---

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**SECURITIES
  AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549**

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**FORM 20-F/AAMENDMENT NO. 1**

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

**OR**

**xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
  OF 1934**For the fiscal year ended December 31, 2002

**OR**

**oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
  ACT OF 1934**For the transition period from ...... to ......

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, RAANANA 43000, ISRAEL**
  (Address of principal executive offices)

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Securities
  registered or to be registered pursuant to section 12(b) of the act:

**Not
  Applicable**

Securities
  registered or to be registered pursuant to section 12(g) of the act:

**Ordinary
  Shares, nominal value NIS 1.0 par value per share**

Securities
  for which there is a reporting obligation pursuant to section 15(d) of the act:

**Not
  Applicable**

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:

**11,993,404
  Ordinary Shares, nominal value NIS 1.0 par value per share**

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 checkmark which financial statements the registrant has elected to follow:

**ITEM
  17****o****ITEM
  18****x**

i

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**EXPLANATORY
  NOTE**

We are filing this Amendment
  No. 1 to our Annual Report on Form 20-F/A in response to comments received by
  us from the Staff of the Securities and Exchange Commission in connection with
  their review of our Registration Statement on Form F-3 (No. 333-110681) filed
  on November 21, 2003. Certain amounts in our financial statements have been
  restated and certain amounts have been reclassified (see Notes 1a and 1u
  to the financial statements for a discussion of the changes). Only certain portions
  of this Form 20-F/A have been amended, and this amended report does not reflect
  events occurring after the filing of the original Form 20-F on June 26, 2003.
  The filing of this Form 20-F/A shall not be deemed an admission that the original
  Form 20-F, when filed, included any untrue statement of a material fact or omitted
  to state a material fact necessary to make a statement not misleading.

ii

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|TABLE OF CONTENTS                                                 |      
|----------------------------------------------------------------- | -----
|
|
|PART
      I                                                      |      
|                                                                  |      
|Item
      1. IDENTITY OF DIRECTORS, SENIOR OFFICERS AND ADVISERS | 1    
|                                                                  |      
|Item
      2. OFFER STATISTICS AND EXPECTED TIMETABLE             | 1    
|                                                                  |      
|Item
      3. KEY INFORMATION                                     | 1-11 
|                                                                  |      
|A.
      Selected Financial Data                                  | 1-2  
|                                                                  |      
|B.
      Capitalization and Indebtedness                          | 2    
|                                                                  |      
|C.
      Reasons for the Offer and Use of Proceeds                | 2    
|                                                                  |      
|D.
      Risk Factors                                             | 3-11 
|                                                                  |      
|Item
      4. INFORMATION ON THE COMPANY                          | 11-26
|                                                                  |      
|A.
      History and Development of the Company                   | 11-14
|                                                                  |      
|B.
      Business Overview                                        | 14-25
|                                                                  |      
|C.
      Organizational Structure                                 | 25   
|                                                                  |      
|D.
      Property, Plants and Equipment                           | 25-26
|                                                                  |      
|Item
      5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS        | 26-40
|                                                                  |      
|A.
      Operating Results                                        | 30-34
|                                                                  |      
|B.
      Liquidity and Capital Resources                          | 34-39
|                                                                  |      
|C.
      Research and Development, Patents and Licenses           | 39-40
|                                                                  |      
|D.
      Trend Information                                        | 40   
|                                                                  |      
|                                                                  |      
|Item
      6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES          | 41-49
|                                                                  |      
|A.
      Directors and Senior Management                          | 41-43
|                                                                  |      
|B.
      Compensation                                             | 43-44
|                                                                  |      
|C.
      Board Practices                                          | 44-46
|                                                                  |      
|D.
      Employees                                                | 46-47
|                                                                  |      
|E.
      Share Ownership                                          | 47-49
|                                                                  |      
|Item
      7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.  | 49-50
|                                                                  |      
|A.
      Major Shareholders                                       | 49-50
|                                                                  |      
|B.
      Related Party Transactions                               | 50   

iii

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|C.
      Interests of Expert and Counsel                                                                                               | 50   
|-------------------------------------------------------------------------------------------------------------------------------------- | -----
|                                                                                                                                       |      
|Item
      8. FINANCIAL INFORMATION                                                                                                    | 50-51
|                                                                                                                                       |      
|A.
      Consolidated Statements and Other Financial Information                                                                       | 50-51
|                                                                                                                                       |      
|B.
      Significant Changes                                                                                                           | 51   
|                                                                                                                                       |      
|Item
      9. THE OFFER AND LISTING                                                                                                    | 51-52
|                                                                                                                                       |      
|A.
      Offer and Listing Details                                                                                                     | 51-52
|                                                                                                                                       |      
|B.
      Plan of Distribution                                                                                                          | 52   
|                                                                                                                                       |      
|C.
      Markets                                                                                                                       | 52   
|                                                                                                                                       |      
|D.
      Selling Shareholders                                                                                                          | 52   
|                                                                                                                                       |      
|E.
      Dilution                                                                                                                      | 52   
|                                                                                                                                       |      
|F.
      Expenses of the Issue                                                                                                         | 52   
|                                                                                                                                       |      
|Item
      10. ADDITIONAL INFORMATION                                                                                                  | 53-68
|                                                                                                                                       |      
|A.
      Share Capital                                                                                                                 | 53   
|                                                                                                                                       |      
|B.
      Memorandum and Articles of Association                                                                                        | 53-58
|                                                                                                                                       |      
|C.
      Material Contracts.                                                                                                           | 58   
|                                                                                                                                       |      
|D.
      Exchange Controls                                                                                                             | 58   
|                                                                                                                                       |      
|E.
      Taxation                                                                                                                      | 58-67
|                                                                                                                                       |      
|F.
      Dividends and Paying Agents                                                                                                   | 67   
|                                                                                                                                       |      
|G.
      Statement by Experts                                                                                                          | 67   
|                                                                                                                                       |      
|H.
      Documents on Display                                                                                                          | 67-68
|                                                                                                                                       |      
|I.
      Subsidiary Information                                                                                                        | 68   
|                                                                                                                                       |      
|                                                                                                                                       |      
|Item
      11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
                                                            MARKET  RISK | 69-70
|                                                                                                                                       |      
|Item
      12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                                                                  | 70   

iv

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|PART
      II                                                   |   
|--------------------------------------------------------------- | --
|                                                                |   
|Item
      13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES  | 70
|                                                               
|Item
      14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
|HOLDERS
      AND USE OF PROCEEDS                               | 71
|                                                                |   
|Item
      15. CONTROLS AND PROCEDURES                          | 71
|                                                                |   
|Item
      16. Reserved                                         | 71
|                                                                |   
|Item
      17.                FINANCIAL
      STATEMENTS        | 71
|                                                                |   
|Item
      18.                FINANCIAL
      STATEMENTS        | 71
|                                                                |   
|Item
      19.                EXHIBITS                          | 72

v

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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.

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 25, 2003, the exchange rate between the
  NIS and the dollar, as quoted by the Bank of Israel, was NIS 4.358 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 United States Federal Securities Laws. 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 3D 
  Risk Factors in this annual report as well as those discussed elsewhere
  in this annual report and in our other filings with the Securities and Exchange
  Commission.

**ITEM
  1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS**

Not applicable.

**ITEM
  2 - OFFER STATISTICS AND EXPECTED TIMETABLE**

Not applicable.

**ITEM
  3 - KEY INFORMATION**

**A. Selected Financial
  Data**
  The selected consolidated statement of income data set forth below with respect
  to the years ended December 31, 1998, 1999, 2000, 2001 and 2002 and the consolidated
  balance sheet data as of December 31, 1998, 1999, 2000, 2001 and 2002 have been
  derived from our audited consolidated financial statements. The selected consolidated
  statement of income data set forth below with respect to the fiscal years ended
  December 31, 1998 and 1999, and the selected consolidated balance sheet data
  as of December 31, 1998 and 1999 have been derived from our audited consolidated
  financial statements that were jointly audited by Kesselman & Kesselman,
  a member of PricewaterhouseCoopers International Limited, a company limited
  by guarantee in England and Wales, and Rosenblum-Holtzman, independent certified
  public accountants in Israel. In addition, the selected consolidated statement
  of income data set forth below with respect to the years ended December 31,
  2000, 2001, and 2002 and the selected consolidated balance sheet data as of
  December 31, 2000, 2001, and 2002 have been derived from our audited consolidated
  financial statements that were audited by Kesselman & Kesselman. The selected
  consolidated financial data set forth below should be read in conjunction with
  Operating and Financial Review and Prospects and the consolidated
  financial statements and notes to those statements for the years 2000, 2001
  and 2002 included elsewhere in this form 20-F/A. Historical results are not
  necessarily indicative of the results to be expected in the future and results
  of interim periods are not necessarily indicative of results for the entire
  year.

1

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|                                                | Year
      ended December 31,
|----------------------------------------------- | -----------------------------
|
|
|
|(in
      thousands, except per share data)    
|**Consolidated
      statement of income data** |                              
|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
      income (expenses):              |                              
|Research
      and development expenses,        |                              
|net                                             |                              
|Sales
      and marketing expenses, net         |                              
|General
      and administrative expenses       |                              
|Other
      general income (expenses)           |                              
|                                                |                              
|Total
      operating expenses                  |                              
|                                                |                              
|Income (loss)
      from operations             |                              
|                                                |                              
|Financial
      income (expenses), net          |                              
|Gain arising
      from issuance of shares by a
|subsidiary                                      |                              
|Other expenses                                  |                              
|                                                |                              
|Income (loss)
      before income taxes         |                              
|Taxes on
      income                           |                              
|Share in
      losses of an associated         
|company                                         |                              
|                                                |                              
|Income (loss)
      before minority interests   |                              
|Minority
      interest in losses of           
|subsidiaries                                    |                              
|                                                |                              
|Net income
      (loss)                         | $                            
|                                                |                              
|                                                |                              
|Earnings
      (loss) per share -               |                              
|Basic                                           | $                            
|                                                |                              
|Diluted                                         | $                            
|                                                |                              
|                                                |                              
|Weighted
      average number of shares         |                              
|used
      in computation(1):                   |                              
|Basic                                           |                              
|Diluted                                         |                              

|                                          | December
      31,
|----------------------------------------- | ------------------
|
|
|
|(in
      thousands)                     
|**Consolidated
      balance sheet data** |                   
|Cash and
      cash equivalents           |                   
|Working capital                           |                   
|Total assets                              |                   
|Shareholders
      equity                |                   
|                                          |                   

|(1) | See Note
      15d of the notes to our consolidated financial statements for the fiscal
      year ended December 31, 2002, attached to this annual report, and which
      are incorporated by reference herein, for a discussion of the shares used
      to compute net income per share for the years ended December 31, 2000, 2001
      and 2002.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

* Restated

# **B.
  Capitalization and Indebtedness**

Not applicable.

2

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# **C.
    Reasons for Offer and Use of Proceeds**

Not applicable.

# **D.
      Risk Factors**

You
        should carefully consider the risks described below and in the documents
        we have incorporated by reference into this annual report. 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.

# **Risks
        Related To Our Business**

The general deterioration
          of the economy worldwide could have a material adverse effect on our
          results of operations.

The general deterioration
          of the economy worldwide resulted in a curtailment of capital investment
          by our existing and potential customers. The attacks on the United States
          on September 11, 2001 caused a further decline in the global economy.
          As a result, many companies, including our current and potential customers,
          have indicated that they plan to postpone or decrease further capital
          investment. A continued decline in capital expenditures by our existing
          and potential customers would reduce our sales and could result in pressure
          on our product prices, each of which would have a material adverse effect
          on our operating results.

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

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

| | the size, timing, terms and fluctuations of customer orders and rollout
      schedules;                                                          
|- | --------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                   
| | the
      long sales cycle associated with certain of our software products;                                                                      
|  |                                                                                                                                                   
| | the
      deferral of customer orders in anticipation of new software products or
      services from us or our competitors;                      
|  |                                                                                                                                                   
| | changes
      in pricing by us or our competitors;                                                                                                
|  |                                                                                                                                                   
| | the
      timing and amount of orders from companies that sell our products through
      our indirect distribution channel;                      
|  |                                                                                                                                                   
| | the
      uncertainty regarding the adoption of our current and future products, including
      our relatively new ASP and e-market applications;
|  |                                                                                                                                                   
| | technical
      difficulties with respect to the use of software solutions and services
      developed by us; and                                
|  |                                                                                                                                                   
| | seasonality
      in customer purchasing and deployment patterns.                                                                                 



Based upon these
          and other factors, our quarterly operating results could fluctuate significantly
          in the future, and previous quarterly results of operations may not
          be meaningful as a predictor of future quarterly operating results.
          As a result, comparisons of these results should not be relied upon
          as indications of future performance.

3

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

Two of our customers
          accounted during 2002 for more then 5% of our revenues. We cannot assure
          you that these customers will maintain their current level of purchases.
          We anticipate that sales of our software products to both of these customers
          will continue to contribute materially to our revenues in the foreseeable
          future. Our dependence on these customers means that their loss as customers
          or a significant reduction in either of their purchases could significantly
          reduce our revenues.

Our failure to
          integrate businesses that we acquire could disrupt our business and
          harm our financial condition.

We plan to make future
          strategic acquisitions of complementary companies, products or technologies.
          These acquisitions could disrupt our business and dilute your holdings
          in us. 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;                 
|  |                                                                                                        
| | risks
      associated with entering markets in which we have no or limited prior experience;
      and
|  |                                                                                                        
| | potential
      loss of key employees, particularly those of the acquired organizations.               



We may not be able
          to successfully integrate any business, technologies or personnel that
          we have acquired or that we might acquire, and this could harm our business
          and operating results. In addition, your holdings in our company would
          be diluted if we issue equity securities in connection with any acquisition.

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

The market for retail
          food 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 retail food
          automation systems. We recently began to roll-out our e-marketplace
          initiatives. Because there are relatively low barriers to entry in the
          e-marketplace arena, competition from other established and emerging
          companies may develop in the future. Some of our existing 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. Additional competitors may enter the market, and we are likely
          to compete with new companies in the future. We 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.

4

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We are dependent upon
  third parties, some of whom compete with us, for the marketing, distribution
  and promotion of our software products, and their failure to market and distribute
  our products could adversely affect our revenues.

Our marketing and distribution
  strategies rely in part on our ability to form long-term relationships and maintain
  existing relationships with our distributors. Our distributors may not devote
  sufficient resources, if any, to market and promote our software solutions.
  To date, we have entered into distribution agreements with Fujitsu Transaction
  Solutions, Inc., or Fujitsu, NCR Corporation, or NCR, and Wincor-Nixdorf, who
  are also our competitors. There is nothing preventing any of these distributors
  from pursuing alternative technologies or products that may compete with our
  software solutions. Outside the United States, Fujitsu sells both our competitors
  and its own products and Wincor-Nixdorf sells competing products worldwide.
  Similarly, NCR competes with us both inside and outside the United States. In
  the United States, NCR sells RCSs ScanMaster Software product, as well
  as their own software products, and Fujitsu sells the StoreLine product under
  the brand name ISS45, through its indirect dealer channel. Our agreements with
  Fujitsu and Wincor-Nixdorf do not contain any firm commitment to purchase any
  minimum amount of our software products.

As our agreements
          with these distributors terminate or expire, our revenues could be adversely
          affected. We may be unable to renew these agreements at prior sales
          level. We may be unable to generate sales to new or existing customers
          to replace the revenues that would be lost under these agreements. The
          failure, for any reason, of our current distributors to successfully
          promote, market and deliver our software solutions could also decrease
          our revenues and harm our results of operations.

In addition, we must
          train our distributors to use our software solutions effectively. Our
          failure to adequately train our distributors could result in lower sales
          of our products by our distributors and could require us to use additional
          resources and employees to service our customers.

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.
          Purchases of our solutions are often part of larger information technology
          infrastructure initiatives on the part of our customers. As a result,
          these customers typically expend significant effort in evaluating, testing
          and qualifying our software products. This evaluation process is frequently
          lengthy and can range from two months to one year or more. Even after
          this evaluation process, a potential customer may not purchase our products.
          In addition, the time required to implement our products can vary significantly
          with the needs of our customers and generally lasts for several months.
          The implementation process is also subject to delay. We cannot control
          these delays. As a result, we cannot predict the length of these sales
          cycles and we cannot control the timing of our sales revenue. 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 ASP business
          is unproven and, if unsuccessful, could adversely affect our growth.

We recently introduced
          our ASP application and began offering our head- and back-office applications
          via the Internet to small chains and single store retailers. These applications
          have not been traditionally used by smaller retailers and if they do
          not adopt them, our ASP initiatives may not succeed. We have recently
          begun charging users of our ASP services a subscription fee for reporting
          and analysis services. In the future, we will charge them a fee for
          additional services. We cannot be assured that these users will accept
          our pricing model. In addition, as the number of users of our ASP services
          increase, we may not be able to successfully scale our services. If
          we are unsuccessful in selling and marketing our ASP services to these
          retailers, our revenues could be harmed.

We have incurred
          significant research and development expenses in connection with the
          development of our ASP 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 ASP services could cause our new business
          initiatives to fail. Even if significant demand does develop for our
          ASP services, the growth of our ASP services may erode parts of existing
          software sales revenue. This could lead to little or no new revenue
          growth.

5

---

---

Our e-market applications
  business model is unproven and, if unsuccessful, our business could be harmed.

The success of our
          e-market applications is dependent on a number of factors. In order
          for us to establish an e-marketplace, our ASP initiatives will need
          to generate a community sufficiently large to support such a marketplace.
          If we are unable to attract such community, we believe that we will
          be unsuccessful in creating e-marketplaces. Even if we successfully
          establish such a community, we may not be able to establish an e-marketplace
          without partnering with strategic players 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 e-marketplaces. We cannot assure you
          that wholesalers and suppliers will choose to participate in our e-marketplaces.
          In addition, this is a new and unproven business model, and we cannot
          assure you that potential users of the e-market applications will use
          them. If we are unsuccessful in establishing these e-market applications
          or if we are unable to generate transaction fees from them, our business
          and operating results could be harmed.

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

Our infrastructure
          is vulnerable to security breaches, computer viruses or similar disruptive
          problems. 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 or disruptions
          in the general operation or our business. In addition, any of these
          occurrences could also lead to interruptions, delays or cessation of
          operation of our ASP servers, which provide access to and distribution
          of many of our enterprise software solutions, products and services.
          As a result, providing unimpeded access to our ASP servers is critical
          to servicing our customers and providing superior customer service.
          Our inability to provide continuous access to our ASP servers could
          cause some of our customers to discontinue subscribing to our ASP and
          e-market applications and harm our business reputation.

We could be exposed
          to possible liability for supplying inaccurate information to our customers.

The information provided
          in our exchanges and on our ASP servers could contain inaccuracies that
          our customers may not accept and we could face liability for information
          that we supply to our customers or third parties if the information
          is inaccurate. Dissatisfaction of the providers of this information
          or our customers with inaccuracies could materially adversely affect
          our ability to attract suppliers, 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 we fail to
          manage our growth effectively, our business could be disrupted, which
          could harm our operating results.

We are undergoing
          rapid growth in the number of our employees, the size of our physical
          facilities and the scope of our operations, due, in part, to several
          acquisitions we made in 1999, 2000 and 2001. For example, we had 178
          employees on January 1, 1999 and 657 employees on December 31, 2002.
          This rapid expansion has placed and is likely to continue to place a
          strain on our senior management team and other resources. To be successful,
          we will need to implement additional management information systems,
          improve our operating, administrative, financial and accounting systems
          and controls and maintain close coordination among our executive, research
          and development, finance, marketing and sales organizations. Any failure
          to manage growth effectively could harm our business and operating results.

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, manufacturing and support personnel. In particular,
          we are dependent on the services of Barry Shaked, our President, Chief
          Executive Officer and Chairman of our Board of Directors. We do not
          have key person life insurance policies covering any of
          our employees. Any loss of the services of Mr. Shaked, our executive
          officer or other key personnel could adversely affect our business.

6

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If we are unable
          to attract, assimilate or retain qualified personnel, we may not be
          able to achieve our objectives.

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
          manufacture, sell and market our products.

If we are unable
          to scale our products across multiple enterprises to meet the demands
          of our customers, our business could be harmed.

As part of our strategy
          to sell our software products and services to small chains and single
          store food retailers, we recently rolled-out our ASP initiatives and
          we are in the process of adapting our software products to a browser-based
          environment in order to reduce the costs associated with our enterprise
          software solutions. Although our software solutions are currently sold
          to small chains and single enterprises, we cannot assure you that we
          will be successful in adapting our software to scale across multiple
          enterprises. The failure of our ASP service to support multiple enterprises
          could harm our business and operating results.

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

We must continually
          modify and enhance our products to keep pace with changes in leading
          computer hardware and database technology as well as emerging technical
          standards in the software industry and changes in customer demands.
          Any changes to 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.
          In 2001 and 2002, we modified our software products to work with Windows
          XP Embedded and Linux open source operating systems. Many existing and
          potential customers have not yet acquired these operating systems and
          we cannot assure you that these modifications will be successful.

Defects in our
          software products could diminish demand for our products, injure 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 despite testing
          by us, our distributors and our current and potential customers, errors
          will not be found in new products or releases after shipment. This could
          result in the loss of revenues, delays in market acceptance and sales,
          diversion of development resources, injury to our reputation or increased
          service and warranty costs. If any of these were to occur, our business
          could be adversely affected and our stock price could fall.

In addition, if software
          errors or design defects in our products cause damage to our customers
          data and our agreements do not protect us from related product liability
          claims, our business could be harmed. Our agreements with customers
          that attempt to limit our exposure to product liability claims may not
          be enforceable in jurisdictions where we operate. Because our products
          are generally used in systems with other vendors products, they
          must integrate successfully with these existing systems. 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.

Necessary licenses
          of third-party technology may not be available to us or could be more
          costly than anticipated, which could adversely affect our ability to
          manufacture and sell our products.

We rely on certain
          technologies that we license from third parties, including certain third-party
          software that may not be available to us in the future on commercially
          reasonable terms or at all. Our loss of, or inability to maintain or
          obtain, any required intellectual property could require us to use substitute
          technology, which could be more costly, of lower quality or performance
          or force us to cease offering our product or service. Any of these results
          could seriously harm our ability to manufacture and sell our products.

