------
|
|
|
|
|Dividend yield                     | 0%                    
|Expected volatility                | 65%-69%               
|Risk free interest rate            | 1%-3%                 
|Expected holding period (in years) | 3-4                   

| | The
following table summarizes information about options and RSUs under the Company's plans
outstanding at December                       31, 2008:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | Exercise
price
U.S.$ | Number of
options and
RSUs
outstanding
at
December 31,
2008 | Aggregate
intrinsic
value * in
U.S. $
In thousands | Number of
options and
RSUs
exercisable at
December 31,
2008 | Aggregate
intrinsic
value * in
U.S. $
In thousands | Weighted
average
remaining
contractual
life (in
years) of
options and
RSUs
outstanding | Weighted
average
remaining
ontractual
life (in
years) of
ecxercisable
options
and RSUs
| | -------------------- | ----------------------------------------------------------- | -------------------------------------------------- | ----------------------------------------------------------- | -------------------------------------------------- | -------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------
|
|
|
|
| | RSUs 0.25            |                                                             |                                                    |                                                             | 199,578                                            |                                                                                        |                                                                                       
| | 15.55                |                                                             |                                                    |                                                             | 402,500                                            |                                                                                        |                                                                                       
| | 15.58                |                                                             |                                                    |                                                             | 200,014                                            |                                                                                        |                                                                                       
| | 16.29                |                                                             |                                                    |                                                             | 196,135                                            |                                                                                        |                                                                                       
| | 18.54                |                                                             |                                                    |                                                             | 100,000                                            |                                                                                        |                                                                                       
| | 18.55                |                                                             |                                                    |                                                             | 355,000                                            |                                                                                        |                                                                                       
| | 23.02                |                                                             |                                                    |                                                             | 127,607                                            |                                                                                        |                                                                                       
| | 24.46                |                                                             |                                                    |                                                             | 194,090                                            |                                                                                        |                                                                                       
| | 26.00                |                                                             |                                                    |                                                             | 25,000                                             |                                                                                        |                                                                                       
| |                      |                                                             |                                                    |                                                             |                                                    |                                                                                        |                                                                                       
| |                      |                                                             |                                                    |                                                             | 1,799,924                                          |                                                                                        |                                                                                       
| |                      |                                                             |                                                    |                                                             |                                                    |                                                                                        |                                                                                       
| |                      |                                                             |                                                    |                                                             |                                                    |                                                                                        |                                                                                       

| | * | Based
on the Companys share last known closing price at the Nasdaq Global Select Market
as at December 31, 2008, of $6 per share.
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| | ** | The
weighted average in respect of all the options and RSUs.
| | -- | ------------------------------------------------------------

F - 33

---

---



# RETALIX LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
9  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 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, additional
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 options to purchase 270,000 shares partly at an
exercise price per share of NIS 0.01, and to two employees at an exercise price of $5.55.
During November 2008 65,000 options were exercised to shares. As of December 31, 2008,
all the unexercised options were forfeited.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
9  SHAREHOLDERS EQUITY (continued):

| | b) | On
December 1, 2004, the board of directors of another subsidiary (the           Additional
Subsidiary) approved an employee stock option plan           (the Additional
Subsidiary Plan). Pursuant to the Additional           Subsidiary Plan, 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, 2008, 31,000 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
IPO           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, 2008,           47,000 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, whichever 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
9  SHAREHOLDERS EQUITY (continued):

| | 2) | Out of the Companys retained
earnings as of December 31, 2008 and 2007, approximately $40,079,000 and $17,365,000 are
tax-exempt respectively, due to Approved Enterprise status granted to some of
the Companys facilities  see note 10b. If such tax-exempt income is
distributed by cash dividend (including a liquidation dividend), it would be taxed at the
reduced corporate tax rate applicable to such profits (25%) and an income tax liability of
up to approximately $10,020,000 and $4,340,000 would be incurred as of December 31, 2008
and 2007, respectively. The Companys board of directors has determined that it will
not distribute any amounts of its undistributed tax exempt income as dividends. 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 10b and 10g(5).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE
10  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 b. below) is taxed at the regular rate.
          According to the provisions of the Law for Amending the Israel Income Tax
          Ordinance, 2005 (hereinafter  Amendment 147) of August 2005, corporate
tax           rates will be gradually lowered, resulting in the corporate following tax
rates           for 2006 and thereafter are as follows: 2006  31%, 2007  29%,
2008            27%, 2009  26% and for 2010 and thereafter  25%.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
enacted statutory tax rates applicable to our primary subsidiaries outside Israel are as
follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Company
incorporated in the U.S.  tax rate of 37%-40%.
| | -------------------------------------------------------

| | Company
incorporated in Italy  tax rate of 33%.
| | ------------------------------------------------

| | Companies
incorporated in Australia, France, Japan and U.K.  tax rate of 30%-40%.
| | ----------------------------------------------------------------------------------

| | 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 Amendment No. 60 thereof, which became effective 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