7

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In the event that
          we need additional capital required to grow our business, we may be
          unable to obtain it.

We may need to raise
          additional capital in the future and we cannot be certain that we would
          be able to obtain additional financing on favorable terms, if at all.
          If we cannot raise funds on acceptable terms, we may not be able to
          develop or enhance our products, progress our ASP initiatives, take
          advantage of future opportunities or respond to competitive pressure.
          This could seriously harm our business.

Antitrust scrutiny
          of e-marketplace initiatives may adversely affect our business.

The establishment
          and operation of e-marketplace 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 e-marketplace initiatives may be
          delayed.

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

We currently sell
          our software products and ASP services in a number of countries and
          we intend to enter additional geographic markets. Our business is subject
          to risks, which 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.

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.
          The laws of some countries in which our products are or may be developed,
          manufactured or sold may not protect our products or intellectual property
          rights, increasing the possibility of piracy of our technology and products.
          Although we intend to vigorously defend our intellectual property rights,
          we may not be able to prevent misappropriation of our technology. Our
          competitors could also independently develop technologies that are substantially
          equivalent or superior to our technology.

8

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It may be necessary
          to litigate to enforce our copyrights and other intellectual property
          rights, to protect our trade secrets, to determine the validity of and
          scope of the proprietary rights of others or to defend against claims
          of infringement or invalidity. 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.

# 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 many of our subcontractors and suppliers 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. A state of hostility, varying in degree
            and intensity, has led to security and economic problems for Israel.
            Since October 2000, there has been an increase in hostilities between
            Israel and the Palestinians, which has adversely affected the peace
            process and has negatively influenced Israels relationship with
            its Arab citizens and several Arab countries. Such ongoing hostilities
            may hinder Israels international trade relations and may limit
            the geographic markets where we can sell our products. Furthermore,
            certain parties with whom we do business have declined to travel to
            Israel during this period, forcing us to make alternative arrangements
            where necessary, and the United States Department of State has issued
            advisories regarding travel to Israel, impeding the ability of travelers
            to attain travel insurance. Any hostilities involving Israel or threatening
            Israel, or the interruption or curtailment of trade between Israel
            and its present trading partners, could adversely affect our operations.

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

Two 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. 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. Any disruption in
            our operations as the result of military service by key personnel
            could harm our business.

Because some
            of our financial assets and liabilities are denominated in non U.S.
            dollar currencies such as the New Israeli Shekel, the British Pound
            Sterling or the Euro, and due to the fact that our financial results
            are measured in U.S. dollars, our results of operations could be harmed,
            as a result of strengthening or weakening of the U.S. dollar compared
            to these other currencies or if the rate of inflation in Israel will
            increase in the future.

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, the British
  Pound Sterling and the Euro. As a result, some of our financial assets are denominated
  in these currencies. 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 New Israeli
  Shekel, the British Pound Sterling or the Euro. As a result, some of our financial
  liabilities are denominated in these 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 fact that
  our financial results are measured in U.S. dollars, our results could be harmed
  as a result of strengthening or weakening of the U.S. dollar compared to these
  other currencies. Our results could also be adversely affected if we are unable
  to guard against currency fluctuations in the future. Accordingly, we may enter
  into currency hedging transactions to decrease the risk of financial exposure
  from fluctuations in the exchange rate of the dollar against the NIS or other
  currencies. These measures, however, may not adequately protect us from material
  adverse effects due to a variety of factors such as the impact of inflation
  in Israel.

9

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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. Any increase in the rate of
            inflation in Israel will increase labor and other costs, which will
            increase the dollar cost of our operations in Israel, unless the increase
            is offset on a timely basis by a devaluation of the NIS in relation
            to the dollar. 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.

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.

We receive tax
            benefits under the Israeli Law for Encouragement of Capital Investments,
            1959 that are designated as Approved Enterprises. To maintain
            our eligibility for these tax benefits, we must continue to meet several
            conditions, including among others, making required investments in
            fixed assets. If we fail to comply with these conditions in the future,
            the tax benefits we received could be cancelled. The Israeli government
            has reduced the benefits available under this program in recent years
            and has indicated that it may reduce or eliminate these benefits in
            the future These tax benefits may not continue in the future at their
            current levels or at any level. From time to time, we submit requests
            for expansion of our Approved Enterprise programs or for new programs.
            These requests might not be approved. In addition, according to the
            Law for Encouragement of Capital Investments, 1959, only programs
            submitted until December 31, 2003, may be approved. The termination
            or reduction of these tax benefits could harm our business and results
            of operations.

Because we have
            received grants from the Office of the Chief Scientist, we are subject
            to ongoing restrictions.

We have received
            grants from the Office of the Chief Scientist of the Ministry of Industry
            and Trade of the Government of Israel. According to Israeli law, any
            products developed with grants from the Office of the Chief Scientist,
            are 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 Office of the Chief Scientist
            up to between 150%-300% of the grants we received. In addition, we
            are prohibited from transferring to third parties the technology developed
            with these grants without the prior approval of a governmental committee.

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

We are incorporated
            in the State of Israel. A substantial number of our executive officers
            and directors are non-residents of the United States, and a substantial
            portion of our assets and the assets of these persons are located
            outside the United States. Therefore, it could be difficult to enforce
            a judgment obtained in the United States against us or any of these
            persons.

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

The Israeli Companies
            Law-1999, includes restrictions on mergers, like special voting requirements,
            the ability of creditors to seek court intervention to prevent a merger,
            and a mandatory waiting period. In addition, under certain circumstances,
            the Companies Law requires that acquisitions be performed in compliance
            with tender offer regulations. The Israeli Minister of Justice has
            adopted regulations which exempt from the majority of these tender
            offer regulations companies like us that were publicly traded outside
            of Israel and on a stock exchange in Israel prior to the effective
            date of the Companies Law.

10

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In addition, Israeli
            tax law treats some acquisitions, such as stock-for-stock exchanges
            between an Israeli company and a foreign company, less favorable 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

# **Risks
            Related to the Market for Our Ordinary Shares**

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

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

| | fluctuations
      in our quarterly revenues and earnings and those of our publicly held competitors;
|- | -----------------------------------------------------------------------------------------------------
|  |                                                                                                      
| | shortfalls in our
      operating results from levels forecast by securities analysts;               
|  |                                                                                                      
| | announcements concerning
      us or our competitors;                                                
|  |                                                                                                      
| | changes in pricing
      policies by us or our competitors;                                          
|  |                                                                                                      
| | general market conditions,
      and changes in market conditions in our industry; and               
|  |                                                                                                      
| | the general state
      of the securities market.                                                    



In addition,
              trading in shares of companies listed on the Nasdaq National 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.
              The price levels of technology stocks traded on the Nasdaq National
              Market decreased significantly during 2001 and 2002. These broad
              market and industry factors may depress our share price, regardless
              of our actual operating results.

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 our shareholders may sell a substantial
              number of our ordinary shares, the market price of our ordinary
              shares may fall. Any substantial sales of our ordinary shares in
              the public market also might make it more difficult for us to sell
              equity or equity related securities in the future at a time and
              in a place we deem appropriate.

# **ITEM
  4 - INFORMATION ON THE COMPANY**

**A.
                  History and Development of the Company**

Both our
                  legal and commercial name is Retalix Ltd. During 2000, we changed
                  our name from Point Of Sale Ltd. to our current name. We were
                  incorporated on March 5, 1982, under the laws of the State of
                  Israel. We are domiciled in Israel. Our legal form is a company
                  limited by shares. We operate under the laws of the State of
                  Israel. Our registered office is located at 10 Zarhin Street,
                  Raanana 43000, Israel, and our telephone number is +011
                  972-9-776-6677.

11

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We provide
                  integrated enterprise-wide software solutions for the retail
                  food industry worldwide, including supermarkets, convenience
                  stores and restaurants. Our products are designed to capture,
                  analyze and rapidly disseminate mission-critical information,
                  thereby enabling food retailers to increase operating efficiencies
                  and respond rapidly to changing competitive market requirements
                  and consumer preferences. Our solutions support a wide variety
                  of essential retailing operations, including data capture and
                  communications at the point-of-sale-terminal or checkout (referred
                  to as the post); fuel pump control and fuel sales management;
                  front-office activities, such as cash management and credit
                  authorizations; back-office activities, such as employee scheduling
                  and inventory control; and enterprise-wide (referred to as host)
                  activities, such as pricing strategy, supplier management, and
                  data mining and analysis. To date, our software products have
                  been installed in more than 20,000 stores and quick service
                  restaurants in 43 countries, serving more than 190,000 checkout
                  lanes, including leading retailers such as Albertsons,
                  Publix and Costco in the US and Tesco, J. Sainsbury, Delhaize
                  and IKEA food services in Europe.

We have a
                  broad portfolio of software solutions to meet the need of food
                  retailers to manage their entire retail chain, ranging from
                  multi-national supermarket chains to local, independent groceries.
                  Our software products offer food retailers a full suite of products
                  to address all elements of their organization:

| |  | Supermarket Solutions: Our supermarket solutions
                      provide supermarkets with a suite of business applications
                      providing comprehensive supermarket operational and management
                      tools. Our supermarket solutions include StoreLine, RBO
                      (Retalix Back-Office), BASSpoint and ScanMaster.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Convenience Store, Fuel and Food Service Solutions:
                      Our software solutions for the convenience store (or C-store),
                      fuel and food service sectors are based on our StorePoint
                      product family, which comprises our StorePoint point-of-sale
                      (or POS) application and our StorePoint Back-Office application.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Retalix Host for C-Stores: Retalix Host is a software
                      solution for managing chain-wide operational aspects for
                      convenience and petroleum retailers.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | ReMA (Retalix e-Market Applications): ReMA is a suite
                      of head-office and back-office applications that is based
                      on a thin-client, or web browser-based, architecture,
                      providing retailers centralized operation and management
                      of their enterprise-wide and store-level applications.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | ASP and
      e-Marketplace Solutions: We offer our ReMA and back office applications
      to independent and small retailers on an ASP (application service provider)
      basis, meaning that the application is remotely hosted on our servers and
      accessible by the retailer over the web or private data lines. We provide
      these solutions through our StoreNext joint ventures.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We market
                  our software solutions primarily to large and mid-sized supermarket
                  and convenience store chains, small and independent groceries,
                  fuel stations and restaurants. In the supermarket and grocery
                  sector, we market to four tiers of food retailers that are characterized
                  by revenue levels:

| |  | Tier 1 
      annual revenues of over $3 billion;                         
| | - | ---------------------------------------------------------------------------
| |  | Tier 2  annual
      revenues of between $500 million and $3 billion;     
| |  | Tier 3  annual
      revenues of between $50 million and $500 million; and
| |  | Tier 4  annual
      revenues of between $5 million and $50 million.      

|We
                      have a direct sales force in the U.S. and Europe to market
                      our products to Tier 1 and Tier 2 supermarket and convenience
                      store chains, augmented by a combination of channel partners
                      and resellers. Sales to Tier 1 and Tier 2 customers currently
                      represent approximately 70-80% of our revenues. We target
                      Tier 3 and Tier 4 food retailers indirectly through our
                      channel partners and through our StoreNext joint ventures
                      in the U.S. and Israel. For larger supermarket and convenience
                      store chains, our professional services provide our customers
                      with expert retail business consulting, 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
                      and ongoing support and maintenance services.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



**Acquisitions,
                  joint ventures and investments during recent years**

Since the
                  inception of our business in 1982 and until 1995, our business
                  activities were conducted solely through our company. Since
                  1995, we have grown through a combination of internal expansion
                  and strategic acquisitions of companies with related businesses
                  and technologies. Some of our subsidiaries engage primarily
                  in development, some act as sales and support centers for our
                  products and the products of our subsidiaries, and some engage
                  both in development and sales of their own products.

12

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Our principal
                  recent acquisitions, joint ventures and investments include:

| |  | Retail Control Systems. In September 2000, we acquired
                      Retail Control Systems, Inc., or RCS, which sold POS and
                      back-office systems to mid- and small-size independent supermarket
                      sectors in the United States. RCS, which is now operating
                      as Retalix Pittsburgh, employs approximately 90 people in
                      Pennsylvania, Ohioand Washington. Its flagship product,
                      RCS ScanMaster Solution Series, is distributed primarily
                      through NCR Corporations dealer channel. The acquisition
                      of RCS enabled us accelerate our penetration of the market
                      for POS systems for Tier 3 and Tier 4 food retailers in
                      North America.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | BASS. In September 2001, we acquired BASS Inc., or
                      BASS, a provider of POS and back-office systems tailored
                      to fit the needs of the small chains and single store grocers.
                      BASS, which is now operating as Retalix Dayton, employs
                      approximately 80 employees, headquartered in Dayton, Ohio.
                      Its POS product, BASSpoint, is distributed through a network
                      of dealers in North America. The acquisition of BASS complemented
                      our acquisition of RCS, enabling us to further penetrate
                      the Tier 3 and Tier 4 North America food retailer market.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | PalmPoint. Through a series of transactions from
                      1999 through 2002, we acquired PalmPointLtd., which
                      develops software solutions for hand-held devices like Palm
                      and PC pocket computers supporting in-store retail applications,
                      such as ordering, receiving and inventory management. The
                      acquisition of PalmPoint enabled us to offer our Retalix
                      Pocket-Office solution, a series of in-store mobile applications
                      which operate on the Microsoft Windows CE platform.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | StoreNext Israel. As the result of a series of investments
                      from 1999 through 2002 by us and third parties, we hold
                      a majority interest of StoreNext Israel Ltd., a subsidiary
                      of StoreAlliance.com Ltd. StoreNext Israel is our e-marketplace
                      initiative in Israel, which is a collaborative community
                      of food retailers and suppliers.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | StoreNext USA. In July 2002, we established StoreNext
                      Retail TechnologiesLLC (StoreNext USA) together
                      with Fujitsu Transaction Solutions Inc. StoreNext USA provides
                      point-of-sale hardware and software as well as web-based
                      store management solutions for independent grocers throughout
                      North America.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our StoreNext
                  solutions, tailored to smaller chains and independent groceries,
                  enable smaller establishments with limited IT (information technology)
                  resources to enjoy the benefits of our ReMA enterprise and back
                  office applications through an ASP model, remotely hosted by
                  us and accessible over the web or private lines. Additionally,
                  through the collection of sales and inventory data obtained
                  in providing ASP solutions to retailers, our StoreNext initiatives
                  enable us to attract suppliers to subscribe to our e-market
                  initiatives, in order to obtain access to this aggregated data.

In the future,
                  we plan to continue our investment and acquisition strategies.
                  We continually evaluate opportunities to acquire complementary
                  businesses and technologies in the retail information systems
                  market to better serve our customers, more rapidly develop product
                  offerings, shorten our time-to-market, advance our technology,
                  expand distribution capabilities or penetrate other targeted
                  markets or geographic locations.

For more
                  information regarding our recent acquisitions, see Note 2 of
                  the notes to our consolidated financial statements attached
                  to this annual report.

13

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**Principal
                  capital expenditures**

In June
                    1998, we purchased the rights of third parties in a long-term
                    lease from the Israel Lands Authority, a government agency
                    that regulates land in Israel, and approximately 2,300 square
                    meters of office space in a building in Raanana, Israel, which
                    houses our corporate headquarters. Towards the end of 1999,
                    we acquired the rights for an additional 1,200 square meters
                    in the same building to accommodate new activities and the
                    main operations of newly acquired subsidiaries. We have financed
                    these acquisitions through long term loans secured partly
                    by our interest in approximately 2,300 square meters of the
                    Raanana property. The remainder is currently secured by deposits
                    and other liquid financial assets. During the last three years
                    our capital expenditures were mostly attributable to computers,
                    peripheral equipment and licenses, and software development
                    tools. Among the more significant investments within this
                    framework our new Customer Relationship Management system
                    is notable. In addition we invested considerable amounts in
                    office furniture and equipment as some of our operations relocated
                    to new offices both in the United States and in Israel. Our
                    owned car fleet has decreased significantly during the last
                    three years as we move rapidly in this area to operational
                    leasing.

**B.
                    Business Overview**

We provide
                      integrated enterprise-wide software solutions for the retail
                      food industry worldwide, including supermarkets, convenience
                      stores and restaurants. Our products are designed to capture,
                      analyze and rapidly disseminate mission-critical information,
                      thereby enabling food retailers to increase operating efficiencies
                      and respond rapidly to changing competitive market requirements
                      and consumer preferences. Our solutions support a wide variety
                      of essential retailing operations, including data capture
                      and communications at the point-of-sale-terminal or checkout
                      (post); fuel pump control and fuel sales management; front-office
                      activities, such as cash management and credit authorizations;
                      back-office activities, such as employee scheduling and
                      inventory control; and enterprise-wide (host) activities,
                      such as pricing strategy, supplier management, and data
                      mining and analysis. To date, our software products have
                      been installed in more than 20,000 stores and quick service
                      restaurants in 43 countries, serving more than 190,000 checkout
                      lanes, including leading retailers such as Albertsons, Publix
                      and Costco in the US, and Tesco, Sainsburys, Delhaize
                      and IKEA food services in Europe.

Over
                      the past ten years, we have grown through a combination
                      of internal expansion and strategic acquisitions of companies
                      with related businesses and technologies. In the future,
                      we plan to continue our expansion and acquisition strategies.
                      We will take advantage of our new browser-based enterprise
                      management and store back-office applications to establish
                      new marketing opportunities by expanding our current offerings
                      to the Tier 1 and Tier 2 grocery chains to include thin
                      head-office and back-office applications. We believe that
                      offering existing products to the Tier 1 and Tier 2 market
                      sectors will not only provide us with an additional source
                      of revenue, but will also provide opportunities for our
                      point-of-sale software business as these markets adopt our
                      browser-based applications.

We also
                      intend to take advantage of our new browser-based enterprise
                      management and store back-office applications, by offering
                      on an ASP basis our broad set of browser-based applications
                      to independent and small chain grocers. We believe that
                      the independent and small chain grocers are under increasing
                      competitive pressure to avail themselves of sophisticated
                      back-office and host applications, but cannot afford to
                      acquire, host and manage them. We believe our established
                      relationship with this market sector, many of whom already
                      use our point-of-sale applications, and our track-record
                      of developing and providing such applications to large food
                      retailers, provide us with a competitive advantage over
                      others who may try to enter this market. Moreover, we believe
                      these initiatives will provide us with a powerful mechanism
                      to create a critical mass, or communities, of retailers
                      using these ASP applications sufficiently large to attract
                      food suppliers and manufacturers, who will be willing to
                      pay for the aggregated data we collect from retailers through
                      the provision of ASP applications. Adding suppliers to the
                      communities will enable us to create an e-marketplace, where
                      retailers and suppliers use our applications to collaborate
                      in the fields of price exchanging, ordering, inventory and
                      other market information. We believe that the collaborative
                      functionality provided by our applications enables food
                      suppliers and manufacturers to become more efficient and
                      reduce their supply chain management costs.

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**Industry
                      Background**

The
                        retail food industry has typically been characterized
                        by increasing competition, pricing pressure and narrow
                        operating margins requiring retailers to react rapidly
                        to changing consumer preferences in order to remain competitive.
                        Rapidly devised marketing programs and new product areas
                        such as fuel sales in the grocery sector typify the need
                        to meet new consumer demands. Historically, large supermarkets
                        have relied on complex proprietary information systems
                        comprised of mainframe or other expensive hardware and
                        highly customized in-store and enterprise software solutions.
                        As fuel and other new marketing programs have begun to
                        dominate the food retailing landscape, the implementation
                        of these features on older proprietary systems has been
                        costly and in some cases impossible. This has forced many
                        larger chains to look for new store systems and platforms
                        that are flexible and feature rich. In contrast, smaller
                        retailers, which typically do not have the capital or
                        expertise to develop and implement complex information
                        technology, have relied on much less sophisticated systems
                        and manual processes to run their businesses. As a result,
                        these retailers have been slower or unable to add fuel
                        sales or other new marketing programs that are responsive
                        to changing consumer preferences. In addition, because
                        these retailers have not had timely access to customer
                        information, they have been unable to provide their manufacturers
                        and suppliers with sufficient data to plan their promotions
                        and inventory levels, thereby creating widespread supply
                        chain inefficiencies, including high out-of-stocks and
                        less competitive pricing in this marketplace.

Retalix
                        is continuing to align its development focus with areas
                        identified as most problematic to our customers. Industry
                        surveys have identified IT as the area of highest concern
                        to our current and potential customers. Of the four first
                        most important IT issues listed in one of such surveys,
                        we are currently addressing three: (1) integration between
                        store systems, (2) loyalty card and authentication, and
                        (3) wireless capabilities. The survey also reports that
                        IT spending in 2002 was expected to be equal to 1.7% of
                        total food retail revenues.

We
                        believe this increase in demand is being driven, in part,
                        by the convergence of a number of recent trends in the
                        retail food industry, including:

| | increasing consolidation of nationwide and large grocery chains in the United
      States;                                                                         
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a shift
      in consumer preferences from retailer loyalty toward value in the form of
      lower prices;                                                         
| | the convergence
      of various retail services at single retail locations (such as the addition
      of coffee shops and fuel stations to supermarket sites); and
| | the introduction
      of new customer-activated ordering and payment applications.                                                                                 

|These trends require food retailers to rapidly integrate
                            and analyze data throughout their organizations across
                            a number of formats in order to operate efficiently
                            and improve customer acquisition, retention and profitability.
                            Most traditional systems, however, are not designed
                            to integrate data across multiple formats. As a result,
                            large food retailers are turning to state-of-the-art
                            enterprise-wide software solutions to meet their needs.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
                        increased adoption of state-of-the-art enterprise-wide
                        software solutions by large retailers is placing increased
                        pressure on the rest of the retail food industry to implement
                        comparable software solutions to remain competitive. As
                        a result, small chains and independent food retailers,
                        which comprise over 19,000 grocery stores and 20,000 convenience
                        stores in the United States, need access to affordable,
                        state of the art management applications to remain competitive.
                        Furthermore, we believe that in order for these retailers,
                        and the manufacturers and wholesalers who serve them,
                        to remain profitable and competitive, they need to efficiently
                        exchange information throughout the supply chain. This
                        will in turn increase customer service levels and reduce
                        supply chain management and promotional costs.

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**Our
                        Solution**

We
                          offer a wide range of retailing applications that address
                          the increasingly complex and rapidly changing requirements
                          of the retail food industry. These applications can
                          be hosted either on our customers internal servers
                          or on our centrally managed ASP servers. The key features
                          of our solution include:

*Robust,
                          integrated host-to-post enterprise software solutions
                          for large food retailers*

Our
                          integrated software solutions provide management tools
                          to food retailers for monitoring, reporting and analyzing
                          sales data, vendor relationships, merchandising and
                          other important activities from the point-of-sale or
                          fuel pump (post) to the back office and headquarters
                          (host) in a consistent manner. Through the use of these
                          integrated software solutions, food retailers can improve
                          operational and logistical efficiencies and better manage
                          inventory including wet stock (or fuel), purchasing,
                          merchandising, pricing, promotions and shrinkage control.
                          They can also implement price changes simultaneously
                          throughout an enterprise and rapidly initiate targeted
                          marketing programs.

Comprehensive
                          host-to-post office solutions for small and single store
                          food retailers

We
                          have browser-enabled our host and back office applications
                          allowing food retailers to access essential management
                          applications over the Internet. Small chains and single
                          store food retailers can gain access to information
                          and services that would otherwise be too expensive for
                          them to procure and manage in-house. Through the use
                          of this information at low cost, small retailers can
                          increase operating efficiency and lower prices to become
                          more competitive with large food retailers.

*Browser-based
                          solutions*

As
                          retailers continue to anticipate greater competition,
                          we believe that out-sourcing of information technology
                          services will increase. Using the Internet as an information
                          pipeline both to and from the stores, retailers can
                          access their management information anytime and anywhere
                          there is Internet access. We believe that centrally
                          managed applications will greatly reduce the cost of
                          hardware, maintenance and support for retailers and
                          that these services will enable such food retailers
                          to improve their operating efficiencies and respond
                          more rapidly to changing market requirements and consumer
                          demand. We also plan to offer large retailers our browser-based
                          software solutions on their Intranets to enable them
                          to take advantage of Internet communications and more
                          easily adapt the applications to changing business needs
                          while decreasing the cost of hosting and maintaining
                          them.

*Single
                          solution for multiple retail formats*

Our
                          solutions offer single back-office and configurable
                          point-of-sale applications to retailers that have multiple
                          business formats operating at a single site. These applications
                          enable retailers to produce consolidated location results
                          that can combine various formats such as grocery, gasoline
                          and quick service food sales into one site management
                          report. This can help reduce management time, help to
                          ensure accurate royalties are computed for on-site vendors,
                          reduce the cost of licensing and training, and provide
                          better customer service.

*Multi-lingual
                          and multi-currency capabilities*

Our
                          software solutions provide multi-lingual and multi-currency
                          features that enable large multinational chains to use
                          the same version of our applications throughout the
                          world. We believe that these capabilities also provide
                          us with a competitive advantage with chains having stores
                          near national borders and with multinational retailers
                          that prefer licensing software from one vendor.

*System
                          resiliency and data redundancy*

Our
                          software architecture is designed to be resilient and
                          provide data redundancy. Essential data are protected
                          through duplication at the server level. Further, our
                          system design allows each point-of-sale terminal to
                          continue to operate in situations where communications
                          with the back office server or host systems have been
                          lost. When communications reengage, the system automatically
                          updates all data points. Such resiliency or resistance
                          to failure helps ensure that consumers can be served
                          without interruption.

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*Consumer-based
                          ordering and promotion support*

Our
                          software supports a variety of consumer-based ordering
                          services, including Internet-based home shopping and
                          order placement via call centers, kiosks and hand-held
                          or palm computer devices. Each of these services when
                          connected to our head office application allows for
                          a single point of update and pricing for customer-placed
                          orders. We believe these capabilities simplify remote
                          consumer ordering and help to improve accuracy in fulfillment,
                          which in turn enables retailers to enhance customer
                          satisfaction and retention.

*Flexible
                          and scalable architecture*

We
                          have designed our suite of products to allow for a mix
                          and match of functions. Each food retailer can
                          select applicationspecific modules and can add
                          modules as its needs evolve. Our products are scalable,
                          meaning they can accommodate the addition of more sites
                          and checkout lanes without the need to replace or upgrade
                          the system. As such, our products can be used to support
                          retail environments from a small store with one checkout
                          lane to a multiple format retail chain with over 80
                          checkout lanes per store location.

**Our
                          Strategy**

We
                            strive to develop innovative products and solutions
                            that meet the needs of our customers based on our
                            expertise in developing enterprise-wide software solutions.
                            In pursuit of our strategy, we intend to:

*Continue
                            expanding our customer base in our core business*

We
                            intend to continue the expansion of our customer base
                            in our core enterprise-wide software licensing business
                            by increasing the distribution of our products worldwide
                            both through direct sales and third party distribution
                            relationships. We expect that our strong historic
                            alliances with large hardware manufacturers will continue.
                            We will focus first on the large chains with our direct
                            sales force as those chains have the sophistication
                            to make software decisions independently from a hardware
                            selection. We will also seek to collaborate further
                            with hardware manufacturers on large bids where the
                            customer has specified open-systems software
                            requirements. We believe that together, our expanded
                            sales efforts and key partnerships will help us to
                            achieve our goals and maintain our position as one
                            of the leading suppliers of retailing software to
                            the food industry worldwide.

*Continue
                            expanding and enhancing our product and service offerings*

We
                            plan to continue to expand the breadth and depth of
                            our product line and to design, develop and introduce
                            new products and product applications, such as our
                            ReMA platform and applications suite and our StoreLine
                            in-store software, which runs on Linux as well as
                            on MicroSofts operating systems. The first enterprise
                            installation of our new flagship ReMA (Retalix e-Market
                            Applications) product occurred in the first quarter
                            of 2003. ReMA provides integrated head-office and
                            back-office applications to Tier 1 and Tier 2 grocery
                            and c-store retailers. By centralizing much of the
                            office computing in a single or few sites, ReMA is
                            expected to reduce hardware and maintenance costs.
                            The incorporation of modules for customer loyalty,
                            one-on-one target marketing and electronic journals
                            into this offering differentiates ReMA from many competing
                            solutions.

Leverage
                            our ReMA solutions to further penetrate the independent
                            and smaller chain grocery market

In
                            the past, we have sold our point-of-sale applications
                            to independent and smaller chain retailers and our
                            back-office and head-office applications to large
                            chains. We believe that ReMA will enable us to provide
                            these back-office and head-office applications to
                            the independent and smaller retailers. Through our
                            StoreNext ventures in the U.S. and Israel, we offer
                            these retailers the ability to access back-office
                            and host applications on an ASP basis. We intend to
                            leverage our ReMA applications to offer to these retailers
                            Connected Services, providing these smaller retailers,
                            on a hosted, subscription basis, access to applications
                            that they do not have the resources to acquire and
                            maintain in-house.

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Leverage
                            our Internet based software applications to participate
                            in collaborative retailer supplier communities

We
                            believe that we are well positioned to establish successful
                            e-market initiatives. We enjoy a substantial software
                            market share in the U.S. independent grocery market.
                            Our software is currently installed in over 6,000
                            independent groceries out of the total U.S. market
                            of approximately 20,000 independent groceries. We
                            believe that many in this community can benefit from
                            the functionality and easy access to our Internet
                            based headquarters and store back-office applications.
                            StoreNext IL, our e-marketing initiative in Israel,
                            has attracted the attention of some of the largest
                            grocery suppliers in Israel, including Osem-Nestle,
                            Procter & Gamble (Israel), Strauss-Elite, Tnuva
                            and Unilever-Bestfoods, as well as many large grocery
                            retailers, including Supersol, one of the largest,
                            publicly traded supermarket chains in Israel. We have
                            started generating revenues from the retailer community
                            as well as from several of the larger suppliers. We
                            talk to these and other suppliers and retailers on
                            an ongoing basis, about additional collaborative services,
                            such as out-of-stock notification, which both sides
                            are willing to pay for. We believe that our e-market
                            initiatives will enable retailers and suppliers to
                            reduce their operating costs. It is also fair to assume
                            that part of these savings will be passed onto our
                            StoreNext initiatives in the form of subscription
                            fees paid to us by these retailers and suppliers for
                            use of our e-market platform and its collaborative
                            services.

*Continue
                            broadening market penetration through strategic acquisitions*

We
                            continually evaluate opportunities to acquire complementary
                            businesses and technologies in the retail information
                            systems market to better serve our customers, more
                            rapidly develop product offerings, shorten our time-to-market,
                            advance our technology, expand distribution capabilities
                            or penetrate other targeted markets or geographic
                            locations. For example, in September 2001, our wholly-owned
                            subsidiary, Retalix USA Inc., acquired all of the
                            outstanding shares of BASS Inc., a provider of retail
                            automation technology primarily to Tier 2 grocery
                            operators in the U.S. In addition, in September 2000,
                            we acquired Retail Control Systems, now operating
                            as Retalix Pittsburgh, to further increase our market
                            share in the independent grocery market in the U.S.
                            Retalix Pittsburghs ScanMaster Solution Series
                            has an installed base of 2,200 small-chain grocery
                            stores, which increases our total installed base in
                            the United States to approximately 7,000 stores.

In
                            addition, our acquisition of Israel-based PalmPoint
                            has strengthened our position in the growing market
                            for portable software used in handheld computing devices.
                            We have recently released a series of in-store mobile
                            applications, which operate on the Windows CE platform
                            Retalix Pocket Office (RPO). Customer response
                            has been very favorable. In the first year from product
                            launch, five retail chains have purchased RPO with
                            several others in advanced stages of evaluation. RPO
                            applications for the c-store sector presently include
                            stock count, receiving, inventory, ordering and price
                            management features. We recently launched our first
                            RPO applications for the grocery sector, including
                            item maintenance, stock count and Q-Busting, and the
                            initial response is positive.

**Products**

We
                              develop, market, sell and support a suite of enterprise-wide
                              software products for the retail food industry aimed
                              at automating retail store operations and integrating
                              the dissemination of information throughout an enterprise.
                              Our software solutions cover a wide range of retail
                              applications, from easy-to-use, comprehensive point-of-sale
                              and back office store systems through the corporate
                              host system using client/server technology. Each
                              retailer can select from a broad range of application-specific
                              modules based upon its current marketing configuration
                              and information management requirements, and can
                              add modules as the retailers needs evolve.

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The
                              following table briefly describes our main products
                              and their respective features and functions. A fuller
                              description is set forth below the table.

|**Product**                         | **Purpose/Technology**                                                                                                                                           | **Key
      Features & Functions**                                                                                                                                                                                                                                                                                                                              
|----------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**Supermarket**                     |                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                 
|                                    |                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                 
|*StoreLine*                         | POS
        software for all tiers inthe
               grocery marketClient
        Server, 3 tierapplication,
               Windowsoperating
        system | Highly
        configurableMulti-language,
        currency and tax  supportHigh
        availability and resilienceHardware
        neutralSupports
        multiple types of POS                                                                                                                                                                         
|*ScanMaster*                        | POS
      software for Tier 3&
      4        grocery retailersClient
      Server, Windowsoperating
             system                                       | Functionally
      rich and well suited for         theTier
      3 & 4 grocersOpen
      architecture                                                                                                                                                                                                                                                        
|*BASSpoint*                         | POS
      software for Tier 3&
      4        grocery retailersClient
      Server, Windowsoperating
             system                                       | Functionally
      rich and well suited for        theTier
      3 & 4 grocersOpen
      architecture                                                                                                                                                                                                                                                         
|*RBO
      (Retalix Back*-*Office)* | A
      back-office applicationfor
      the        Tier 2 - 4 groceryClient
      Server, Windowsoperating
             system                                | Functionally
      rich back-officeOpen
      architecture, Microsoft Windows-based back-officeInterfaces
      to several types of POSWell
       integrated with StoreLine                                                                                                                                                                                
|**Convenience
      Store**         |                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                 
|*StorePoint
      POS*              | POS
      software for theconvenience
             store andpetroleum
      marketClient
      Server, Windowsoperating
             system                    | Highly
      configurableMulti-language,
      currency and tax supportHigh
      availability and resilienceHardware
      neutralSupports
      multiple types of POS - c-
             store,fuel,
      quick service, POS at the        pump                                                                                                          
|*StorePoint
      Back-Office*      | Back-office
      applicationfor
      the        convenience andpetroleum
             marketClient Server,
      Windowsoperating
             system        | Functionally
      rich back-officeWell
      integrated with StorePoint POSSupports
      multiple retail services -        regularC-store
      sales, quick service        operations,
      fueloperations,
      labor        scheduling                                                                                                                
|**Retalix
      Host**              | An
      enterprisemanagement
             system for the convenience andpetroleum marketClient
      Server, Windowsoperating
             system             | Provides
      enterprise functionality for        priceand
      promotion management and        data
      analysis and reportingHandles large
      amounts of data from        theenterprise
      to the stores and from the        storesback to the enterprise                                                                                         
|**ReMA**                            | An
      enterprise system forcentral
             management ofhead-office
      and        back-office applicationsWeb-based
      architecture              | Web-based,
      open architecture provides        forcentral
      operation of the system with        usersaccessing
      from corporate or stores        locationsBroad
      functionality - pricing,        promotions,loyalty,
      ordering, receiving,        analysis
      and reportingReduces the technology
      footprint in the       store

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*Supermarket
                              solutions*

StoreLineis a suite of business applications providing
                              comprehensive supermarket operational and management
                              tools. The StoreLine suite includes Retalix POS,
                              Retalix Café, Retalix Fuel, Retalix Self
                              Checkout, Retalix SelfScan, Retalix U-Weigh, Retalix
                              e-Shop, Retalix CallCenter, Retalix Kiosk and Retalix
                              Back-Office. This suite is specifically designed
                              to cater to the growing trend of supermarket businesses
                              adding new formats as well as related sales and
                              services. StoreLines family of products provides
                              supermarkets with support for checkout terminals
                              in various formats, customer self-service applications,
                              Internet shopping, call-centers and kiosks, each
                              of which is integrated with the stores management
                              system. For back-office management, StoreLine consists
                              of in-store servers as well as back-office workstations
                              for inventory and employee management. The system
                              provides interfaces to host systems and to third-party
                              applications as well as to payment service providers.
                              Using a standard local area network, StoreLines
                              client/server architecture supports a variety of
                              open and proprietary peripherals such as full-screen
                              customer displays, color touch screens, scanners,
                              checkout and area scales, magnetic card and check
                              readers, coin dispensers and smart card readers.
                              StoreLine runs on Microsoft Windows platforms as
                              well as the Linux operating system. We installed
                              our first Linux point-of-sale system at Hannaford
                              Brothers during the fourth quarter of 2002.

Customized
                              versions of StoreLine software solutions include
                              ISS45, which is branded and distributed by StoreNext,
                              our joint venture with Fujitsu in the United States,
                              and POSition, a Wincor-Nixdorf branded offering,
                              which was adapted to meet the needs of German-speaking
                              countries.

ScanMaster,
                              developed and marketed by Retalix Pittsburgh (formerly
                              RCS Technologies), and distributed by NCR, is a
                              Microsoft Windows-based open platform POS software
                              system tailored to fit the needs of the small chain
                              and single store supermarkets. ScanMaster includes
                              a wide variety of custom utilities required for
                              this market. We added this product to our POS product
                              line as a result of our acquisition of RCS Technologies
                              in 2000.

BASSpoint,developed and marketed by Retalix Dayton (formerly
                              BASS Inc.), and distributed through a network of
                              dealers in North America. BASSpoint is a Microsoft
                              Windows-based open platform POS software system
                              tailored to fit the needs of the small chain and
                              single store supermarkets and includes a variety
                              of custom utilities required for this market. We
                              added this product to our POS product line as a
                              result of our acquisition of BASS Inc. in 2001.

*Convenience
                              store, fuel and food service solutions*

Our
                              software solutions for the convenience store, fuel
                              and food service sectors are based on our StorePointproduct family. The StorePoint family includes
                              Retalix POS, Retalix Fuel, Retalix QSR, Retalix-SelfServ
                              and StorePoint BackOffice. For the cashier, StorePoint
                              offers a touch-activated point-of-sale system, providing
                              the user with an easy-to-use, graphical application,
                              using icons to represent items, departments and
                              function keys, drill-down menus and special features
                              to guide the user and provide prompts for suggestive
                              selling. At the back-office, StorePoint provides
                              extensive item maintenance, inventory, supplier
                              and employee management modules as well as specialized
                              functionality for the food service environment,
                              such as menu, recipe and inventory management. StorePoint
                              provides integrated interfaces to head office systems
                              to provide central management and decision control
                              for the entire enterprise. By using StorePoint,
                              convenience stores can integrate item scanning,
                              fuel sales and quick service food. StorePoint operates
                              on the Microsoft Windows platform.

*Retalix
                              Host for C-Stores*

Retalix
                              Host offers a software solution for managing
                              chain operational aspects for convenience and petroleum
                              retailers. It features price book management, various
                              types of promotions, customer loyalty, supplier
                              and inventory management and a geographical information
                              system to provide analysis of customer behavior
                              and store performance in relation to socio-geographical
                              factors. Retalix Host system also features a broad
                              set of management reports and queries to analyze
                              business performance. Through the connection of
                              Retalix Host to the StorePoint in-store system,
                              convenience store retailers can benefit from an
                              integrated host-to-post software solution, providing
                              consistent workflow operations and synchronized
                              databases from the point-of-sale through the office
                              and host system.

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Retalix
                              Host can be supplemented with Retalix CommPoint,
                              a Retalix data communications product that manages
                              bi-directional communication between stores and
                              Retalix Host. Retalix CommPoint can also be used
                              to distribute updates of new software versions and
                              provide remote diagnostics and maintenance.

ReMA

Retalix
                              e-Market Applications, or ReMA, is a suite of head-office
                              and back-office applications that is based on a
                              thin-client architecture. ReMA is the
                              next generation of our Retalix Host product, targeted
                              at the Tier 1 supermarket chain market. ReMA is
                              designed to serve as an enterprise solution for
                              large retail chains combining both head-office and
                              back-office applications from one server location,
                              and to provide a platform and application set for
                              collaborative services among food retailers and
                              their suppliers. ReMA provides food retailers centralized
                              operation and management of their enterprise-wide
                              and store-level applications serving the needs of
                              corporate personnel and store managers. As distinguished
                              from Retalix Back-Office, which is based on a client
                              server architecture and therefore requires the software
                              to be installed in every store, ReMA leverages its
                              scalable, web-based architecture to enable a retailer
                              to provide from a single host, centrally managed
                              back-office applications to all its stores. ReMAs
                              application set includes pricebook, promotions,
                              ordering, receiving, inventory, reporting, data
                              analysis, loyalty, targeted 1-on-1, electronic journal
                              and enterprise alerts. ReMAs thin-client architecture
                              allows authorized users to access the centrally
                              hosted applications using any standard browser,
                              over a LAN, VPN (virtual private network) or the
                              Internet.

Historically,
                              we have not offered host applications to Tier 1
                              grocery chains. ReMAs ability to scale allows
                              us to offer for the first time a host offering to
                              Tier 1 supermarkets. The inclusion of back-office
                              functionality in ReMA enables retailers to eliminate
                              back-office hardware and software from the stores.
                              In addition, Tier 1 supermarkets will be able to
                              upgrade their back-office software in one location
                              rather than in hundreds, or thousands of stores.
                              This single update location also allows retailers
                              to keep current with business changes by significantly
                              simplifying the software upgrade process.

*ASP
  and e-Marketplace Solutions*

Small
                              to medium sized food retailers have many of the
                              same needs and face many of the same challenges
                              as do the larger retailers, but lack the managerial,
                              financial and technological capacity of the larger
                              retailers. Our StoreNext solutions, tailored to
                              smaller chains and independent groceries, enable
                              smaller establishments with limited IT resources
                              to enjoy the benefits of our ReMA enterprise and
                              our back office applications through an ASP (application
                              service provider) model, remotely hosted by us and
                              accessible over the web or private lines. We refer
                              to these remotely-accessed applications as Connected
                              Services. Connected Services include web-based head-office
                              and back-office applications and other data hosting
                              and management, merchandising, reporting and analysis
                              tools. We provide these services to retailers in
                              exchange for monthly subscription fees, which vary
                              depending upon the number of Connected Services
                              subscribed to.

In
                              addition, through the provision of Connected Services,
                              our StoreNext ventures can offer food suppliers
                              access to aggregated food retail sales and other
                              market data, which assists these suppliers in planning
                              and managing their supply chain. By offering retailers
                              Connected Services and suppliers retail sales and
                              market information, we are able to establish a community
                              of retailers and suppliers collaborating and interchanging
                              data through our centralized servers, enabling the
                              exchange of pricing, ordering, inventory and other
                              market information. We call this community an e-marketplace.
                              We provide these collaborative e-marketplace services
                              to suppliers and retailers in exchange for subscription
                              fees. We also offer these suppliers messaging services,
                              commonly referred to as EDI, or electronic data
                              interchange, which enables the exchange of data
                              between retailers and suppliers electronically using
                              the same data format and protocols.

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*Home shopping
  products*

We offer a suite of online
  shopping applications, including Retalix e-Shop, Retalix TeleOrder and Retalix
  KioskOrder. This comprehensive set of e-commerce applications is operating very
  successfully with Delhaize in Belgium, a highly experienced e-commerce grocery
  chain. Retalix remote shopping applications complements a broad variety of the
  other Retalix brick and mortar applications. Consumers are able
  to purchase groceries over the Internet, via telephone or kiosk ordering. Retalixs
  e-shopping application suite is unique in that it provides full support for
  the logistic operations that follow the placement of the order, such as ordering
  prioritization, picking list by store layout, interim storage of picked baskets,
  truck-loading order, delivery schedules, and payment collections.

**Clients**

Our
                                software has been deployed in over 500 retail
                                chains worldwide, including grocery stores, convenience
                                stores and restaurants. The following is a select
                                list of companies that purchased at least $200,000
                                of our products and services in 2002.

|                                    |  | 
|----------------------------------- |  | 
|**Supermarkets**                    |  | 
|                                    |  | 
|Albertsons
      (US)               |  | 
|Big Y (US)                          |  | 
|Costco (US)                         |  | 
|DelHaize
      Group (Bel)          |  | 
|Tesco Stores
      (UK)             |  | 
|Sainsburys
      (UK)              |  | 
|Metro Cash
      & Carry (SA & Aus) |  | 
|Spar (SA)                           |  | 
|Shoprite
      Checkers (SA)        |  | 
|Supersol
      (IL)                 |  | 
|Blue Square
      (IL)              |  | 

**Sales
                                and Marketing**

We
                                distribute our products through direct sales,
                                OEMs and distributors, and local business systems
                                dealers. In addition, we participate in marketing
                                programs with several companies, including Fujitsu,
                                IBM and NCR. Our marketing efforts are focused
                                on increasing our brand recognition, as well as
                                the competitive advantages of our software solutions.
                                We participate in major trade show events and
                                conferences and do some advertising in trade publications.