---

---



# RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 10  TAXES ON
INCOME (continued):

| | The
main tax benefits available to the Company are:
| | ---------------------------------------------------

| | 1) | Reduced
tax rates:
| | -- | ------------------

| | In
respect of income derived from the approved enterprises, the Company is entitled to
benefits under the laws reduced tax rates during a period of seven 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 nine approved enterprises.
| | ------------------------------------------

| | Income
derived from the approved enterprises is tax exempt during the first two years of the
seven-year tax benefit period as above, and is subject to a reduced tax rate of 25%
during the remaining five years of benefits.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the periods of benefits relating to six of the approved enterprises
of the Company have already expired. The periods of benefits relating to other three
approved enterprise programs will expire in 2009, 2011 and 2014.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the event of a cash dividend 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 10g(5) below and note 9c(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).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Measurement
of results for tax purposes under the Income Tax (Inflationary
               Adjustments) Law, 1985 (the InflationaryAdjustments Law)
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant to the Israel Income Tax Law
(Adjustments for Inflation), 1985 (hereinafter  the Adjustments Law), the results
for tax purposes have been measured through 2007 on a real basis, based on changes in the
Israel CPI. The Israeli companies in the Group are taxed under this law. Under the Israel
Income Tax Law (Adjustments for Inflation) (Amendment No. 20), 2008 (hereinafter 
the amendment), the provisions of the Adjustments Law will no longer apply to the Company
in the 2008 tax year and thereafter, and therefore, the results of the Company and its
Israeli subsidiaries will be measured for tax purposes in nominal terms. The amendment
includes a number of transition provisions regarding the end of application of the
Adjustments Law, which applied to the Company through the end of the 2007 tax year.
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 FAS 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 37

---

---



# RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 10  TAXES ON
INCOME (continued):

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

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

| | Carryforward
tax losses of the Company as of December 31, 2008 and 2007 aggregate approximately
$18,059,000 and $5,274,000, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------

| | Carryforward
tax losses of certain subsidiaries as of December 31, 2008 and 2007 aggregate
approximately $53,730,000 and $53,150,000, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008 and 2007, the Companys U.S. subsidiaries (which are taxed on a
consolidated basis) have U.S. federal net operating loss carryforwards of approximately
$43,600,000 and $43,400,000, respectively, which include approximately $5,600,000
relating to excess stock option deductions. 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. Federal and State
net operating loss carryforwards of the U.S. subsidiaries expire at various dates from
2014 through 2028. 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Uncertain
tax positions:
| | -- | ------------------------

| | Effective
January 1, 2007, the Company adopted FIN 48. 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, 2008 | Year ended
December 31, 2007
|--------------------------------------------------- | ---------------------------- | ----------------------------
|
|
|
|
|Balance at Beginning of Year                        |                              |                             
|Increase (decrease) in tax positions for prior year |                              |                             
|Increase in tax positions for current year          |                              |                             
|                                                    |                              |                             
|Balance at End of Year                              |                              |                             
|                                                    |                              |                             
|                                                    |                              |                             