We
                                have sales personnel in the United States, United
                                Kingdom, South Africa, Australia and Israel that
                                sell our products directly to supermarket, convenience
                                store and restaurant chains within these countries.
                                Our direct sales force relies on trade shows,
                                promotions, and referrals to obtain new customers.
                                In 2002, we continued to expand our direct sales
                                coverage in the United States with new mostly
                                high-level recruits.

We
                                have product distribution arrangements with NCR
                                and Fujitsu. Both companies market our products
                                to their respective reseller networks in the United
                                States. NCR resells our ScanMaster product under
                                the name NCR ScanMaster while Fujitsu resells
                                our StoreLine product under the brand name ISS45.
                                These arrangements provide us access to a widespread
                                network of business equipment dealers that specialize
                                in in-store systems for smaller retailers.

In
                                October 1997, we entered into a global marketing
                                partnership program with NCR for our convenience
                                store products. Under this agreement, we became
                                an NCR Global Solutions Partner. As an NCR Global
                                Solutions Partner, our StorePoint product line
                                may be promoted by NCR in the worldwide convenience
                                store sector. Either party may terminate this
                                agreement upon 30 days notice.

22

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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 U.S. convenience store market and are evaluating
                                possible collaborative opportunities in Europe
                                and Asia Pacific. We are also included on IBMs
                                ISV partner list.

In
                                July 2002, we established StoreNext Retail Technologies
                                LLC (StoreNext USA) together with Fujitsu Transaction
                                Solutions Inc. StoreNext USA provides point-of-sale
                                hardware and software as well as Internet-based
                                store management solutions for independent grocers
                                throughout North America. We currently hold 50.01%
                                of the shares of StoreNext USA. StoreNext USA
                                uses the dealer channels originally operated by
                                Fujitsu in this area.

We
                                have direct distribution agreements for the sale
                                of certain of our products with dealers in Australia,
                                Finland, Germany, New Zealand, Norway, the Philippines,
                                Singapore, South Africa, Switzerland, the United
                                Kingdom and the United States. We believe that
                                qualified dealers can be an effective sales channel
                                for our products in their respective markets and
                                can help us to overcome language barriers in countries
                                where English is not the native language. We intend
                                to continue to recruit dealers in countries where
                                we have identified sufficient sales potential
                                and a suitable market profile.

Our
                                professional services personnel provide customers
                                with expertise and assistance in planning, designing
                                and implementing integrated information software
                                solutions. Technical personnel assist retailers
                                with initial system planning, implementation,
                                historical data conversion, training, education
                                and project management. Our technical personnel
                                help to customize our products to the food retailers
                                needs, enhancing their current information systems
                                and managing upgrades and conversions. We believe
                                that our professional services facilitate a food
                                retailers early success with our products, strengthen
                                our relationships with the retailers and enhance
                                our industry-specific knowledge for use in future
                                implementation and software development projects.

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 customers into our convenience store
                                product offerings.

Our
                                StoreLine and StorePoint point-of-sale software
                                solutions are implemented using a common three-tier
                                architecture consisting of a user interface layer,
                                a business logic layer and a services layer. The
                                user interface layer consists of a collection
                                of software modules that are the basis for our
                                graphical user interface and user input interface.
                                The business logic layer consists of a collection
                                of rules for a given store format that can be
                                customized by users through the use of parameters.
                                The services layer provides a set of modules that
                                is designed to interface with open database management
                                systems and unique point-of-sale hardware devices
                                such as scanners, scales, gas pumps and displays,
                                as well as handling the redundancy and resiliency
                                features of the system.

Our
                                products are modular, scalable and provide for
                                resiliency and data redundancy. Additional users
                                can be added to our host-to-post application,
                                with minimal loss of performance and without significantly
                                increasing incremental costs. This is achieved
                                by employing a scalable, client-server architecture
                                based on Windows 2000 and SQL 2000 at the server.
                                To assist with system resilience at the in-store
                                level, StoreLine has two main file servers and
                                transaction databases that provide data redundancy.
                                At the point-of-sale, information is sent and
                                maintained on both back office file servers and
                                is logged into a local transaction file. Each
                                file server directs the information to its respective
                                database for permanent storage and retrieval.
                                Multiple servers and databases provide the necessary
                                replication to save and access data, even when
                                part of the system is unavailable. The local transaction
                                file allows for the point-of-sale to operate on
                                a standalone basis, maintaining a complete record
                                of all transactions until reconnected to one or
                                both of the file servers.

23

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**Research
  and Development**

We
                                believe that our research and development efforts
                                are essential to our ability to successfully develop
                                innovative products that meet the needs of our
                                customers as the market for enterprise-wide software
                                solutions evolves. As a result, we plan to continue
                                to devote a significant portion of our personnel
                                and financial resources to research and development,
                                particularly in connection with our out-sourcing
                                and e-marketplace initiatives. As of December
                                31, 2002, our research and development staff consisted
                                of 285 employees. Our research and development
                                expenses were $17.0 million in 2002, $14.6 million
                                in 2001, and $12.1 million in 2000.

From
                                time to time we participate in programs of the
                                Office of the Chief Scientist of the Ministry
                                of Industry and Trade of the Government of Israel.
                                A budget of approximately $1.1 million of grants
                                was approved to us under these programs during
                                2002 and grants of approximately $2,491,000 were
                                received by us from the Office of the Chief Scientist
                                through 2002. Regarding this issue, see the further
                                discussion set forth in Item 5C - Research and
                                Development, Patents and Licenses of this annual
                                report.

We
                                expect our research and development expenses to
                                grow as we hire additional personnel to develop
                                new products, and upgrade our existing products.

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

| | quality and reliability track
      record of our software solutions;                 
|- | --------------------------------------------------------------------------------------
|  |                                                                                       
| | established reputation with key customers;                                            
|  |                                                                                       
| | cost-effective products that balance feature/performance
      requirements with cost;
|  |                                                                                       
| | scope and responsiveness of customization
      services and technical support;       
|  |                                                                                       
| | breadth of product offerings;                                                         
|  |                                                                                       
| | compatibility with emerging industry standards;                                       
|  |                                                                                       
| | ease of upgrading and ease of use; and                                                
|  |                                                                                       
| | timeliness of new product introductions.                                              

A
                                number of companies offer competitive products
                                that address our target markets. In the supermarket
                                sector, our software solutions compete with software
                                products offered by several companies, including
                                IBM, Fujitsu, NCR, Triversity and Wincor-Nixdorf.
                                In the convenience store sector, we compete with
                                a number of companies including Radiant Systems
                                Inc., Pinnacle Systems, Gilbarco and VeriFone
                                Inc. Some of these competitors compete in more
                                than one of our targeted markets. In addition,
                                we believe that new market entrants may attempt
                                to develop food retail software solutions and
                                target small and single store food retailers.
                                Some competitors, such as Fujitsu, NCR, Wincor-Nixdorf
                                and IBM, are also Retalix marketing partners in
                                other market sectors or locations.

In
                                the e-market arena, we expect to see growing competition
                                from companies such as Retek and JDA who are investing
                                heavily in the area of browser-based retail enterprise
                                applications. Less competition is expected from
                                the larger e-marketplaces in food retail, such
                                as the Worldwide Retail Exchange, whose participants
                                include Royal Aholdt, Safeway, Tesco and Albertsons;
                                and GlobalNetXchange, whose participants include
                                Kroger, Carrefour and J. Sainsbury. These e-marketplaces
                                were conceived to provide added-value services
                                to large chains and lack the offerings, infrastructure
                                and marketing programs to address the small retailer
                                market.

24

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**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.

The
                                protective steps we have taken may be inadequate
                                to deter misappropriation of our technology and
                                information. We may be unable to detect the unauthorized
                                use of, or take appropriate steps to enforce,
                                our intellectual property rights. Our competitors
                                may independently develop technologies that are
                                substantially equivalent or superior to our technology.
                                Any licenses for any intellectual property that
                                might be required for our software solutions may
                                not be available on reasonable terms.

**C. Organizational Structure**

We
                                have the following subsidiaries and related companies:

|****Subsidiary                                              | Country
      of
      Residence | Portion
      of Ownership interest
      and voting power held (%)
|----------------------------------------------------------- | -------------------------------- | -------------------------------------------------------------------
|****Retalix
      Holdings Inc.                             | United
      States              | 100                                                                
|****Retalix
      USA Inc.(1)                               | United
      States              | 100                                                                
|****Retail
      Control Systems Inc. (1)                   | United
      States              | 100                                                                
|****BASS
      Inc. (2)                                     | United
      States              | 100                                                                
|****StoreNext
      Retail Technology LLC (1)               | United
      States              | 50.01                                                              
|****C-StoreMatrix.com
      Inc. (3)                        | United
      States              | 25                                                                 
|****Palm
      Point Ltd. (4)                               | Israel                           | 100                                                                
|****Tamar
      Industries M. R. Electronic (1985) Ltd. (5) | Israel                           | 100                                                                
|****StoreAlliance.com,
      Ltd. (6)                       | Israel                           | 59.2                                                               
|****StoreNext
      Ltd. (7)                                | Israel                           | 59.2                                                               
|****TradaNet
      Electronic Commerce Services Ltd. (7)    | Israel                           | 59.2                                                               
|****IREX
       Israel Retail Exchange Ltd. (7)            | Israel                           | 59.2                                                               
|****Cell-Time
      Ltd. (8)                                | Israel                           | 19.7                                                               
|****P.O.S.
      (Restaurant Solutions) Ltd.                | Israel                           | 69                                                                 
|****Net
      Point Ltd.                                    | Israel                           | 95                                                                 
|****Kohav
      Orion Advertising and Information Ltd.      | Israel                           | 100                                                                
|****Orlan
      Orion Systems Ltd.                          | Israel                           | 100                                                                
|****Retalix
      (UK) Limited                              | United
      Kingdom             | 100                                                                
|****Retalix
      SA PTY Ltd.                               | South Africa                     | 100                                                                
|****Retalix
      Australia PTY Ltd.                        | Australia                        | 100                                                                



**D.
                                Property, Plants and Equipment**

In
                                June 1998, we purchased the rights of third parties
                                in a long-term lease from the Israel Lands Authority,
                                a government agency, relating to land and approximately
                                2,300 square meters of office space in a building
                                in Raanana, Israel, which houses our corporate
                                headquarters. Towards the end of 1999, we acquired
                                the rights for an additional 1,200 square meters
                                in the same building to accommodate new activities
                                and the main operations of newly acquired subsidiaries.
                                We have financed these acquisitions through long
                                term loans secured partly by our interest in approximately
                                2,300 square meters of the Raanana property.
                                Deposits and other liquid financial assets currently
                                secure the remainder. In April 2001 we rented
                                additional space of approximately 400 square meters
                                in the same building in which we operate a dining
                                facility for our Raanana employees.

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In
                                addition to our corporate headquarters in Raanana,
                                Israel, we currently maintain the following office
                                spaces through leasing agreements: 16,400 square
                                feet in Plano, Texas; 6,200 square feet in Irving,
                                Texas (subleased); 214,000 square feet in Warrendale,
                                Pennsylvania; 16,400 square feet in Dayton, Ohio;
                                2,300 square feet in Carlsbad, California; 3,200
                                square feet in Boise, Idaho; 60 square feet in
                                London, United Kingdom, 700 square meters in Petah-Tikva,
                                Israel and 700 square meters in Haifa, Israel.
                                Our current total annual leasing expenses to be
                                paid under these agreements, some of which continue
                                through 2006, is approximately $1,072,000.

**You
                                should read the following discussion of our financial
                                condition and consolidated results of operations
                                in conjunction with Item 3A - Selected Consolidated
                                Financial Data and our consolidated financial
                                statements and notes to those statements included
                                elsewhere in this annual report. This discussion
                                contains certain forward-looking statements that
                                involve risks, uncertainties and assumptions.
                                As a result of many factors, including those set
                                forth under Item 3D - Risk Factors and elsewhere
                                in this annual report, our actual results may
                                differ materially from those anticipated in these
                                forward-looking statements.**

*General*

We
                                provide integrated enterprise-wide software solutions
                                for the retail food industry worldwide, including
                                supermarkets, convenience stores and restaurants.
                                Our products are designed to capture, analyze
                                and rapidly disseminate mission-critical information,
                                thereby enabling food retailers to increase operating
                                efficiencies and respond rapidly to changing competitive
                                market requirements and consumer preferences.

Since inception, we have significantly increased
                                our revenues through a combination of factors,
                                including obtaining new customers, expanding existing
                                customer relationships, acquiring complementary
                                businesses, including RCS in 2000 and BASS in
                                2001, and through introducing new products as
                                well as expanding the features and functionality
                                of our existing products.

We have derived the substantial majority of our
                                historical revenues from the sale of our software
                                solutions to large (Tier 1 and Tier 2) supermarkets
                                and convenience store chains, and we anticipate
                                that revenues from such customers will continue
                                to represent the majority of our revenues over
                                the near term. In 2003, we began to offer Connected
                                Services to Tier 3 and Tier 4 grocers in the U.S.,
                                for which we receive monthly subscription fees.
                                We anticipate that revenues related to Connected
                                Services will account for a growing, though substantially
                                smaller, portion of our revenues in future periods.

During 2002, we continued our strategy of focusing
                                on Tier 1 and Tier 2 food retailers. In addition,
                                through the formation of our StoreNext USA joint
                                venture, we expanded our focus on the Tier 3 and
                                Tier 4 food retailers, both through the assumption
                                of joint management for the dealer channel, through
                                whom our products are sold to food retailers,
                                as well as through the introduction of Connected
                                Services for this market segment, for which we
                                began to generate revenues in 2003. In 2002, we
                                also continued to expand our sales in North America,
                                where revenues grew by 20%, as well as our sales
                                in Europe, where revenues grew by 55%, in part
                                due to the contribution of our sales to Sainsburys,
                                one of the leading supermarket chains in the U.K.

|  | Highlights from 2002 include:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | We
                                    established StoreNext Retail Technologies
                                    LLC (StoreNext USA) together with Fujitsu
                                    Transaction Solutions Inc. StoreNext USA is
                                    designed to be our primary channel for store
                                    management solutions for Tier 3 and Tier 4
                                    independent grocers throughout North America.
                                    In addition to providing point-of-sale hardware
                                    and software to this sector of the U.S. market,
                                    StoreNext USA is our platform for providing
                                    our office and enterprise applications on
                                    an ASP basis to independent grocers, who cannot
                                    justify the investment required to support
                                    such applications in-house. We hold 50.01%
                                    of StoreNext USA.

26

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| | We
      increased our investment in research and development by 17% to $17.0 million
      for 2002, reflecting significant investments made in developing next-generation
      applications and Web-based architectures targeted to the needs of both large
      chains and independent retailers.                                                                                                                                            
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | We
      appointed Jeff Yelton as CEO of Retalix Inc., our North American subsidiary.
      Jeff Yelton joined us from Kyrus Corporation, IBM Corporations largest
      provider of point of sale systems. With over 60% of our sales and 40% of
      our employees in North America, appointing Jeff Yelton as CEO was an important
      part of our strategy to continue to focus on penetrating the North America
      food retail market.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | We
      announced that Hannaford Brothers, a 119-store chain in the Northeast United
      States owned by the Delhaize Group, selected our StoreLine product designed
      to operate on the Linux operating system, the first to operate on Linux
      in the grocery sector.                                                                                                                                                                

*Sources
                                of Revenue*

We
                                derive our revenues primarily from the licensing
                                of integrated software products, which we classify
                                as revenues from product sales, and the provision
                                of related maintenance and other services, principally
                                software changes requested by customers, which
                                we classify as revenues from services and projects.
                                In addition, we provide communication services
                                between retailers and suppliers and data analysis
                                and supply chain information services, which are
                                included in revenues from services and projects.

Our relationships with our Tier 1 and Tier 2 customers
                                are long term in nature as our core business is
                                based on supplying products that are mission critical
                                to our customers operations and involve considerable
                                commitment, attention, and investment of financial
                                and human resources by them. Revenues generated
                                from projects for any specific Tier 1 and Tier
                                2 customer are generally recognized over a period
                                of up to twenty-four months, depending upon the
                                products and the scope of the project. While no
                                single customer accounted for 10% or more of our
                                revenues in 2002, our quarterly revenues generally
                                include a number of large sales of products and/or
                                projects to a relatively small number of Tier
                                1 and Tier 2 customers.

*Product
                                sales*

Product sales primarily consist of the sale of
                                software through license agreements with direct
                                customers, distributors and dealers. Sales to
                                smaller retailers which constitute the lower end
                                of the market (Tier 3 and Tier 4) are occasionally
                                bundled with hardware. We recognize revenues from
                                sales of our products when delivery has occurred,
                                when the sales price is fixed or determinable,
                                when our ability to collect payment is probable
                                and when we have no material obligations remaining
                                under the sales agreements. We recognize revenues
                                from transactions involving resellers when our
                                software products are delivered to end-users.
                                We recognize revenues under agreements for the
                                sale of a specified number of software licenses
                                over a specified term over the term of the agreements.

*Services and projects*

Revenues
                                from services consist of maintenance and other
                                services, including communication services between
                                retailers and suppliers and the provision of data
                                analysis and supply chain information services.
                                Revenues from services are recognized as the services
                                are performed or over the term of the service
                                period, depending on the terms of the arrangement.
                                We generally sell maintenance on an annual basis,
                                which provides customers with the right to receive
                                technical support. Maintenance revenues are recorded
                                as deferred revenue at the time the associated
                                license is sold or a maintenance renewal is purchased,
                                and are recognized ratably over the term of the
                                maintenance agreement. If maintenance services
                                are included free of charge or discounted in a
                                license agreement, such amounts are unbundled
                                from the license fee at their fair market value
                                based upon the value established by independent
                                sales of such maintenance services to other customers.

27

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Revenues from projects consist primarily of fixed
                                price contracts for the development of changes
                                to the software code of our products at the request
                                of a specific customer.
                                Revenues from projects are deferred and recognized
                                as revenue upon completion of the development
                                of the software changes. Projects for changes
                                to software code requested by customers are not
                                begun until after the software license is sold
                                and generally take up to twelve weeks to complete.

In addition to the above revenue recognition criteria,
                                in situations where we have a continuing obligation
                                to the customer to provide additional products
                                or services, we only recognize revenues relating
                                to the products or services that have already
                                been delivered if

| | any
      undelivered products or services are not essential to the functionality
      of the delivered products or services;             
|- | -------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                            
| | payment
      for the delivered products or services is not contingent upon delivery of
      the remaining products or services;          
|  |                                                                                                                                            
| | we
      have an enforceable claim to receive the amount due in the event we do not
      deliver the undelivered products or services; and
|  |                                                                                                                                            
| | there
      is evidence of the fair value for each of the undelivered products or services.                                                

Deferred revenue primarily relates to software
                                maintenance agreements billed to customers for
                                whom the services have not yet been provided and
                                advances from customers for services that have
                                not been provided. The liability associated with
                                performing these services is included in deferred
                                revenue.

Because our revenue recognition differs based
                                on contract terms and customer requirements, our
                                services and projects revenues may vary from period
                                to period depending upon the mix of these arrangements
                                we enter into in such periods. Please refer to
                                 Application of Critical Accounting Policies
                                and Use of Estimates-- Revenue Recognition, for
                                further information regarding revenue recognition.

*Cost
                                of Revenues*

Cost
                                of revenues is comprised of the cost of product
                                sales and the cost of services and projects. In
                                addition we are obligated to pay the Israeli government
                                royalties at a rate of 2% to 5% on revenues on
                                specific products resulting from grants, up to
                                a total of 100% or 150% of the grants received.
                                These royalties are presented as part of our cost
                                of revenues.

*Cost of Product Sales * Cost of product
                                sales consists of costs related to product installation
                                and hardware. Historically, our revenues from
                                hardware sales represented a relatively small
                                portion of our overall revenues. Beginning in
                                July 2002, we began consolidating the results
                                of StoreNext USA into our financial statements.
                                As hardware sales constitute a significant portion
                                of StoreNext USA revenues, our cost of product
                                sales has increased, reflecting the higher costs
                                of hardware.

*Cost of Services and
  Projects*** Cost of services and projects consists of costs
  directly attributable to service and project sales, including software support,
  maintenance services, market information services, messaging and other services.
  Because the cost of services and projects is substantially higher, as a percentage
  of related revenues, than the cost of products, our overall gross margins may
  vary from period to period as a function of the mix of services and projects
  versus product revenues in such periods.

*Operating Expenses*

Operating expenses consist of research and development
                                expenses, net, selling and marketing expenses,
                                net and general and administrative expenses.

*Research
                                and Development Expenses, Net* - Research
                                and development expenses, net, consist primarily
                                of salaries, benefits and depreciation of equipment
                                for software developers. These expenses are net
                                of the amount of grants received from the Israeli
                                government for research and development activities.
                                Under Israeli law, research and development programs
                                that meet specified criteria and are approved
                                by the Office of the Chief Scientist are eligible
                                for grants of up to 50% of certain approved expenditures
                                of such programs. Please refer to C. Research
                                and Development, Patents and Licenses, for further
                                information regarding these programs.

28

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*Selling and Marketing Expenses* - Selling
                                and marketing expenses consist primarily of salaries,
                                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.
                                Selling and marketing expenses have increased
                                significantly over the last few years as we have
                                increased our efforts to strengthen our marketing
                                channels, particularly through direct sales.

*General
                                and Administrative Expenses* - General and
                                administrative expenses consist primarily of compensation,
                                professional fees and regular 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 activities as well as new joint ventures.
                                In addition, we adopted FAS No. 142 of the FASB,
                                Goodwill and other Intangible Assets and FAS
                                No. 141 Business Combinations in their entirety
                                as of January 1, 2002 except for acquisition we
                                entered into as of September 2001, for which we
                                applied the provisions of FAS 141 and FAS 142
                                as of the acquisition date. As a result, goodwill
                                that was previously amortized within general and
                                administrative expenses on a straight-line basis
                                over periods of four to seven years, is no longer
                                being amortized to earnings, but instead is subject
                                to periodic testing for impairment.

An
                                additional factor which affected our general and
                                administrative expenses in recent years, and 2002
                                in particular, is the worldwide economic recession,
                                which contributed to an increase in our bad debt
                                write-offs and allowance for doubtful accounts
                                and to the expenses associated with such debts.
                                In 2002, our allowance for doubtful accounts increased
                                from 2.6% in 2001 to 6.7% of the gross amount
                                of trade receivables due to the global recession,
                                especially the recession in Israel, where we had
                                to increase the allowance for doubtful accounts
                                for a number of smaller Israeli customers. In
                                determining the allowance for doubtful accounts,
                                we considered, among other things, our past experience
                                with such customers, the economic environment,
                                the industry in which such customers operate and
                                financial information available on such customers.
                                In addition, in 2002, one of our customers declared
                                bankruptcy and we wrote-off $650,000 in account
                                receivables attributable to that customer. In
                                light of this write-off and the continuing economic
                                recession, we re-examined our trade receivables
                                balances and increased our allowance for doubtful
                                accounts.

*Other
                                General Income, Net*

In
                                September 2000, we acquired RCS, a POS dealer
                                engaged in the sale of third party POS hardware
                                and internally developed software to the Tier
                                3 and Tier 4 market segment. RCS operated primarily
                                in several Eastern and Midwestern U.S. states.
                                In 2002, we sold a relatively small part of the
                                RCS dealership operations, principally RCSs operations
                                in the Tennessee area, due to conflicting interests
                                with our new StoreNext USA joint venture. Other
                                general income, net consists primarily of the
                                gain we realized upon this sale in 2002.

*Financial
                                Income, Net*

Financial income, net, consists primarily of interest
                                earned on bank deposits and securities, interest
                                paid on loans and credit from banks and gains
                                and losses from the conversion of monetary balance
                                sheet items denominated in non-dollar currencies
                                into dollars.

*Minority Interest in Losses of Subsidiaries*

29

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**A.
                                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
      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 expenses, net               |                              
|Selling
      and marketing expenses                       |                              
|General
      and administrative expenses                  |                              
|Other
      general income - net                           |                              
|                                                           |                              
|Total
      operating expenses                             |                              
|                                                           |                              
|Operating
      income (loss)                              |                              
|Financial
      income (expenses), net                     |                              
|Gain arising
      from issuance of shares by a subsidiary |                              
|Other expenses,
      net                                  |                              
|                                                           |                              
|Income (loss)
      before income taxes                    |                              
|Income taxes                                               |                              
|                                                           |                              
|Income (loss)
      before minority interests              |                              
|Minority
      interests in losses of subsidiaries         |                              
|                                                           |                              
|Net income
      (loss)                                    |                              
|                                                           |                              

**Comparison
                                of 2000, 2001 and 2002**

*Revenues*

|($
      in millions)       | Year ended
      December 31, | % Change
      2001 vs. 2000 | % Change2002
      vs. 2001
|--------------------------- | ----------------------------- | ---------------------------- | ---------------------------
|
|                            |                               |                              |                            
|Product sales               | $                             | 22.5                         |                            
|Services
      and projects |                               | 13.6                         |                            
|                            |                               |                              |                            
|Total
      revenues        | $                             | 36.1                         |                            



During
                                  2002, our revenue increase resulted primarily
                                  from an increase in sales to customers in the
                                  United States, where revenues increased from
                                  $37.0 million to $48.8 million, or approximately
                                  32%. Growth in the U.S. was contributed to by
                                  our inclusion, beginning in July 2002, of sales
                                  generated by StoreNext USA, our joint venture
                                  with Fujitsu targeted at the Tier 3 and Tier
                                  4 segment of the food retail market. As opposed
                                  to our direct sales, which consist primarily
                                  of revenues from sales of software and related
                                  services, StoreNext USA also sells third party
                                  POS hardware. As a result, our revenues in the
                                  second half of 2002 grew in part due to the
                                  inclusion of hardware sales generated by StoreNext
                                  USA. Our revenue growth in 2002 was also supported
                                  by our international sales, primarily in Europe,
                                  South Africa, Australia and the Far East, which
                                  increased from $11.6 million in 2001 to $18.0
                                  million in 2002.

During
                                  2001, our revenue growth was primarily attributable
                                  to our direct sales to Tier 1 and Tier 2 convenience
                                  store chains in the U.S., which increased sales
                                  of our StorePoint product, as well as an increase
                                  in revenues from services and projects due to
                                  the larger integration and customization requirements
                                  of such Tier 1 and Tier 2 customers. This growth
                                  contributed to a 153% increase in sales in the
                                  United States, from $14.6 million in 2000 to
                                  $37.0 million in 2001. During the same period,
                                  revenues from customers in Israel, Europe and
                                  the rest of the world enjoyed modest growth,
                                  increasing from $21.5 million in 2000 to $22.3
                                  million in 2001.

30

---

---

*Cost of Revenues*

|Year ended
      December 31,       | %
      Change2001 vs. 2000 | %
      Change
      2002 vs. 2001
|----------------------------------- | --------------------------- | ----------------------------------
|
|Cost of product
      sales         |                             |                                   
|Cost of services
      and projects |                             |                                   
|                                    |                             |                                   
|Total
      cost of revenues        |                             |                                   

The increase in cost of product
  sales in 2002 as well as the increase in this item as a percentage of product
  revenues resulted primarily from an increase in hardware associated sales attributable
  to our StoreNext USA initiative. Beginning in the third quarter of 2002, we
  consolidate the results of StoreNext USA into our financial statements. Whereas
  we historically generated revenues primarily from the sale of software and related
  services, StoreNext USA generates revenues from the sale of third party POS
  hardware as well, which have higher associated cost of revenues and lower gross
  margins. As a result, we expect our gross margins for future periods to be lower
  than our historical gross margins prior to July 2002.

In 2001, cost of product
  sales decreased slightly as a percentage of revenues due to the fact that there
  was no increase in hardware associated sales during 2001, and most of the increase
  in product sales was attributable to software licenses, which have a higher
  margin than hardware sales. The significant increase in 2001 in cost of services
  and projects was primarily due to an increase in the number of personnel associated
  with rendering such services in new projects to customers in the United States
  and in Europe.

|                                                   |  | %
      Change
      2001 vs. 2000 | %
      Change
      2002 vs. 2001
|-------------------------------------------------- |  | ---------------------------------- | ----------------------------------
|($
      in millions)                             
|
|Research
      and development, net                |  |                                    | $                                 
|Selling and
      marketing                        |  |                                    |                                   
|General and
      administrative                   |  |                                    |                                   
|                                                   |  |                                    |                                   
|Total
      operating expenses                     |  |                                    | $                                 
|*Net
      of $1.0 million in other general income |  |                                    |                                   

Research and Development Expenses,
Net 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. To that end, we
increased our research and development staff in both 2001 and 2002. Measured on a weighted
average basis, our research and development staff consisted of 35 more employees in 2002
than in 2001, and 36 more employees in 2001 than in 2000. These additional employees,
which were the primary cause for the increase in our research and development expenses in
2001 and 2002, were recruited in order to support our growing efforts in developing new
and enhanced solutions, and our efforts invested in modifying existing and new products to
new technology environments, new combinations of retail formats and market requirements as
defined by leading food retail chains. In particular, we continue to invest significant
development resources in developing new ReMA applications for use in our growing ASP and
e-marketplace initiatives and in upgrading our existing applications to be web-browser
enabled. We plan to continue to devote a significant portion of our personnel and
financial resources to research and development, particularly in connection with our ASP
and e-marketplace initiatives.

Selling and Marketing Expenses Approximately 75% of the increase in selling and marketing expenses in 2002 was
a result of our intensified efforts in our new ASP and e-marketplace initiatives, and the
remainder of the increase in selling and marketing expenses was primarily attributable to
the strengthening of sales and marketing infrastructure as part of our strategy to market
our products in new geographic markets. In addition, during 2002, we strengthened our
sales and marketing force in the United States, recruiting highly experienced industry
personnel, including key sales executives with extensive background and experience in the
U.S. market, in order to improve our ability to accommodate new opportunities, primarily
in the U.S. grocery sector. We also significantly increased our efforts to increase
awareness of our products globally by participating in additional tradeshows and industry
events. The 47% increase in our selling and marketing expenses in 2001 was primarily
attributable to our increased marketing efforts in the Tier 3 and Tier 4 grocery sector in
the U.S., which was assisted by our acquisitions of BASS and RCS. We anticipate that
selling and marketing expenses, net, will continue to increase in absolute dollars as we
expand our operations. As we devote increasing resources to our sales and marketing
efforts, such expenses as a percentage of revenues may increase as well.

31

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General and Administrative
Expenses In 2002, our general and administrative expenses decreased as a
percentage of sales, due to our ability to leverage our existing infrastructure to
accommodate our growing revenues. In 2001, our general and administrative expenses
increased by over 75% due primarily to the impact of our growth through acquisitions and
the higher administrative expenses of the acquired entities. Although we acquired RCS in
2000 and BASS in 2001, the cost savings achieved through the consolidation of the
administrative infrastructure of the acquired entities into our existing infrastructure
were only begun to be realized in 2002.

*Financial
  Income (Expenses), Net*

Financial income (expenses), net,
totaled an expense of $499,000 for 2002 and $365,000 for 2001 compared to $140,000 of
income for 2000. The changes resulted primarily from financial expenses incurred on bank
loans used to finance acquisitions and purchasing of fixed assets and the devaluation of
net financial non-dollar assets as a result of the strengthening of the U.S. Dollar
compared to the Israeli Shekel and the British Pound Sterling.

**Corporate
  Tax Rate**

The corporate tax rate in Israel is
36%. Our effective tax rate, however, was 28.9% in 2002 and 16.4% in 2001. In 2000, we
suffered a pre-tax loss of $1.8 million and our tax expenses amounted to $124,000. These
lower tax rates are primarily a result of the fact that we enjoy tax reductions under
Israels Law for Encouragement of Capital Investments, 1959, with respect to our
investment programs that were granted the status of approved enterprises. We have derived,
and expect to continue to derive, a portion of our income from approved enterprise
investments. Under the approved enterprise program, we are entitled to reductions in the
tax rate normally applicable to Israeli companies with respect to income generated from
our approved enterprise investments. We are also entitled to certain tax exemptions in
connection with our approved enterprise investments. There could be no assurance that such
tax benefits will be available for us in the future at all or at their current levels.

**Quarterly
  Results of Operations**

The following tables set forth
certain unaudited quarterly financial data for each of our last eight quarters and these
data are expressed as a percentage of total revenues for each quarter. The data have been
prepared on a consistent basis with our audited consolidated financial statements included
elsewhere in this annual report. The operating results for any quarter are not necessarily
indicative of results for any future period.

32

---

---

Consolidated
Statement of Income Data (unaudited, in thousands except per share amounts)



| | **(Restated)**
| | --------------
| |               

|                                       | Mar. 31,
      2001 | Jun. 30,
      2001 | Sep. 30,
      2001 | Dec. 31,
      2001 | Mar. 31,
      2002 | Jun. 30,
      2002 | Sep. 30,
      2002 | Dec. 31,
      2002
|-------------------------------------- | ------------------- | ------------------- | ------------------- | ------------------- | ------------------- | ------------------- | ------------------- | -------------------
|Revenues:                              |                     |                     |                     |                     |                     |                     |                     |                    
|Product
      sales                    |                     |                     | $                   | 8,221               |                     | $                   | 8,346               |                    
|Services
      and projects            |                     |                     |                     | 6,035               |                     |                     | 6,157               |                    
|                                       |                     |                     |                     |                     |                     |                     |                     |                    
|Total
      revenues                   |                     |                     |                     | 14,256              |                     |                     | 14,503              |                    
|Cost of revenues:                      |                     |                    
|Cost
      of product sales            |                     |                     |                     | 1,910               |                     |                     | 1,663               |                    
|Cost
      of services and projects    |                     |                     |                     | 2,109               |                     |                     | 2,192               |                    
|                                       |                     |                     |                     |                     |                     |                     |                     |                    
|Total
      cost of revenues           |                     |                     |                     | 4,019               |                     |                     | 3,855               |                    
|                                       |                     |                     |                     |                     |                     |                     |                     |                    
|Gross profit                           |                     |                     |                     | 10,237              |                     |                     | 10,648              |                    
|Operating
      expenses:              |                     |                    
|Research
      and development         |                     |                    
|expenses,
      net                    |                     |                     |                     | (3,619              | )                   |                     | (3,603              | )                  
|Selling
      and marketing            |                     |                    
|expenses                               |                     |                     |                     | (3,410              | )                   |                     | (3,571              | )                  
|General
      and administrative       |                     |                    
|expenses,
      net                    |                     |                     |                     | (2,746              | )                   |                     | (2,937              | )                  
|Other
      general income (expenses), |                     |                    
|net                                    |                     |                     |                     | 3                   |                     |                     | (18                 | )                  
|                                       |                     |                     |                     |                     |                     |                     |                     |                    
|Total
      operating expenses         |                     |                     |                     | 9,772               |                     |                     | 10,129              |                    
|                                       |                     |                     |                     |                     |                     |                     |                     |                    
|Operating
      income (loss)          |                     |                     |                     | 465                 |                     |                     | 519                 |                    
|Financial
      income (expenses),     |                     |                    
|net                                    |                     |                     |                     | (367                | )                   |                     | 69                  |                    
|Gain arising
      from issuance of    |                     |                    
|shares
      by a subsidiary           |                     |                     |                     | 2,391               |                     |                     | 486                 |                    
|Other expenses                         |                     |                     |                     |                     |                     |                     | (501                | )                  
|                                       |                     |                     |                     |                     |                     |                     |                     |                    
|Income (loss)
      before income      |                     |                    
|taxes                                  |                     |                     |                     | 2,489               |                     |                     | 573                 |                    
|Income taxes                           |                     |                     |                     | 2                   |                     |                     | 210                 |                    
|                                       |                     |                     |                     |                     |                     |                     |                     |                    
|Income (loss)
      before minority    |                     |                    
|interests                              |                     |                     |                     | 2,487               |                     |                     | 363                 |                    
|Minority
      interest in losses      |                     |                    
|(profits)
      of subsidiaries .      |                     |                     |                     | (285                | )                   |                     | 164                 |                    
|                                       |                     |                     |                     |                     |                     |                     |                     |                    
|Net income
      (loss)                |                     |                     | $                   | 2,202               |                     | $                   | 527                 |                    
|                                       |                     |                     |                     |                     |                     |                     |                     |                    

|                                 | Mar. 31,
      2001 | Jun. 30,
      2001 | Sep. 30,
      2001 | Dec. 31,
      2001 | Mar. 31,
      2002 | Jun. 30,
      2002 | Sep. 30,
      2002 | Dec. 31,
      2002
|-------------------------------- | ------------------- | ------------------- | ------------------- | ------------------- | ------------------- | ------------------- | ------------------- | -------------------
|Earnings
      (loss) per share: |                     |                     |                     |                     |                     |                     |                     |                    
|Basic                            |                     |                     | $                   | 0.19                |                     | $                   | 0.05                |                    
|                                 |                     |                     |                     |                     |                     |                     |                     |                    
|Diluted                          |                     |                     | $                   | 0.19                |                     | $                   | 0.04                |                    
|                                 |                     |                     |                     |                     |                     |                     |                     |                    
|Weighted
      average number    |                     |                    
|of
      shares used in          |                     |                    
|computation
      of             |                     |                    
|earning
      per share:         |                     |                    
|Basic                            |                     |                     |                     | 11,319              |                     |                     | 11,371              |                    
|Diluted                          |                     |                     |                     | 11,827              |                     |                     | 12,108              |                    

33

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---

**As a
  Percentage of Total Revenues (unaudited)**

|                                    | Mar. 31,
      2001 | Jun. 30,
      2001 | Sep. 30,
      2001 | Dec. 31,
      2001 | Mar. 31,
      2002 | Jun. 30,
      2002 | Sep. 30,
      2002 | Dec. 31,
      2002
|----------------------------------- | ------------------- | ------------------- | ------------------- | ------------------- | ------------------- | ------------------- | ------------------- | -------------------
|Revenues:                           |                     |                     |                     |                     |                     |                     |                     |                    
|Product
      sales                 |                     |                     |                     | 57.7                | %                   |                     | 57.5                | %                  
|Services
      and projects         |                     |                     |                     | 42.3                |                     |                     | 42.5                |                    
|                                    |                     |                     |                     |                     |                     |                     |                     |                    
|                                    |                     |                     |                     | 100.0               |                     |                     | 100.0               |                    
|Cost of revenues:                   |                     |                    
|Cost
      of product sales         |                     |                     |                     | 13.4                |                     |                     | 11.5                |                    
|Cost
      of services and          |                     |                    
|projects                            |                     |                     |                     | 14.8                |                     |                     | 15.1                |                    
|                                    |                     |                     |                     |                     |                     |                     |                     |                    
|Total cost
      of revenues        |                     |                     |                     | 28.2                |                     |                     | 26.6                |                    
|                                    |                     |                     |                     |                     |                     |                     |                     |                    
|Gross profit                        |                     |                     |                     | 71.8                |                     |                     | 73.4                |                    
|Operating
      expenses:           |                     |                    
|Research
      and                  |                     |                    
|development
      expenses,         |                     |                    
|net                                 |                     |                     |                     | (25.4               | )                   |                     | (24.8               | )                  
|Selling
      and marketing         |                     |                    
|expenses                            |                     |                     |                     | (23.9               | )                   |                     | (24.6               | )                  
|General
      and                   |                     |                    
|administrative                      |                     |                    
|expenses                            |                     |                     |                     | (19.3               | )                   |                     | (20.3               | )                  
|Other
      general income          |                     |                    
|(expenses),                         |                     |                    
|net                                 |                     |                     |                     |                     |                     |                     | (0.1                | )                  
|                                    |                     |                     |                     |                     |                     |                     |                     |                    
|Total
      operating               |                     |                    
|expenses                            |                     |                     |                     | 68.5                |                     |                     | 69.8                |                    
|                                    |                     |                     |                     |                     |                     |                     |                     |                    
|Operating
      income (loss)       |                     |                     |                     | 3.3                 |                     |                     | 3.6                 |                    
|Financial
      income              |                     |                    
|(expenses),
      net               |                     |                     |                     | (2.6                | )                   |                     | 0.5                 |                    
|Gain arising
      from issuance of |                     |                    
|shares
      by a                   |                     |                    
|subsidiary                          |                     |                     |                     | 16.8                |                     |                     | 3.4                 |                    
|Other expenses                      |                     |                     |                     |                     |                     |                     | (3.5                | )                  
|                                    |                     |                     |                     |                     |                     |                     |                     |                    
|Income (loss)
      before          |                     |                    
|income
      taxes                  |                     |                     |                     | 17.5                |                     |                     | 4.0                 |                    
|Income taxes                        |                     |                     |                     |                    |                     |                     | 1.4                 |                    
|                                    |                     |                     |                     |                     |                     |                     |                     |                    
|Income (loss)
      before          |                     |                    
|minority
      interests            |                     |                     |                     | 17.4                |                     |                     | 2.5                 |                    
|Minority
      interest in          |                     |                    
|losses
      (profits) of           |                     |                    
|subsidiaries                        |                     |                     |                     | (2.0                | )                   |                     | 1.1                 |                    
|                                    |                     |                     |                     |                     |                     |                     |                     |                    
|Net income
      (loss)             |                     |                     |                     | 15.4                |                     |                     | 3.6                 |                    
|                                    |                     |                     |                     |                     |                     |                     |                     |                    

**B.
  Liquidity and Capital Resources**

We had cash and cash equivalents of
approximately $28.4 million, $9.2 million and $14.5 million as of December 31, 2002, 2001
and 2000, respectively. Our total current financial balances including cash and cash
equivalents, short-term bank deposits and marketable securities amounted to approximately
$31.5 million, $27.4 million and $21.7 million as of December 31, 2002, 2001 and 2000,
respectively. As of December 31, 2002, we had approximately $3.0 million in marketable
securities.

Net Cash Provided by/Used in
Operating Activities. Net cash provided by operating activities was approximately
$10.1 million in 2002, primarily the result of an increase of $4.5 million in our accounts
payable and accruals, partially offset by a $1.4 million net increase in our accounts
receivable due to our growing sales. Net cash provided by operating activities in 2001 was
approximately $5.6 million, primarily the result of a $2.1 million net decrease in trading
securities, offset in part by a $1.0 million net increase in our accounts receivable and a
decrease of $2.1 million in our accounts payable and accruals. Net cash used in operating
activities in 2000 was approximately $8.9 million, primarily the result of a $6.5 million
increase in our accounts receivable and a $1.7 million increase in our trading securities.
Our accounts receivable balance fluctuates from period to period, which impacts our cash
flow from operating activities. Fluctuations vary depending on the timing of sales and
billing activity, cash collections and changes to our provision for doubtful accounts.

34

---

---

Net Cash Provided by/Used in
Investing Activities. Net cash provided by investing activities was approximately
$11.1 million in 2002. Net cash used in investing activities in 2001 was approximately
$15.5 million, and net cash used in 2000 was approximately $7.8 million. Net cash provided
by investing activities in 2002 was primarily attributable to the maturity of short-term
bank deposits and proceeds from the sale of portion of the dealership activity of one of
our subsidiaries in the United States, net of investments in marketable securities and
acquisitions of fixed assets.

Net Cash Provided by/Used in
Financing Activities. Net cash used in financing activities in 2002 was approximately
$1.9 million, primarily attributable to repayment of long term bank loans net of proceeds
from the issuance of share capital with regard to options exercised by employees. In 2001,
net cash provided by financing activities was approximately $4.6 million, primarily
attributable to a long term bank loan received and proceeds from the issuance of shares of
a subsidiary to a third party which were offset by a repayment of $4.4 million in
long-term loans from banks. In 2000, net cash provided by financing activities was
approximately $16.0 million, primarily attributable to a long-term bank loan received. Our
capital expenditures (consisting of the purchase of fixed assets, and from acquisitions of
subsidiaries consolidated for the first time in 2000) were $1.7 million, $2.2 million and
$10.1 million in 2002, 2001 and 2000, respectively.