F - 38

---

---



# RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 10  TAXES ON
INCOME (continued):

| | The
total amount of net unrecognized tax benefits that, if recognized, would affect the
effective tax rate was $ 2,672,000 and $3,000,000 at December 31, 2008 and 2007,
respectively. The liability in respect of unrecognized tax benefits included accrued
potential interest of $ 792,000 and $ 371,000, respectively. We expect unrecognized tax
expenses to change over the next 12 months due to closure of the Companys tax
assessment for the years 2003-2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
years 2008 and 2007, the Company recognized interest expense related to unrecognized tax
benefits in the amounts of $421,000 and $149,000, respectively. As of December 31, 2008,
the amounts of interest and penalties accrued on the balance sheet are $792,000.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, consistent with the provisions of FIN 48, the Company reclassified a liability
for unrecognized tax benefits in amount of $1,112,000 from current to non-current
liabilities because payment of cash is not anticipated within one year subsequent to the
balance sheet date. This non-current liability is included in the consolidated balance
sheet among long-term liabilities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
| | -- | ------------------------------------- | -----------
|
|
|
|
| | 1) | Provided in respect of the following: |            
| |    | Provisions for employee rights        |            
| |    | Deferred revenues                     |            
| |    | Carryforward tax losses               |            
| |    | Doubtful accounts                     |            
| |    | Research and development              |            
| |    | Employee stock options and RSUs       |            
| |    | Non employee stock options            |            
| |    | Depreciable fixed assets              |            
| |    | Goodwill and other intangible assets  |            
| |    | Other                                 |            
| |    |                                       |            
| |    |                                       |            
| |    | Goodwill and other intangible assets  |            
| |    |                                       |            
| |    |                                       |            
| |    | L e s s - valuation allowance         |            
| |    |                                       |            
| |    |                                       |            
| |    |                                       |            
| |    |                                       |            

F - 39

---

---



# RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 10  TAXES ON
INCOME (continued):

| | 2) | The
deferred taxes are presented in the balance sheets as follows:
| | -- | ------------------------------------------------------------------

| |                            | December 31
| | -------------------------- | -----------
|
|
|
|
| | As a current asset         |            
| | As a non-current asset     |            
| |                            |            
| |                            |            
| |                            |            
| | As a non-current liability |            
| |                            |            
| |                            |            
| |                            |            
| |                            |            

| | 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 (see note 9c(2)).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | Income
(loss) before taxes on income and income taxes (tax benefit) included           in the
income statements:
| | -- | ----------------------------------------------------------------------------------------------------------------

| |    |                                                   | Year ended December 31
| | -- | ------------------------------------------------- | ----------------------
|
|
|
|
| | 1) | Income (loss) before taxes on income:             |                       
| |    |                                                   |                       
| |    | Israeli                                           |                       
| |    | Non-Israeli                                       |                       
| |    |                                                   |                       
| |    |                                                   |                       
| |    |                                                   |                       
| | 2) | Income taxes (tax benefit) included in the income |                       
| |    | statements:                                       |                       
| |    | Current:                                          |                       
| |    | Israeli                                           |                       
| |    | Non-Israeli                                       |                       
| |    |                                                   |                       
| |    |                                                   |                       
| |    |                                                   |                       
| |    | Deferred:                                         |                       
| |    | Israeli                                           |                       
| |    | Non-Israeli                                       |                       
| |    |                                                   |                       
| |    |                                                   |                       
| |    |                                                   |                       
| |    |                                                   |                       
| |    |                                                   |                       
| |    |                                                   |                       

F - 40

---

---



# RETALIX LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 10  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           (2008-27%,
2007-29% and 2006-31%) and the actual tax expense:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                          | Year ended December 31
| | -------------------------------------------------------- | ----------------------
|
|
|
|
| | Income before taxes on income, as reported in the income |                       
| | statements                                               |                       
| |                                                          |                       
| | Theoretical tax expense (tax benefit)                    |                       
| |                                                          |                       
| | L e s s - tax benefits arising from approved enterprise  |                       
| | status                                                   |                       
| |                                                          |                       
| |                                                          |                       
| | Increase (decrease) in taxes resulting from permanent    |                       
| | differences:                                             |                       
| | Disallowable deductions                                  |                       
| | Disallowable goodwill Impairment                         |                       
| | Increase (decrease) in taxes resulting from different    |                       
| | tax rates applicable to non - Israeli subsidiaries       |                       
| | Changes in valuation allowance                           |                       
| | 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                                  |                       
| | Prior years tax expenses*                                |                       
| | Increase in taxes on income resulting from the           |                       
| | computation of deferred taxes at a rate which is         |                       
| | different from the theoretical rate                      |                       
| | Other                                                    |                       
| |                                                          |                       
| | Taxes on income (tax benefit) for the reported years     |                       
| |                                                          |                       
| |                                                          |                       

| | * | During
2008 the Company recorded a tax benefit of approx $5.8 million due to a recent retrospective
applied change in the Israeli Law for the Encouragement of Capital Investments,
under which the Company was entitled to additional tax benefits in the years 2005 and 2006
(prior to the change the financial statement changes include tax expenses were calculated
based on the prior enacted law as required under FAS 109).
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | i. | Tax
assessments
| | -- | ---------------

| | The
Company has received final tax assessments through the year ended December 31, 2004.
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, Palm Point Ltd. and PRS received final assessments through the year ended
December 31, 2004. 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 - 41