*Bank Debt*

In June 1998, we entered
  into a loan agreement with Bank Leumi for approximately $2.5 million to finance
  the purchase of our facility in Raanana, Israel. The loan is secured by
  a mortgage on the property. In January 2000, we entered into an additional loan
  agreement with Bank Leumi for approximately $1.7 million to finance the purchase
  of additional office space in the same building in Raanana. The loan is
  secured by a lien on our securities portfolio. In respect of both loans, we
  have made covenants, including maintenance of financial ratios, to Bank Leumi
  and have undertaken not to pledge any of our assets without the banks
  prior consent.

At December 31, 2002, we
  had the following outstanding debt obligations, most of which were incurred
  to finance acquisitions:

|Currency                  | Date of Loan | Original
      Loan Amount | Outstanding
      Principal Amount | Maturity Date         | Interest Rate      
|------------------------- | ------------ | -------------------------- | ---------------------------------- | --------------------- | -------------------
|                          |              |                            |                                    | ($
      in millions) |                    
|Bank Leumi                |              |                            | USD                                |                       | June
      1998    
|Bank Leumi                |              |                            | USD                                |                       | January
      2000 
|Bank Leumi                |              |                            | USD                                |                       | August
      2000  
|United Mizrahi
      Bank |              |                            | USD                                |                       | December
      2000
|Bank Leumi                |              |                            | NIS                                |                       | December
      2001
|Bank Leumi*               |              |                            | NIS                                |                       | April 2002         
|Bank Hapoalim             |              |                            | NIS                                |                       | April 2002         
|Bank Leumi*               |              |                            | GBP                                |                       | April 2002         
|                          |              |                            |                                    |                       |                    
|Total                     |              |                            |                                    |                       |                    

* Repaid in full at maturity in April
2003.

35

---

---

*Contractual
  Obligations*

The following table presents further
information relating to our liquidity:

|Contractual Obligations (U.S. dollars in
thousands) * | Total | Less than
1 year | 1-3 years | 4-5 years
|----------------------------------------------------- | ----- | ---------------- | --------- | ---------
|Long-Term Debt (including current maturities)**       |       |                  | $         | 15,792   
|Liabilities with regard to executory unfavorable      |       |                 
|contracts (including current maturities)              |       |                  |           | 5,379    
|Capital Lease Obligations with regard to offices      |       |                 
|and facilities                                        |       |                  |           | 3,692    

____________________________
  
  * See also the notes to our consolidated financial statements attached at Item
  18 to this annual report, and in particular, Notes 5, 6 and 8 thereto. 
  ** Includes $171 in loans from shareholders of subsidiaries to the subsidiaries.

*Credit Risk*

Other than one foreign currency
forward contract described below, we have no significant off-balance-sheet concentration
of credit risk, such as foreign exchange contracts, option contracts or other foreign
hedging arrangements. We may be subject to concentrations of credit risk from financial
balances, consisting principally of cash and cash equivalents, short-term bank deposits,
trade and unbilled receivables and investments in marketable securities. We invest our
cash and cash equivalents and marketable securities in U.S. dollar deposits with major
Israeli and U.S. banks. We believe that the financial institutions that hold our
investments are financially sound, and, accordingly, minimal credit risk exists with
respect to these investments.

Most of our revenue has historically
been generated from a large number of customers. Consequently, the exposure to credit
risks relating to trade receivables is limited. We perform ongoing credit evaluations of
our customers and we generally do not require collateral. An appropriate allowance for
doubtful accounts is included in the accounts receivables.

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 have only limited involvement with
derivative financial instruments. We carry out transactions involving foreign exchange
derivative financial instruments (forward exchange contracts). These transactions do not
qualify for hedge accounting under FAS No. 133, Accounting for Derivative
Instruments and Hedging Activities.

During 2002, we entered into one foreign
currency forward contract for conversion of British Pounds Sterling into a notional amount
of U.S. dollars of approximately $2.3 million. The fair value of that contract as of
December 31, 2002 reflects a liability in the amount of $89,700, which was charged to
financial expenses.

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 enhancement to existing products, and the continuing
market acceptance of our products. To the extent that our existing financial reserves and
cash generated from operations are insufficient to fund our future activities, we may need
to raise additional funds through public or private equity or debt financing. Although we
are currently not a party to any agreement or letter of intent with respect to potential
investments in, or acquisitions of, complementary businesses, products or technologies, we
may enter into these types of arrangements in the future, which could also require us to
seek additional equity or debt financing.

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

Most of
our sales are denominated in dollars or are dollar linked. However, a significant portion
of our expenses, primarily expenses associated with employee compensation, is 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, which 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 inflation in Israel. An increase in inflation which is not offset by a devaluation of
the NIS relative to the U.S. dollar can cause our expenses to increase.

In recent years, the behavior of the
exchange rate of the NIS to the U.S. dollar in comparison to the inflation in Israel was
not consistent. In 1997, 1998, 2001, and 2002, the rate of devaluation of the NIS to the
U.S. dollar exceeded the rate of inflation in Israel, while in 1999 and 2000 the rate of
inflation in Israel exceeded the rate of devaluation of the NIS to the U.S. dollar. The
rate of inflation was 7.0% in 1997, 8.6% in 1998, 1.3% in 1999, 0% in 2000, 1.4% in 2001,
and 6.5% in 2002, while the rate of devaluation of the NIS to the US dollar was 8.8% in
1997, 17.6% in 1998, (0.2) % in 1999, (2.7) % in 2000, 9.3% in 2001 and 7.3% in 2002.

Because exchange rates between the
NIS and the dollar fluctuate continuously, albeit with a historically declining trend in
the value of the NIS, exchange rate fluctuations and especially larger periodic
devaluations may have an impact on our profitability and period-to-period comparisons of
our results. We believe that inflation in Israel and exchange rate fluctuations between
the NIS and the dollar have not had a material effect on our results of operations.

**Restatement
  of financial statements**

We have restated our consolidated
financial statements for the years ended December 31, 2002 and 2001, to correct the value
assigned to shares issued by our subsidiary, Store Alliance.Com Ltd. (Store
Alliance), in April 2001 in an exchange for shares in TradaNet Electronic Commerce
Services Ltd. (Tradanet). That transaction was accounted for as a business
combination. In our previously issued financial statements the aggregate value assigned to
the shares issued was approximately $ 1,901,000, or $5.56 per share. The financial
statements for the years ended December 31, 2002 and 2001 have been restated to reflect an
aggregate value of approximately $ 1,331,000, or $3.89 per share. The price of $3.89 was
determined based on a separate cash transaction involving issuance of Store Alliance
shares, which closely preceded the Tradanet transaction.

**Application
  of Critical Accounting Policies and Use of Estimates**

Our discussion and analysis of our
financial condition and results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. 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 to be 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.

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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 understanding our historical
and future performance, as these policies relate to the more significant areas involving
managements judgments and estimates. Please refer to Note 1 to our consolidated
financial statements for a further description of our accounting policies.

*Revenue recognition*

Our revenue recognition policy is
significant because our revenue is a key component of our results of operations. In
addition, our revenue recognition determines the timing of certain expenses, such as
commissions and royalties. We follow very specific and detailed guidelines in measuring
revenue; however, certain judgments affect the application of our revenue policy. 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 could be adversely affected (see Note 1 to our consolidated
financial statements attached at Item 18 of this annual report).

*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. Allowance for doubtful accounts adequacy is regularly
evaluated by taking into account variables such as past experience, age of the receivable
balance, and current economic conditions of the receivable balance. If the financial
conditions of certain of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowance may be required.

*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 recognized 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 reassesses deferred taxes and examine
whether any amounts need to be added or released.

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 generally record revenues in dollars or in NIS linked
  to the dollar. Our financing is also comprised primarily from dollar loans.
  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: (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.

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**Market
  Risk**

For information on our market risk,
see Item 11  Quantitative and Qualitative Disclosures About Market Risk.

**C. Research
  and Development, Patents and Licenses**

**Grants
  from the Office of the Chief Scientist**

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 a result, we plan to continue to devote a significant
portion of our personnel and financial resources to research and development, particularly
in connection with our out-sourcing and e-marketplace initiatives.

As of December 31, 2002, our research
and development staff consisted of 285 employees. Our research and development expenses
were $17.0 million in 2002, $14.6 million in 2001 and $12.1 million in 2000.

From time to
time we receive grants under programs of the Office of the Chief Scientist of the Ministry
of Industry and Trade of the Government of Israel. A budget of approximately $755,000 of
grants was recorded by us under these programs during 2002 and between the years 1988
through 2002 aggregate grants of approximately $2.5 million were received by us, of which
as of December 31, 2002, approximately $327,000 has been repaid through a mandatory
royalty based on revenues from products incorporating know-how developed with these
grants. This governmental support is conditioned upon our ability to comply with certain
applicable requirements and conditions specified in the Chief Scientists program and
with 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 Office of the Chief Scientist of the Ministry of Industry
and Trade of the Government of Israel 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 Office of the Chief Scientist royalties from the revenues
derived from products incorporating know-how developed within the framework of each such
program or derived therefrom (including ancillary services in connection therewith), up to
an aggregate of 100% of the dollar-linked value of the total grants received in respect of
such program, plus interest, or up to 150% thereof in the case of some of our earliest
programs. The royalty rates applicable to our programs range from 3% to 5%.

The Research and Development Law
generally requires that the product developed under a program be manufactured in Israel.
However, upon the approval of the Chief Scientist, some of the manufacturing volume may be
performed outside of Israel, provided that the grant recipient pays royalties at an
increased rate, which may be substantial, and the aggregate repayment amount is increased
to 120%, 150% or 300% of the grant, depending on the portion of the total manufacturing
volume that is performed outside of Israel. Effective April 1, 2003, 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 Office of Chief Scientist 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 will be required in such cases.

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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 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.

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
interested parties to notify the Office of the Chief Scientist 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 Office of the Chief Scientist to
comply with the Research and Development Law. In addition, the rules of the Office of the
Chief Scientist require prior approval (and not only notification) in respect of certain
of such events. 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 Office of the Chief Scientist that it has
become an interested party and to sign an undertaking to comply with the Research and
Development Law.

The funds available for Office of the
Chief Scientist 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 Office of the Chief Scientist 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**

Other than as discussed elsewhere in
Item 4.B and this Item 5, we do not have relevant trend information.

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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.

|Name                        |  | Age |  | Position                                                          
|--------------------------- |  | --- |  | ------------------------------------------------------------------
|Barry
      Shaked          |  | 46  |  | President,
      Chief Executive Officer and Chairman of the Board
|Danny Moshaioff             |  | 56  |  | Executive
      Vice President, Chief Financial Officer           
|Avinoam Bloch               |  | 46  |  | Executive
      Vice President, Products                          
|Yoni Stutzen                |  | 51  |  | Vice President,
      International Sales                         
|Saul Simon                  |  | 50  |  | Vice President,
      Marketing and Business Development          
|Alon Goetz                  |  | 44  |  | Vice President,
      Development                                 
|Larry Susman                |  | 42  |  | Vice President,
      Israeli operations                          
|Jeff Yelton                 |  | 44  |  | Chief Executive
      Officer, Retalix USA                        
|Eli Spirer                  |  | 47  |  | Executive
      Vice President, US Operations, Retalix USA        
|Patrick Ervin               |  | 47  |  | Executive
      Vice President, Sales, Retalix USA                
|Elhanan (Elli)
      Streit |  | 63  |  | External
      Director                                           
|Ilan Horesh                 |  | 51  |  | External
      Director                                           
|Orly Eshkar                 |  | 44  |  | Director                                                          
|Brian Cooper                |  | 47  |  | Director                                                          
|Ian OReilly                |  | 54  |  | Director                                                          
|Amnon Lipkin-Shahak         |  | 59  |  | Director                                                          

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

Danny Moshaioff has served as
an Executive Vice President and our Chief Financial Officer since December 1999. From July
1997 to December 1999, Mr. Moshaioff served as Chief Financial Officer of Blue Square ISR
and from September 1995 to June 1997, he served as General Manger of Mashbir Mazon. 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.

Avinoam Bloch has served as
our Executive Vice President, Products since January 2002. During 2000, Mr. Bloch served
as Executive Vice President, Operations. From February 1993 to January 2000, Mr. Bloch
served as Vice President, Engineering responsible for Israeli markets and new technology
software development. From December 1988 to January 1993, Mr. Bloch served as a Product
Manager for Wincor-Nixdorf and Wincor-Nixdorf Italy. He served as a Programmer and Product
Manager from January 1986 to December 1998. Mr. Bloch served as an officer in the Israeli
Defense Forces from 1975 to 1979. Mr. Bloch received a B.Sc. in Computer Science and
Mathematics from the Hebrew University in 1993.

Yoni Stutzen has 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.

Saul Simon has served as our
Vice President, Marketing and Business Development since November 1997. Mr. Simon served
as Vice President, U.S. Activities for Adapt Technologies from March 1993 to June 1997.
Mr. Simon received a B.Sc. in Computer Science and Mathematics from Tel Aviv University in
1982.

Alon Goetz has served as our
Vice President, Development since November 1999. Mr. Goetz served as our Vice President,
Supermarket Systems from August 1997 to October 1999. Prior to August 1997, Mr. Goetz was
a manager in charge of product development oversees.

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Larry Susman has served as our
Vice President, in charge of operations in Israel, since October 2002. Prior to this
position and since November 2001, Mr. Susman was our Vice President in charge of the Tesco
account. Mr. Susman served as a senior account manager for the Tesco account since 1999,
and as a senior project manager since 1997. Between 1991 and 1997, Mr. Susman served in
various sales positions within Denel Informatics Pretoria South Africa.

Jeff Yelton has served as
Chief Executive Officer of Retalix USA, since July 2002. Between November 1995 and June
2002, Mr. Yelton served in a variety of senior positions with Kyrus Corporation, including
Director of Sales, Vice President of Sales and Marketing, and Executive Vice President of
Strategy and Business Development. Between September 1993 and October 1995, Mr. Yelton
served in a variety of positions within the sales and operations areas with IBM
Corporation. Mr. Yelton received a B.S. degree in Business Administration from the
University of North Carolina in 1981.

Eli Spirer has served as our
Executive Vice President, US Operations, of Retalix USA since January 2002. During 2000
and 2001, Mr. Spirer served as Vice President, Customer Service. Mr. Spirer served as Vice
President for Strategic Development of Retalix USA, managing the supermarket business and
strategic alliances from August 1996 to December 1999. From January 1992 to July 1996, Mr.
Spirer served as our Vice President for International Development. After serving in the
Israeli Defense Forces from 1974 to 1977, Mr. Spirer graduated from the Technion, Israel
Institute of Technology in 1981.

Patrick Ervin has served as
our Executive Vice President of Sales and Marketing, Retalix USA, since August 2002. Prior
to joining Retalix USA, Mr. Ervin served as President of Lyceum Interactive. Mr. Ervin
worked for IBM Corporation for over 25 years, where he held various sales management and
product development positions in the USA. Mr. Ervin has over 20 years experience working
with large retailers in the United States, including Wal-Mart, The Limited, Albertsons,
and Supervalu.

Elhanan (Elli) Streithas
served as an external director since March 2000. Since January 1999, Mr. Streit has been a
managing director of PFM International Access Limited. Mr. Streit served as an independent
director in Advantech, a public company traded on the Tel Aviv Stock Exchange, from April
2000 to December 2002. Since September 2000, Mr. Streit has served as a director of a
London based private company called Primode. Mr. Streit served as the Director of the
Friends Association at the Israel Museum from July 1996 through July 1998 and as a
managing director at Dizengoff West Africa from August 1991 through January 1996. He
received a B.A. in Economics and Political Science from the Hebrew University in 1963 and
an M.B.A. from the Wharton School at the University of Pennsylvania in 1965.

Ilan Horesh has served as an
external director since March 2000. Since November 1998, Mr. Horesh has been a director of
Value Added Services  Marketing Division at Pelephone Communications Ltd. From
December 1997 to November 1998, Mr. Horesh was CEO at Shefa  The Customers Club of
Maccabi Health Services and, from January 1994 to December 1997, Mr. Horesh was a planning
and development executive at PAZ Oil Corporation. He received a B.A. in History from Tel
Aviv University in 1984, an M.A. in Political Science from Haifa University in 1990 and an
M.A. in Business Management from Tel Aviv Management College in 1996.

Orly Eshkar has served as a
director since March 2000. Ms. Eshkar has been our Senior Systems Analyst since April
2000. From May 1985 to February 2000, Ms. Eshkar was a Senior Systems Analyst at Advanced
Technology Limited. She received an M.A. in Computer Sciences from The Bari University in
Italy in 1985 and a B.A. in Computer Science from The Bari University in Italy in 1983.

Brian Cooperhas served as a
director since August 1984. From December 1999 to June 2001, Mr. Cooper served as our Vice
President, Israeli operations. Mr. Cooper also served as our Chief Financial Officer from
August 1984 until December 1999. From 1979 to 1984, Mr. Cooper served as an officer in the
Israeli Defense Forces as an economist and programmer. Mr. Cooper received a B.A. in
Economics from Haifa University in 1977.

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Ian OReilly has served
as a director since November 2000. Mr. OReilly serves as a director of e-Daily and
The Cambridge Building Society and served as a Group IT Manager at Tesco Stores Ltd.
between 1991 and 2000. He received a British Computer Society Qualification from the
Cambridge College of Arts and Technology in 1972.

Amnon Lipkin-Shahakhas served
as a director since April 2002. Since May 2001, Mr. Lipkin-Shahak has served as the
chairman of the board in the TAHAL Group, and as a director in the Kardan Group, Granit
Hacarmel and NILIT, and as the chairman of the Bountiful Israel Council. Between May 1999
and March 2001, Mr. Lipkin-Shahak served as a member of the Israeli parliament (the
Knesset). During most of this period, Mr. Lipkin-Shahak served as a cabinet minister in
charge of transport (between July 2000 and March 2001) and in charge of tourism (between
July 1999 and July 2000). 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 in the
Israeli army.

**B. Compensation**

The aggregate accrued compensation of
all 16 persons as a group who served in the capacity of a director or an executive officer
during the year ended December 31, 2002, was approximately $1.72 million. This amount
includes pension, retirement and similar benefits in the aggregate amount of $150,000.
This does not include amounts expensed by the Company 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 require the approval of
our audit committee, followed by the approval of our board of directors and then the
approval of our shareholders. An external director is entitled to consideration and
reimbursement of expenses only as provided in regulations promulgated under the Companies
Law and is otherwise prohibited from receiving any other compensation, directly or
indirectly, in connection with his service as an external director.

Our external directors receive annual
compensation of approximately $7,600 each and in addition approximately $280 per board
meeting or per board committee meeting in which they participate, and approximately $170
per such meeting by telephone in which they participate.

In addition, Mr. Barry Shaked, our
Chairman and Chief Executive Officer, is entitled to receive a 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, reaching a low of $35,000 for seven million
dollars of net income and for each million dollars earned thereafter.

As compensation for his services to
us, Mr. Shaked is entitled to receive options equal to 1.0% of our outstanding ordinary
shares annually. According to this arrangement, in January of 2002, Mr. Shaked was granted
options to purchase a total of up to 117,212 of our ordinary shares at an exercise price
of $16.43 per share. One-third of these options is exercisable from January 1, 2003, and
the remaining two-thirds will be exercisable in two equal portions from January 1st of
each of the years 2004 and 2005. The expiration date of these options is December 31,
2005. According to this arrangement, Mr. Shaked is entitled to additional options to
purchase a total of up to 119,999 of our ordinary shares, which was 1.0% of our
outstanding ordinary shares as of December 31, 2002.

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

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

Our employment agreements
  with our executive officers located in Israel, including those that are also
  members of our board of directors, provide for standard Israeli benefits as
  follows: bituach menahalim (managers insurance)
  and Keren Hishtalmut (educational fund). We make payments
  in this context as follows: pension - 5.0% of gross salary; severance pay -
  8.33% of gross salary; loss of earning capacity - up to 2.5% of gross salary;
  and educational fund - 7.5% of gross salary. The total amount we expensed in
  2002 under these arrangements for all executive officers as a group was approximately
  $150,000.

During 2002 and through May
  2003, officers and directors other then our Mr. Shaked were granted options
  to purchase a total of 115,000 of our shares in the following terms:

Options to purchase 30,000
  of our ordinary shares were granted at an exercise price of $11.53 each. One-
  third of these options vested on April 1, 2003, and the remaining two-thirds
  will vest in equal portions on April 1 of 2004 and 2005. These options will
  expire on April 1, 2006.

Options to purchase 70,000 of our
ordinary shares were granted at an exercise price of $8.75 each. These options vest in
three equal portions on August 1 of 2003, 2004 and 2005, and will expire on April 30,
2008.

Additional options to purchase 15,000
of our ordinary shares were granted at an exercise price of $8.75 each. These options vest
in three equal portions on January 1 of 2004, 2005 and 2006, and will expire on April 30,
2008.

As of May 31, 2003, all our directors
and executive officers as a group, held options to purchase an aggregate of 1,404,743
shares under our stock option plans. This amount includes options to purchase an aggregate
of 993,626 shares which are already vested. The exercise prices of these options range
between $8.25 to $27.625, and their expiration dates range between October 1, 2004 and
April 30, 2008.

**C. Board Practices**

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 hold office for three-year terms. Our officers serve at the discretion of
the board of directors. There are no family relationships among our directors and
executive officers.

**Alternate Directors**

Our articles of association provide
that any director may appoint, by written notice to the Company, an alternate director for
himself. 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. 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.

**External Directors**

Under the Israeli 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 two external directors. The
Companies Law provides that a person may not be appointed as an external director if the
person, or the persons relative, partner, employer or ajy entity under the
persons control has or had during the two years preceding the date of appointment
any affiliation with:

44

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|  |                                                                         
|- | ------------------------------------------------------------------------
| | the
      company;                                                      
|  |                                                                         
| | any
      entity controlling the company; or                            
|  |                                                                         
| | any
      entity controlled by the company or by its controlling entity.