---

---



# RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

# NOTE
11  MONETARY BALANCES IN NON-DOLLAR CURRENCIES:

| |             | December 31, 2008
| | ----------- | -----------------
|
|
|
|
| | Assets      |                  
| |             |                  
| | Liabilities |                  
| |             |                  
| |             |                  

# NOTE 12  SUPPLEMENTARY
BALANCE SHEET INFORMATION:

| |    |                      |                                        | December 31
| | -- | -------------------- | -------------------------------------- | -----------
|
|
|
|
| | a. | Accounts receivable: |                                        |            
| |    |                      |                                        |            
| |    | 1)                   | Trade:                                 |            
| |    |                      |                                        |            
| |    |                      | Open accounts                          |            
| |    |                      | Less - allowance for doubtful accounts |            
| |    |                      |                                        |            
| |    |                      |                                        |            
| |    |                      |                                        |            
| |    |                      |                                        |            
| |    | 2)                   | Other:                                 |            
| |    |                      |                                        |            
| |    |                      | Government departments and agencies    |            
| |    |                      | Employees                              |            
| |    |                      | Other                                  |            
| |    |                      |                                        |            
| |    |                      |                                        |            
| |    |                      |                                        |            
| |    |                      |                                        |            

| | b. | Marketable
securities and Long term investments:
| | -- | ------------------------------------------------

| | 1) | Held
to maturity 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
| | --------------- | -------------- | ---------------- | ----------------- | --------------------
|
|
|
|
| | At December 31: |                |                  |                   |                     
| | 2008            |                |                  |                   | 1,052               
| |                 |                |                  |                   |                     
| | 2007            |                |                  |                   | 1,227               
| |                 |                |                  |                   |                     
| |                 |                |                  |                   |                     

| | The
bonds mature as follows:
| | ----------------------------

| |      | U.S. $ in
thousands
| | ---- | -------------------
|
|
|
|
| | 2009 |                    
| | 2010 |                    
| | 2011 |                    
| | 2020 |                    
| |      |                    
| |      |                    
| |      |                    
| |      |                    

F - 42

---

---



# RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
12  SUPPLEMENTARY BALANCE SHEET INFORMATION  (continued):

| | 2) | ARS
 See note 1d
| | -- | -----------------

| | 3) | The
marketable securities are presented in the balance sheets as follows:
| | -- | -------------------------------------------------------------------------

| |                                            | December 31
| | ------------------------------------------ | -----------
|
|
|
|
| | Among current assets:                      |            
| | Trading                                    |            
| | Held to maturity corporate bond securities |            
| |                                            |            
| |                                            |            
| | As a non-current asset:                    |            
| | Available for sale security                |            
| | Held to maturity corporate bond securities |            
| |                                            |            
| |                                            |            
| |                                            |            
| |                                            |            

| | c. | Long-term
receivables:
| | -- | ----------------------

| | 1) | Long-term
receivables are composed as follows:
| | -- | ----------------------------------------------

| |                                | December 31
| | ------------------------------ | -----------
|
|
|
|
| | Long-term loans to employees * |            
| | Long-term trade receivables    |            
| | Less - Unamortized discount**  |            
| |                                |            
| |                                |            
| |                                |            
| |                                |            

| | * | 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%.
| | -- | ------------------------------------------------

F - 43

---

---



# RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

# NOTE
13  DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS:

| | a. | 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 surrender value which is close to its 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 b. below. As to the fair value of marketable debt
securities, see note 12b.
| | --------------------------------------------------------------------------------------------------------------------

| | b. | 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 FAS 133.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2008, the Company entered into several foreign currencies forward and cylinder contracts
for conversion of Pounds Sterling, Euro and Israeli currency into a notional amount in
dollars. Most of these contracts were rolled over a few times since their original
closure in recent years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the Company had nineteen open contracts of this nature for the
conversion of such foreign currencies into a total of approximately $9.9 million, the
fair value of which as of December 31, 2008 is $103,000, 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, 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 was
$(147,000).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE
14  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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 44