The term affiliation includes:

| | 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. Until the
lapse of two years from termination of office, a company may not engage an external
director to serve as an office holder and cannot employ or receive services from that
person, 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 at the meeting, including at least one-third of
      the shares of non-controlling shareholders voted at the meeting, 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 may be extended for an additional three years. Each committee
of a companys board of directors is required to include at least one external
director. Pursuant to the provisions of the Companies Law, we elected two external
directors, Elhanan (Elli) Streit and Ilan Horesh.

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

**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 is to examine flaws in the business management of
the company, in consultation with the internal auditor and the companys independent
accountants, and suggest appropriate courses of action. In addition, the approval of the
audit committee is required to effect specified actions and transactions with office
holders and interested parties.

45

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An interested party is defined in the
Companies Law as a shareholder who holds 5% or more of a companys issued share
capital voting rights, any person or entity who has the right to designate one director or
more or the general manager of the company or any person who serves as a director or as a
general manager.

An audit committee may not approve an
action or a transaction with an interested 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.

The members of our audit committee
are Ian OReilly, Elli Streit and Ilan Horesh.

**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. Our internal auditor is Moshe Avreham.

We have obtained directors and
officers liability insurance for the benefit of our office holders.

**D.
  Employees**

As of December 31, 2002, we had 657
employees, of whom 285 employees were in research and development, 211 employees were in
maintenance, support and customization, 99 employees were in sales and marketing and 62
employees were in administration. Of these employees, 346 were based in Israel and 311
were based primarily in the United States.

As of December 31, 2001, we had 629
employees, of whom 272 employees were in research and development, 203 employees were in
maintenance, support and customization, 96 employees were in sales and marketing and 58
employees were in administration. Of these employees, 374 were based in Israel and 255
were based primarily in the United States.

As of December 31, 2000, we had 554
employees, of whom 239 employees were in research and development, 176 employees were in
maintenance, support and customization, 88 employees were in sales and marketing and 51
employees were in administration. Of these employees, 392 were based in Israel and 162
were based primarily in the United States.

None of our employees are represented
by a labor union and we have not experienced a work stoppage. We believe 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 that are employed in Israel, 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. We generally provide our
employees with benefits and working conditions above the required minimums.

46

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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,
  pay for overtime, insurance for work-related accidents, severance pay and other
  conditions of employment. Israeli law generally requires severance pay, which
  may be funded by managers insurance described below, upon the retirement
  or death of an employee or termination of employment without cause as defined
  in the law. These payments amount to approximately 8.3% of wages. Furthermore,
  Israeli employees and employers are required to pay predetermined sums to the
  National Insurance Institute, which is similar to the United States Social Security
  Administration. Since January 1, 1995, such amounts also include payments for
  national health insurance. The payments to the National Insurance Institute
  are approximately 14.5% of wages up to a specified amount, of which the employee
  contributes approximately 66% and the employer contributes approximately 34%.

E. Share Ownership

Mr. Barry Shaked, our President,
  Chief Executive Officer and Chairman of our board of directors, holds, as of
  May 15, 2003, 1,175,715 of our ordinary shares, which equals approximately 9.69%
  of our current issued share capital.

Mr.  Brian Cooper, a
  director and our former Vice President, holds, as of May 15, 2003, 1,226,203
  of our ordinary shares, which equals approximately 10.11% of our current issued
  share capital.

Other of our directors and executive
officers hold as of May 15, 2003, a total of 86,268 of our ordinary shares, which equals
approximately 0.7% of our current issued share capital.

As of May 15, 2003, Mr. Shaked
  held options to purchase a total of up to 350,241 of our ordinary shares granted
  to him on January 1, 2001, January 1, 2002 and January 1, 2003 pursuant to a
  shareholders resolution passed on May 28, 1998, authorizing the grant to him,
  on January 1st of each year, and for no consideration, options to purchase one
  percent of our issued and paid in capital. The exercise price for each share
  according to this resolution will be the Nasdaq closing price on December 31st
  of the year ending just before the date of grant. These options are exercisable
  as follows: 33% - starting one year following the date of grant; 33% - starting
  two years following the date of grant; and 34% - starting three years following
  the date of grant. The exercise of these options is subject to the relevant
  stock exchange regulations with regard to blocking of securities.

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

Options to purchase up to 113,130 of our
ordinary shares were granted on January 1, 2001, and have an exercise price of $12.0. Two
thirds of these options are already exercisable and the rest will be exercisable from
January 1, 2004. These options expire on January 1, 2005.

Options to purchase up to 117,112 of
our ordinary shares were granted on January 1, 2002, and have an exercise price of $16.43.
One third of these options is already exercisable. Another third will be exercisable from
January 1, 2004, and the remaining third will be exercisable from January 1, 2005. These
options expire on January 1, 2006.

Options to purchase up to 119,999 of
our ordinary shares were granted on January 1, 2003, and have an exercise price of $9.01.
These options will be exercisable in three equal portions from January 1, 2004, January 1,
2005 and January 1, 2006. The expiration date is January 1, 2007.

As of May 15, 2003, other directors
and executive officers had options to purchase a total of up to 1,054,502 of our ordinary
shares under our Second 1998 Share Option Plan (which is described below), as follows:

Options to purchase 148,000 of our
ordinary shares, which are fully vested, at an exercise price of $10 each. The expiration
date of these options is April 30, 2008.

Options to purchase 289,000 of our
ordinary shares, which are fully vested, at an exercise price of $14.875 each. The
expiration date of these options is April 30, 2008.

47

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Options to purchase 270,002 of our
ordinary shares, which are fully vested, at an exercise price of $8.25 each. The
expiration date of these options is December 31, 2004.

Options to purchase 201,000 of our
ordinary shares were granted at an exercise price of $11.01 each. Two-thirds of these
options are already vested. The last third of these options will vest on January 1, 2004.
The expiration date of these options is September 30, 2005.

Options to purchase 1,500 of our
ordinary shares, which are fully vested, were granted at an exercise price of $27.625
each. The expiration date of these options is July 31, 2004.

Options to purchase 30,000 of our
ordinary shares, which are fully vested, were granted at an exercise price of $17.113
each. The expiration date of these options is October 1, 2004.

Options to purchase 30,000 of our
ordinary shares were granted at an exercise price of $11.53 each. One- third of these
options vested on April 1, 2003, and the remaining two-thirds will vest in equal portions
on April 1 of 2004 and 2005. These options will expire on April 1, 2006.

Options to purchase 70,000 of our
ordinary shares were granted at an exercise price of $8.75 each. These options vest in
three equal portions on August 1 of 2003, 2004 and 2005, and will expire on April 30,
2008.

Additional options to purchase 15,000
of our ordinary shares were granted at an exercise price of $8.75 each. These options vest
in three equal portions on January 1 of 2004, 2005 and 2006, and will expire on April 30,
2008.

Our Second 1998 Share Option 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,
the Second 1998 Plan will terminate automatically in May 2008. 1,500,000 ordinary shares
were originally reserved for issuance pursuant to the Second 1998 Plan. An additional
1,080,000 ordinary shares were reserved for issuance under our Second 1998 Plan by our
board of directors on February 27, 2000. An additional 420,000 ordinary shares were
reserved for issuance under our Second 1998 Plan by our board of directors on January 8,
2001. Additional 1,200,000 and 800,000 ordinary shares were reserved for issuance under
our Second 1998 Plan by our board of directors on October 1, 2001 and on January 1, 2003,
respectively. As of May 15, 2003, options to purchase 4,262,730 ordinary shares had been
granted under the Second 1998 Plan, out of which options to purchase 2,888,281 (excluding
options already exercised) ordinary shares were exercisable, and 737,270 ordinary shares
remained eligible for future grant. As of May 15, 2003, 719,765 options granted under our
Second 1998 Plan have been exercised.

The Second 1998 Plan may be
administered by our board of directors or by one or more committees of our board of
directors. Under Section 112 of the Companies Law, a committee of the board of directors
may only advise our board of directors with regard to the grant of options, and the actual
grant must be carried out by our board of directors. The committee shall, in the case of
options intended to qualify as performance-based compensation within the
meaning of Section 162(m) of the Internal Revenue Code, consist of two or more
outside directors within the meaning of Section 162(m) of the Code. The plan
administrator 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. In addition, 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 ten-year 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. 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 100% 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.

48

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Our Second 1998 Plan provides that in
the event we merge with or into another corporation, sell substantially all of our assets
or enter into a similar transaction, each outstanding option shall be assumed or an
equivalent option shall be substituted by the successor corporation. If the outstanding
options are not assumed or substituted as described in the preceding sentence, the options
will terminate as of the closing.

**Stock
  option plan of a subsidiary**

On December 4, 2000, the
  board of directors of one of our subsidiaries, Store Alliance.com Ltd., approved
  an employee stock option plan (the Subsidiary Plan). Pursuant to
  the Subsidiary Plan, 270,000 ordinary shares NIS 0.01 par value of the
  subsidiary are reserved for issuance upon the exercise of 270,000 options granted
  to some of the ours and the subsidiarys employees. The options vest as
  follows: 33.33% after the first year, another 33.33% after the second year and
  another 33.33% after the third year, , provided the employee is still the subsidiarys
  or our employees. 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 and (3) seven years from the date of grant.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 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.

270,000 options were originally
granted to employees under this Subsidiarys Plan, at exercise prices ranging from $
0.01 per share, $5.55 per share. During 2002, 13,934 of these options were forfeited.

**ITEM
  7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTION**

**A. Major Shareholders**

Set forth below is information
concerning shareholders holding 5% or more of our outstanding shares as of May 15, 2003.

|Name
      of Shareholder | Number
      of
      Ordinary
      Shares held | Percentage
      of
      outstanding
      ordinary shares
|------------------------- | ------------------------------------------------ | -----------------------------------------------------------
|Barry
      Shaked*       | 1,290,172                                        | 10.6                                                       
|Brian Cooper              | 1,226,203                                        | 10.1                                                       
|Bank Leumi
      Funds    | 1,281,739                                        | 10.6                                                       
|Bank Hapoalim
      Funds | 782,016                                          | 6.4                                                        

* Includes shares directly owned,
shares held through a wholly owned company, options immediately exercisable and options
exercisable within 60 days from May 15, 2003.

Our major shareholders do not have
different voting rights.

In July 1998 we issued and sold
2,200,000 ordinary shares through our initial public offering on the Nasdaq National
Market. In this offering, an additional 550,000 ordinary shares were sold by selling
shareholders. Our ordinary shares have been traded on the Tel Aviv Stock Exchange, or
TASE, since November 1994.

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As of May 15, 2003, 1,625,102 of our
ordinary shares were held in the United States, by 11 record holders with mailing
addresses in the United States, owning an aggregate of approximately 13.3% 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

None.

C. Interests of Experts and Counsel

Not Applicable.

ITEM 8 -
  FINANCIAL INFORMATION

A. Consolidated
Statements and Other Financial Information

See Item 18.

Legal Proceedings

In August 2000, we, together
  with our subsidiary, P.O.S (Restaurant Solutions) Ltd. (P.R.S.),
  filed a claim in the Tel-Aviv District Court asking for injunctions, accounts
  and damages (evaluated, for the purpose of court fees, at NIS 3,000,000) against
  two shareholders of P.R.S. who own the minority interest in P.R.S. and who were
  also directors and employees of P.R.S. This claim alleges that the defendants
  caused us severe damages due to the manner of their conduct as employees and
  directors of P.R.S. , and by developing software that infringes on our rights.
  The defendants filed a Statement of Defense. On January 2003, the District Court
  transferred the file to the Labor Court. We are currently preparing an appeal
  to this decision, which we intend to submit to the High Court of Israel within
  a short period of time.In 2002 these minority shareholders
  of P.R.S. filled a counterclaim for the amount of $4,000,000. We are currently
  preparing a Statement of Defense as well as a counterclaim, which we intend
  to submit within a short period of time. Our management believes that
  we have meritorious defenses against this claim and believes that the claim
  will not have a material effect on our consolidated financial statements. We
  are unable to estimate the outcome of these claims. No provision has been made
  in our consolidated financial statements in respect of these claims.

In 1998, prior to our acquisition of
R.C.S., a legal claim was filed against R.C.S by a customer, for an amount of
approximately $1,300,000, which includes claims for consequential damages and loss of
revenue. The customer claims that R.C.S breached its contract with the customer and
fraudulently misrepresented facts about the product sold to the customer.

An additional claim was filed against
R.C.S., prior to our acquisition of the company, by a dealer who sold one of R.C.S.s
products early in 1994. The dealer claims that promised features and enhancements were
never delivered. The damages claimed in this legal action are in excess of $200,000. These
claims are handled by R.C.S.s errors and omissions insurers. The limit of liability
under our relevant errors and omissions insurance is $1,000,000 per claim and in the
aggregate . The management of R.C.S. is of the opinion that it has meritorious defenses
against these claims and believes that they will not have a material effect on its
financial statements. We are unable to estimate the outcome of these claims. No provision
has been made in our consolidated financial statements in respect of these claims.

50

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On December 2002, a legal claim for
an amount of approximately $240,000, was submitted against our subsidiary, Palm Point, by
a local customer. The claim is for damages allegedly caused by services not duly provided
by Palm Point. On February 2003, Palm Point filed a Statement of Defense that rejects the
claim entirely. The management of Palm Point is of the belief that Palm Point has
meritorious defenses against this claim. We are unable to estimate the outcome of the
claim. No provision has been made in our consolidated financial statements in respect of
these claims.

**Dividend
  Policy**

In 1994 and 1995, we declared and
paid cash dividends of $0.04 and $0.03 per ordinary share. In addition, we declared
dividends in 1993 of $0.08 per ordinary share, which were paid in 1994. Since 1995, we
have not declared nor paid any cash dividends on our ordinary shares.

In the event cash dividends are
declared by us, 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.

Part of our and a number of our
subsidiaries income is tax exempt due to the approved enterprise status granted to
most of the production facilities. Currently our policy is to permanently reinvest the
amount of such tax exempt income, and not to distribute it as dividends. See also note 10g
to the notes to our consolidated financial statements attached to this annual report.

Payment of future dividends, if any,
will be at the discretion of our board of directors and will depend on various factors,
such as our statutory retained earnings, financial condition, operating results and
current and anticipated cash needs.

**B. Significant
  Changes**

No significant change has occurred
since December 31, 2002, except as otherwise disclosed in this annual report.

**ITEM
  9 - THE OFFER AND LISTING**

**A.
   Offer and Listing Details**

Our ordinary shares have been quoted
on the Nasdaq National Market under the symbol RTLX since July 10, 1998. The
following table sets forth, for the periods indicated, the high and low closing prices of
our ordinary shares, as reported on the Nasdaq National Market.

|                                  | High | Low
|--------------------------------- | ---- | ---
|**1998**                          |      |    
|**1999**                          |      |    
|**2000**                          |      |    
|**2001**                          |      |    
|**2002**                          |      |    
|**2001:**                         |      |    
|First Quarter                     |      |    
|Second Quarter                    |      |    
|Third Quarter                     |      |    
|Fourth Quarter                    |      |    
|**2002:**                         |      |    
|First Quarter                     |      |    
|Second Quarter                    |      |    
|Third Quarter                     |      |    
|Fourth Quarter                    |      |    
|**2003:**                         |      |    
|First Quarter                     |      |    
|**Most
      recent six months:** |      |    
|May 2003                          |      |    
|April 2003                        |      |    
|March 2003                        |      |    
|February
      2003               |      |    
|January 2003                      |      |    
|December
      2002               |      |    

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On June 25, 2003, the last reported
sale price of our ordinary shares on the Nasdaq National Market was $15.62 per share.

The following table sets forth, for the
periods indicated, the high and low closing prices of our ordinary shares on the TASE. The
quotations represent the dollar equivalent of the high and low prices for each quarter in
NIS based on the representative rate of exchange published by the Bank of Israel for the
date on which the high or low price in NIS occurred.

|                                  | High | Low
|--------------------------------- | ---- | ---
|1998                              |      |    
|1999                              |      |    
|2000                              |      |    
|2001                              |      |    
|2002                              |      |    
|**2001:**                         |      |    
|First Quarter                     |      |    
|Second Quarter                    |      |    
|Third Quarter                     |      |    
|Fourth Quarter                    |      |    
|**2002:**                         |      |    
|First Quarter                     |      |    
|Second Quarter                    |      |    
|Third Quarter                     |      |    
|Fourth Quarter                    |      |    
|**2003:**                         |      |    
|First Quarter                     |      |    
|**Most
      recent six months:** |      |    
|May 2003                          |      |    
|April 2003                        |      |    
|March 2003                        |      |    
|February
      2003               |      |    
|January 2003                      |      |    
|December
      2002               |      |    

On June 25, 2003, the last reported
sale price of our ordinary shares on the Tel Aviv Stock Exchange was $15.86 per share.

**B.
   Plan of Distribution**

Not applicable.

**C.
   Markets**

Our ordinary shares are quoted on the
Nasdaq National 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.

52

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**ITEM
  10 - ADDITIONAL INFORMATION**

**A.
   Share Capital**

Not applicable.

**B.
   Memorandum and Articles of Association**

Our memorandum of association and
articles of association were amended on May 10, 2001. The following is a summary
description of certain provisions of our amended memorandum of association and articles of
association, and certain relevant provisions of the Israel Companies Law which apply to
us:

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

**Objects
  and Purposes**

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

We are authorized to issue 25,000,000
ordinary shares par value NIS 1.0 per share, of which 12,127,644 ordinary shares were
outstanding as of May 15, 2003.

**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**

Directors remuneration is
subject to the approvals required under the Companies Law.

**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 is 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.

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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 thinks 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**

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 fiscal year or as accrued over a period of two years, whichever is
higher. 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. Dividends that remain unclaimed after seven years will generally be forfeited
and returned to the company.

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.

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.

54

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**Conflict
  of Interest**

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.

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 requirement, 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. Under specific circumstances, shareholder approval may also be required. A
director who has a personal interest in a matter which 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.

**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.

55

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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). Nasdaq requires a quorum of at least 33-1/3% of our ordinary
shares. 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.

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.

**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
      shareholders who have no personal interest in the transaction who vote 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, provided that
the articles of association of the company allow it to do so. Our articles of association
allow us to exempt our office holders to the fullest extent permitted by law.

**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:

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|  |                                                                                                                                                                                                   
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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; 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.

Our articles of association also
include provisions:

| | authorizing
      us to grant in advance an undertaking to indemnify an office holder, provided
      that the undertaking is limited to types of events which our board of directors
      deems to be anticipated at the time of the undertaking and limited to an
      amount determined by our board of directors to be reasonable under the circumstances
      and provided that the total amount of indemnification for all persons we
      have agreed to indemnify in such circumstances does not exceed, in the aggregate
      twenty-five percent (25%) of our shareholders equity at the time of
      the actual indemnification; and
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | authorizing
      us to retroactively indemnify an office holder.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

*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 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;                                                                                                                            
|  |                                                                                                                                                                                                                                              
| | any
      act or omission done with the intent to derive an illegal personal benefit;
      or                                                                                                                                               
|  |                                                                                                                                                                                                                                              
| | any
      fine levied against the office holder.                                                                                                                                                                                             

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

**Anti-Takeover
  Provisions; Mergers and Acquisitions**

The Companies Law provides for mergers,
provided that each party to the transaction obtains the approval of its board of directors
and shareholders. For purposes of the shareholder vote of each party, unless a court rules
otherwise, the merger will not be deemed approved if a majority of the shares not held by
the other party, or by any person who holds 25% or more of the shares or the right to
appoint 25% or more of the directors of the other party, have voted against the merger.
Upon the request of a creditor of either party to the proposed merger, the court may delay
or prevent the merger if it concludes that there exists a reasonable concern that as a
result of the merger the surviving company will be unable to satisfy the obligations of
that party. Finally, a merger may not be completed unless at least 70 days have passed
from the time that the requisite proposals for approval of the merger have been filed with
the Israeli Registrar of Companies.

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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 in which the target company
becomes a wholly-owned subsidiary of the acquirer. These provisions generally require that
the merger 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 for a
merger between Israeli companies, after completion of the above procedure for an
arrangement transaction and court approval of the merger. 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. This rule does not apply if there is already another 25%
shareholder of the company. Similarly, the Companies Law provides that an acquisition of
shares in a public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 45% shareholder of the company, unless there is
already a majority 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. If more than
95% of the outstanding shares are tendered in the tender offer, all the shares that the
acquirer offered to purchase will be transferred to it.

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.

**C.
   Material Contracts**

Other then in the ordinary course of
business, we did not enter into any material contracts in the past two years.

**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
United States, Israeli or other tax consequences of the purchase, ownership and
disposition of ordinary shares, including, in particular, the effect of any foreign, state
or local taxes.

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**U.S. TAXATION**

Subject to the limitations described
in the next paragraph, the following discussion describes the material United States
federal income tax consequences to a U.S. holder arising from the purchase, ownership and
disposition of our ordinary shares. A U.S. holder is a holder of ordinary shares that is:
(1) an individual citizen or resident of the United States, (2) a corporation created or
organized under the laws of the United States or any political subdivision thereof, or (3)
an estate, the income of which is includable in gross income for United States federal
income tax purposes regardless of its source, (4) a trust if a court within the U.S.
is able to exercise primary supervision over the administration of the trust, and one or
more U.S. persons have the authority to control all substantial decisions of the trust, or
(5) a trust that has a valid election in effect to be treated as a U.S. person. This
summary is for general information purposes only and does not purport to be a
comprehensive description of all of the federal income tax considerations that may be
relevant to a decision to purchase ordinary shares. This summary generally considers only
U.S. holders that will own ordinary shares as capital assets. Except to the limited extent
discussed below, this summary does not consider the United States tax consequences to a
person that is not a U.S. holder, nor does it describe the rules applicable to determine a
taxpayers status as a U.S. holder.

This discussion is based on current
provisions of the Internal Revenue Code of 1986, as amended, current and proposed Treasury
regulations promulgated thereunder, and administrative and judicial interpretations
thereof, all as in effect on the date hereof and all of which are subject to change,
possibly on a retroactive basis. This discussion does not address all aspects of United
States federal income taxation that may be relevant to any particular shareholder based on
such shareholders particular circumstances. In particular, this discussion does not
address the tax treatment of U.S. holders who are broker-dealers or who own, directly,
indirectly or constructively at any time, stock representing 10% or more of our voting
power, U.S. holders holding the ordinary shares as a hedge or as part of a hedging,
straddle or conversion transaction, and certain U.S. holders, including, without
limitation, insurance companies, tax-exempt organizations, financial institutions and
persons subject to the alternative minimum tax who may be subject to special rules not
discussed below. Additionally, the tax treatment of persons who hold ordinary shares
through a partnership or other pass-through entity are not considered, nor are the
possible application of United States federal gift or estate taxes or any aspect of state,
local or non-United States tax laws. Each prospective investor is advised to consult such
persons own tax advisor with respect to the specific United States federal income
tax consequences in the applicable state to such person of purchasing, holding or
disposing of the ordinary shares.