---

---



# RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 14  SEGMENT
INFORMATION  (continued):

| | Geographic
segments:
| | --------------------

| | Summarized
financial information by geographic segment, for 2008, 2007 and 2006 is as follows:
| | ----------------------------------------------------------------------------------------------

| |                                     | Year ended December 31
| | ----------------------------------- | ----------------------
|
|
|
|
| | Revenues:                           |                       
| | U.S                                 |                       
| | Israel                              |                       
| | International*                      |                       
| |                                     |                       
| | Total revenues                      |                       
| |                                     |                       
| |                                     |                       
| | *The international segment includes |                       
| | revenues from customers in Europe   |                       
| |                                     |                       
| |                                     |                       

| | 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
| | ------------- | ----------------------------------
|
|
|
|
| | Israel        |                                   
| | U.S.          |                                   
| | International |                                   
| |               |                                   
| |               |                                   
| |               |                                   
| |               |                                   

| | As
for location of goodwill, see note 4a.
| | -----------------------------------------

| | c. | Revenues
from customer exceeding 10% of total revenues:
| | -- | -------------------------------------------------------

| | In
the years ended December 31, 2008, 2007 and 2006, no customer generated revenues in
excess of 10% of the Groups total revenues.
| | -----------------------------------------------------------------------------------------------------------------------------------

F - 45

---

---



# RETALIX LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

# NOTE
15  SELECTED INCOME STATEMENT DATA:

| | a. | General
and administrative expenses  allowance for doubtful accounts:
| | -- | ----------------------------------------------------------------------

| |                                                | Year ended December 31
| | ---------------------------------------------- | ----------------------
|
|
|
|
| | The changes in allowance for doubtful accounts |                       
| | are composed as follows:                       |                       
| | Balance at beginning of year                   |                       
| | Increase during the year                       |                       
| | Bad debt written off                           |                       
| | Adjustments resulting from the adoption of     |                       
| | SAB 108                                        |                       
| |                                                |                       
| | Balance at end of year                         |                       
| |                                                |                       

| |    |                              | Year ended December 31
| | -- | ---------------------------- | ----------------------
|
|
|
|
| | b. | Financial income (expenses): |                       

| | Gains (losses) on marketable securities - net |  |  |  | (141   | ) |  | 95     |   |  | 111    |  
| | --------------------------------------------- |  |  |  | ------ | - |  | ------ | - |  | ------ | -
| | Non-dollar currency gains (losses) - net      |  |  |  | (1,883 | ) |  | 1,227  |   |  | (209   | )
| | Impairment of auction rate security           |  |  |  | (700   | ) |  | -      |   |  | -      |  
| | Interest income                               |  |  |  | 879    |   |  | 1,950  |   |  | 2,163  |  
| | Interest and bank commissions expense         |  |  |  | (133   | ) |  | (2,240 | ) |  | (1,986 | )
| |                                               |  |  |  |        |   | 
| |                                               |  |  |  | (1,978 | ) |  | 1,032  |   |  | 79     |  
| |                                               |  |  |  |        |   | 

| | c. | Other
(income) expenses -net:
| | -- | -----------------------------

| | Loss (gain) on sale of property and equipment |  |  |  | (46  | ) |  | (57 | ) |  | 22 | 
| | --------------------------------------------- |  |  |  | ---- | - |  | --- | - |  | -- | 
| | Gains on sale of product line                 |  |  |  | (210 | ) |  | -   |   |  | -  | 
| | Debt remittal                                 |  |  |  | (43  | ) |  | -   |   |  | -  | 
| | Due Diligence Costs                           |  |  |  | -    |   |  | 700 |   |  | -  | 
| | Other non-recurring income                    |  |  |  | (77  | ) |  |     |   |  | -  | 
| |                                               |  |  |  |      |   | 
| |                                               |  |  |  | (376 | ) |  | 643 |   |  | 22 | 
| |                                               |  |  |  |      |   | 
| |                                               |  |  | 

F - 46

---

---



# RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 15  SELECTED
INCOME STATEMENT DATA (continued):

| | 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
| | ------------------------------------------------------------------------------------ | ----------------------
|
|
|
|
| | Weighted average number of shares issued and                                         |                       
| | outstanding- used in computation of basic                                            |                       
| | earnings per share                                                                   |                       
| |                                                                                      |                       
| | Add incremental shares from assumed exercise                                         |                       
| | of options                                                                           |                       
| |                                                                                      |                       
| | Weighted average number of shares used in  computation of diluted earnings per share |                       
| |                                                                                      |                       
| |                                                                                      |                       

For the years ended December 31,
2008, 2007 and 2006 options and RSUs in the total amount of 1,799,924, 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.

F - 47

---

---