**Distributions on
Ordinary Shares**

Since 1995, we have not paid cash dividends
on our ordinary shares, and we do not intend to pay cash dividends in the foreseeable
future. In the event that we do pay dividends, and subject to the discussion under the
headings Passive Foreign Investment Companies and Foreign
Personal Holding Company 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 on the
date the distribution is required to be included in the U.S. holders income 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 as capital gain. Preferential tax rates for long-term capital gains are
applicable for U.S. holders that are individuals, estates or trusts. Corporate holders
generally will not be allowed a deduction for dividends received.

The amount of a distribution with
respect to our ordinary shares will be measured by the amount of fair market value of any
property, distributed, and for U.S. federal income tax purposes, the amount of any Israeli
taxes withheld therefrom. 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 income or loss.

59

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

**Disposition of Shares**

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

Gain realized by a U.S. holder on a
sale, exchange or other disposition of ordinary shares generally will be treated as United
States source income for United States 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 under recently-finalized regulations. However, those
regulations require the loss to be allocated to foreign source income to the extent
certain dividends were received by the taxpayer within the 24-month period preceding the
date on which the taxpayer recognized the loss. The deductibility of a loss realized on
the sale, exchange or other disposition of ordinary shares is subject to limitations.

**Passive Foreign
Investment Companies**

We would be a passive foreign
investment company, or PFIC, if:

| | 75%
      or more of our gross income, including the pro rata share of our gross income
      for any company, United States or foreign, in which we are considered to
      own 25% or more of the shares by value, in a taxable year is passive income;
      or                                                                 
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                    
| | at
      least 50% of the assets, averaged over the year and generally determined
      based upon value, including the pro rata share of the assets of any company
      of which we are considered to own 25% or more of the shares by value, in
      a taxable year are held for the production of, or produce, passive income.

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

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

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

A U.S. holder of PFIC stock
  which is publicly traded could elect to mark the stock 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 stock
  and the U.S. holders adjusted tax basis in the PFIC stock. Losses would
  be allowed only to the extent of net mark-to-market gain previously included
  by the U.S. holder under the election for prior taxable years. If the mark-to-market
  election were made, then the rules set forth above would not apply for periods
  covered by the election.

We believe that we are not
  a PFIC for 2002. The tests for determining PFIC status, however, are applied
  annually, and it is difficult to make accurate predictions of future income
  and assets in 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 mark-to-market or QEF 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 mark-to-market or QEF election with
  respect to our ordinary shares in the event that we qualify as a PFIC.

# Foreign Personal
  Holding Company

Under certain circumstances,
  the Internal Revenue Code also provides for the current payment of tax by U.S.
  holders with respect to undistributed income of a foreign corporation in which
  they own interests. If we or any of our non-U.S. subsidiaries is a foreign personal
  holding company, or FPHC, for a taxable year, each U.S. holder who sold ordinary
  shares on the last day of our taxable year or, if earlier, the last day of the
  year in which a required ownership test is met, is required to include in gross
  income as a deemed dividend its pro rata portion of our undistributed income
  even if no cash dividend is actually paid. In such case, the U.S. holder is
  generally entitled to increase its tax basis in the ordinary shares by the amount
  of the deemed dividend. In a situation where there is an overlap of income inclusion
  under both the PFIC and FPHC regimes, the FPHC rules will take precedence. The
  FPHC rules, however, only apply in cases in which five or fewer U.S. holders
  own directly, indirectly or constructively 50% or more of the stock of the foreign
  corporation. Accordingly, we do not expect that the FPHC provisions will apply
  to ownership of our ordinary shares. In the event, however, that our ownership
  changes and U.S. holders acquire control of us, these rules would apply.

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# Backup Withholding

A U.S. holder may be subject
  to backup withholding at a rate of 31% with respect to cash dividend payments
  and proceeds from a disposition of ordinary shares. In general, backup withholding
  will apply only if a U.S. holder fails to comply with certain identification
  procedures. Backup withholding will not apply with respect to payments made
  to certain exempt recipients, such as corporations and tax-exempt organizations.
  Backup withholding is not an additional tax and may be claimed as a credit against
  the U.S. federal income tax liability of a U.S. holder, provided that the required
  information is furnished to the Internal Revenue Service.

# Non-U.S. holders
  of Ordinary Shares

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

A non-U.S. holder may be
  subject to U.S. federal income or withholding tax on the proceeds from the disposition
  of an ordinary share if (1) such item is effectively connected with the conduct
  by the non-U.S. holder of a trade or business in the United States and, in the
  case of 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 United States; or (2) the individual non-U.S. holder is present in the
  United States for 183 days or more in the taxable year of the sale and certain
  other conditions are met or (3) the non-U.S. holder is subject to 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 31% rate of backup withholding with respect to the
  payment of dividends on ordinary shares unless payment is made through a paying
  agent, or office, in the United States. After January 1, 2001, however, if payment
  is made in the United States or by a U.S. related person, non-U.S. holders will
  be subject to backup withholding. In general, if a non-U.S. holder provides
  a taxpayer identification number, certifies to its foreign status, or otherwise
  establishes an exemption, the non-U.S. holder will not be subject to backup
  withholding. 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
  will be subject to backup withholding at a rate of 31% on the payment of the
  proceeds from the disposition of ordinary shares to or through the United States
  office of a broker, whether domestic or foreign, unless the holder provides
  a taxpayer identification number, certifies to its foreign status or otherwise
  establishes an exemption. Non-U.S. holders will not be subject to backup withholding
  with respect to the payment of proceeds from the disposition of ordinary shares
  by a foreign office of a broker. After January 1, 2001, however, non-U.S. holders
  will be subject to backup withholding at a rate of 31% with respect to the payment
  of proceeds from the disposition of ordinary shares effected outside the United
  States if the broker is a U.S. related person, unless the holder provides a
  taxpayer identification number, certifies to its foreign status or otherwise
  establishes an exemption.

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 furnished
  to the Internal Revenue Service.

# Taxation of our
  US subsidiaries

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

62

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We operate in the United
  States through several corporations.  Retalix Holdings, Inc. (Retalix
  USA Holdings) is the US parent, which is wholly-owned by Retalix Ltd.
  in Israel.  Retalix USA Holdings owns 100% of the stock of several
  US corporations  Retalix USA Inc., RCS and BASS (BASS - through Retalix
  USA Inc.) and 50.01% of a US limited liability company  StoreNext USA.
  Retalix USA Holdings has elected to file United States income tax returns
  on a consolidated company basis.   Income taxes are imposed on
  the taxable income of the US consolidated group at progressive income tax
  rates ranging from 15% to 35%.  The corporation is subject to the same
  US income tax rates on capital gain income.   The United States 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.

# 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.

# Tax Reform

On January 1, 2003, the Law
  for Amendment of the Income Tax Ordinance (Amendment No. 132), 5762-2002, as
  amended, known as the Tax Reform, came into effect. The Tax Reform,
  aimed at broadening the categories of taxable income and reducing the tax rates
  imposed on employment income, introduced the following, among other things:

| |  | Reduction
      of the tax rate levied on real capital gains (other than gains deriving
      from the sale of listed securities) derived after January 1, 2003, to a
      general rate of 25% for both individuals and corporations. Regarding assets
      acquired prior to January 1, 2003, the reduced tax rate will apply to a
      proportionate part of the gain, in accordance with the holding periods of
      the asset, before or after January 1, 2003, on a linear basis. In addition,
      the tax reform enables a carryforward of capital losses generated in 1996
      and onwards without any time restrictions;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Imposition
      of Israeli tax on all income of Israeli residents, individuals and corporations,
      regardless of the territorial source of income, including income derived
      from passive sources such as interest, dividends and royalties;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Introduction
      of controlled foreign corporation (CFC) rules into the Israeli tax structure.
      Generally, under such rules, an Israeli resident who holds, directly or
      indirectly, 10% or more of the rights in a foreign corporation whose shares
      are not publicly traded (or which has offered less than 30% of its shares
      or any rights to its shares to the public), in which more than 50% of the
      rights are held directly or indirectly by Israeli residents, and a majority
      of its income in a tax year is considered passive income, will be liable
      for tax on the portion of such income attributed to his/her holdings in
      such corporation, as if such income were distributed to him/her as a dividend;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Imposition
      of capital gain tax on capital gains, realized by individuals beginning
      January 1, 2003, from the sale of shares of publicly traded companies in
      the Tel-Aviv Stock Exchange (such gain was previously exempt from capital
      gains tax in Israel). For information with respect to the applicability
      of Israeli capital gains taxes on the sale of ordinary shares, see Taxation
      of Shareholders Capital Gains Tax below;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Introduction
      of a new regime for the taxation of shares and options issued to employees,
      officers and directors; and
| | - | --------------------------------------------------------------------------------------------------------------------------------

| |  | Introduction
      of tax at a rate of 25% on dividends paid by one Israeli company to another
      (which are generally not subject to tax), if the source of such dividends
      is income that was derived outside of Israel.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

63

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# General Corporate
  Tax Structure in Israel

Most Israeli companies are
  subject to corporate tax at the rate of 36% of their taxable income (and are
  subject to capital gains tax at a rate of 25% for capital gains derived after
  January 1, 2003). However, as in our case, the rate is effectively reduced for
  income derived from an Approved Enterprise, as set forth below.

# Special Provisions
  Relating to Taxation Under Inflationary Conditions

The Income Tax Law (Inflationary
  Adjustments), 1985, generally referred to as the Inflationary Adjustments Law,
  represents an attempt to overcome the problems presented to a traditional tax
  system by an economy undergoing rapid inflation. The Inflationary Adjustments
  Law is highly complex. Its features, which are material to us can be described
  as follows:

| |  | Where a companys
      equity, as calculated under the Inflationary Adjustments Law, exceeds the
      depreciated cost of its Fixed Assets (as defined in the Inflationary
      Adjustments Law), a deduction from taxable income is permitted equal to
      the excess multiplied by the applicable annual rate of inflation. The maximum
      deduction permitted in any single tax year is 70% of taxable income, with
      the unused portion permitted to be carried forward.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Where a companys
      depreciated cost of Fixed Assets exceeds its equity, then the excess multiplied
      by the applicable annual rate of inflation is added to taxable income.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Subject to
      specified limitations, depreciation deductions on Fixed Assets and losses
      carried forward are adjusted for inflation based on the increase in the
      consumer price index.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Law for the Encouragement
  of Capital Investments, 1959

The Law for Encouragement
  of Capital Investments, 1959 (the Investment Law) provides that
  capital investments in a production facility (or other eligible assets) may,
  upon approval by the Investment Center of the Israel Ministry of Industry and
  Trade (the Investment Center), be designated as an Approved Enterprise.
  Such approvals may be granted only for applications to be submitted until December
  31, 2003. Each certificate of approval for an Approved Enterprise relates to
  a specific investment program, delineated both by the financial scope of the
  investment and by the physical characteristics of the facility or the asset.
  The tax benefits from any such certificate of approval relate only to taxable
  profits attributable to the specific Approved Enterprise. An Approved Enterprise
  is entitled to benefits, including Israeli Government cash grants, which are
  made available if it is located in a government designated development area,
  and/or tax benefits. As discussed below, our production facilities have been
  granted Approved Enterprise status.

Taxable income derived from
  an Approved Enterprise within the benefit period, and subject to compliance
  with the conditions for approval as disclosed below is subject to a reduced
  corporate tax rate of 25% rather than the usual rate of 36%. The benefit period
  is ordinarily seven years, or ten years for a company whose foreign investment
  level as defined below exceeds 25%, commencing with the year in which the Approved
  Enterprise first generates taxable income, and is limited to twelve years from
  the commencement of production or fourteen years from the date of approval,
  whichever is earlier. That income is eligible for further reductions in tax
  rates if the company qualifies as a foreign investors company. A foreign
  investors company is a company in which more than 25% of its combined
  share capital including loans from shareholders (in terms of shares, rights
  to profits, voting and appointment of directors) is owned by non-Israeli residents.
  The tax rate is reduced to 20% if the foreign ownership of the foreign investors
  company is 49% or more but less than 74%; 15% if the foreign ownership of the
  foreign investors company is 74% or more but less than 90%; and 10% if
  the foreign ownership of the foreign investors company is 90% or more.
  The determination of foreign ownership is made on the basis of the lowest level
  of foreign ownership during the tax year. Such tax rates, are applicable only
  to a foreign investors company that submitted an application for the grant of
  Approved Enterprise status prior to December 31, 2003.

64

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In the event that a company
  is operating under more than one approval, or that not all of its capital investments
  are approved, its effective corporate tax rate is the result of a weighted combination
  of the various applicable rates. A company may elect to forego entitlement to
  the grants otherwise available under the Investment Law and, in lieu thereof,
  participate in an alternative benefits program, referred to as the Alternative
  Benefits Program, under which the undistributed income from the Approved Enterprise
  is fully exempt from corporate tax for a period of between two and ten years,
  depending upon the geographic location within Israel and the type of the Approved
  Enterprise. Upon expiration of the exemption period, the Approved Enterprise
  is eligible for beneficial tax rates under the Investment Law for the remainder,
  if any, of the applicable benefit period. We participate in the Alternative
  Benefits Program. There can be no assurance that this benefit program will continue
  to be available or that we will continue to qualify for benefits under the current
  program.

Dividends paid by a company
  that owns an Approved Enterprise and that are attributable to income derived
  from that Approved Enterprise during the applicable benefits period, are taxed
  at a reduced rate of 15%, if the dividends are paid during the benefit period
  or no more than twelve years thereafter; or, if the Company qualifies as a foreign
  investors company without any time limitations. This tax must be withheld
  at source by the company paying the dividend. A dividend paid from income derived
  from an enterprise owned by a company that has elected the Alternative Benefits
  Program during the period in which it is exempt from tax is also subject to
  withholding tax at a 15% rate but causes the company to be liable for corporate
  tax on the amount distributed which for this purpose includes the amount of
  the corporate tax at the rate that would have been applicable had the company
  not elected the Alternative Benefits Program, of up to 25%. The Investment Law
  also provides that an Approved Enterprise is entitled to accelerated depreciation
  on its property and equipment that are included in an approved investment program.

Our production facilities
  have been granted Approved Enterprise status under the Investment Law. In respect
  of income derived from each of our Approved Enterprises, we are entitled to
  reduced tax rates during a period of seven years from the year in which such
  enterprises first earn taxable income (limited to 12 years from commencement
  of production or 14 years from the date of approval, whichever is earlier).
  We have six Approved Enterprises. One of our Israeli subsidiaries has one Approved
  Enterprise. Income derived from our Approved Enterprise is tax exempt during
  the first two years of the seven year tax benefit period mentioned above (except
  for one of our Approved Enterprises which is tax exempt during a period of four
  years), and is subject to a reduced tax rate of 25% during the remaining years
  of benefits. The periods of benefits relating to three of our Approved Enterprises
  have already expired. The periods of benefits relating to our other Approved
  Enterprises will expire in 2003 and 2005. The period of benefits for our Israeli
  subsidiary with Approved Enterprises has not yet commenced (restricted to the
  year 2010). Since we participate in the Alternative Benefits Program, in the
  event we distribute dividend from income that is tax exempt, as described above,
  we would have to pay up to 25% tax (depending on our foreign investment level,
  as defined above) in respect of the amount distributed.

The benefits available to
  an Approved Enterprise are conditioned upon terms stipulated in the Investment
  Law and the regulations thereunder and the criteria set forth in the applicable
  certificate of approval. In the event that we do not fulfill these conditions
  in whole or in part, the benefits can be canceled and we may be required to
  refund the amount of the benefits, with the addition of the Israeli consumer
  price index linkage differences and interest. We believe that our Approved Enterprises
  currently operate in compliance with all applicable conditions and criteria,
  but there can be no assurance that they will continue to do so.

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

We believe that we currently
  qualify as an Industrial Company within the meaning of the Law for
  the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law.
  According to the Industry Encouragement Law, an Industrial Company
  is a company resident in Israel, 90% or more of the income of which in any tax
  year, other than 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 major activity in a given
  tax year is industrial production.

65

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The following corporate tax
  benefits are available to Industrial Companies, among others:

| |  | amortization
      of the cost of purchased know-how and patents over an eight-year period
      for tax purposes;                        
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                           
| |  | accelerated depreciation
      rates on equipment and buildings; and                                                                      
| |   |                                                                                                                                           
| |  | under specified conditions,
      an election to file consolidated tax returns with additional related Israeli
      Industrial Companies.

Eligibility for the benefits
  under the Industry Encouragement Law is not subject to receipt of prior approval
  from any governmental authority. No assurance can be given that we qualify or
  will continue to qualify as an Industrial Company or that the benefits
  described above will be available in the future.

# Taxation of Shareholders
  Capital Gains Tax in Israel

Israeli law generally imposes
  a capital gains tax on the sale of capital assets located in Israel, including
  shares in Israeli companies, by both residents and non-residents of Israel,
  unless a specific exemption is available or unless a tax treaty between Israel
  and the shareholders country of residence provides otherwise. The law
  distinguishes between the inflationary surplus and the real gain. The inflationary
  surplus is a portion of the total capital gain, which is equivalent to the increase
  of the relevant assets purchase price attributable to the increase in
  the Israeli consumer price index 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. A nonresident that invests in taxable assets with foreign currency
  may elect to calculate the inflationary amount in that foreign currency.

Prior to the tax reform,
  sales of our ordinary shares by individuals were generally exempt from Israeli
  capital gains tax so long as (i) our ordinary shares were quoted on Nasdaq or
  listed on a stock exchange in a country appearing on a list approved by the
  Controller of Foreign Currency and (ii) we qualified as an Industrial Company
  within the definition of the Law for the Encouragement of Industry (Taxes),
  5729-1969. We believe that we currently qualify as an Industrial Company, but
  no assurance can be given that we will continue to qualify as an Industrial
  Company.

Pursuant to the tax reform,
  generally, capital gains tax is imposed at a rate of 15% on real gains derived
  on or after January 1, 2003 from the sale of shares in: (i) companies publicly
  traded on the Tel Aviv Stock Exchange (TASE); or (ii) subject to
  a necessary determination by the Israeli Minister of Finance, Israeli companies
  publicly traded on Nasdaq or a recognized stock exchange or a regulated market
  outside of Israel; or (iii) companies dually traded on both the TASE and Nasdaq
  or a recognized stock exchange or a regulated market outside of Israel. This
  tax rate is contingent upon the shareholder not claiming a deduction for financing
  expenses, and does not apply to: (i) dealers in securities; (ii) shareholders
  that report in accordance with the Income Tax Law (Inflationary Adjustments),
  5745-1985; or (iii) shareholders who acquired their shares prior to an
  initial public offering (that are subject to a different tax arrangement).

The tax basis of shares acquired
  prior to January 1, 2003, with respect of which the shareholders had been exempt
  from capital gains tax prior to January 1, 2003, will be determined in accordance
  with the average closing share price in the three trading days preceding January
  1, 2003. However, a request may be made to the tax authorities to consider the
  actual adjusted cost of the shares as the tax basis if it is higher than such
  average price.

66

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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, except when assets are attributable to an
  Israeli permanent establishment of the foreign resident, and are exempt from
  Israeli capital gains tax on any gains derived from the sale of shares of Israeli
  companies publicly traded on Nasdaq or a recognized stock exchange or a regulated
  market outside of Israel, provided that such capital gains are not derived by
  a permanent establishment of the foreign resident in Israel and that such shareholders
  did not acquire their shares prior to the issuers initial public offering.
  However, non-Israeli corporations will not be entitled to such exemption if
  an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli
  corporation, or (ii) is the beneficiary of or is entitled to 25% or more of
  the revenues or profits of such non-Israeli corporation, whether directly or
  indirectly. In any event, the provisions of the tax reform shall not affect
  the exemption from capital gains tax for gains accrued before January 1, 2003,
  as described above.

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

# Application of
  the U.S.-Israel Tax Treaty to Capital Gains Tax

Subject to the U.S.-Israel
  Tax Treaty, the sale, exchange or disposition of our ordinary shares by a person
  who qualifies as a resident of the United States and is entitled to claim the
  benefits afforded to a resident, or a Treaty U.S. Resident, will not be subject
  to Israeli capital gains tax unless (i) that Treaty U.S. Resident held, directly
  or indirectly, shares representing 10% or more of our voting power during any
  part of the 12-month period preceding the sale, exchange or disposition; or
  (ii) the capital gains from such sale can be treated as business income allocated
  to a permanent establishment in Israel. A sale, exchange or disposition of our
  ordinary shares by a Treaty U.S. Resident who held, directly or indirectly,
  shares representing 10% or more of our voting power at any time during the 12-month
  period preceding the sale, exchange or disposition will be subject to Israeli
  capital gains tax, to the extent applicable. However, under the U.S.-Israel
  Tax Treaty, this Treaty U.S. Resident would be permitted to claim credit for
  these taxes if required to be paid against U.S. income tax imposed with respect
  to such sale, exchange or disposition, subject to the limitations set in U.S.
  laws applicable to foreign tax credits.

# Taxation of Non-Residents
  on Receipt of Dividends

Nonresidents of Israel will
  be subject to Israeli income tax on the receipt of dividends paid on the ordinary
  shares at the rate of 25%, which tax will be withheld at source, unless the
  dividends are paid from income derived from an approved enterprise during the
  applicable benefit period, or a different rate is provided in a treaty between
  Israel and the shareholders country of residence. Under the U.S.-Israel
  Tax Treaty, the maximum tax on dividends paid to a holder of the ordinary shares
  who is a Treaty U.S. Resident will be 25%. However, when dividends are paid
  from income derived during any period for which the Israeli company is not entitled
  to the reduced tax rate applicable to an Approved Enterprise under Israels
  Law for the Encouragement of Capital Investments, 1959, the maximum tax will
  be 12.5% if the holder is a U.S. company holding shares representing 10% or
  more of the voting power during the part of the taxable year preceding the date
  of payment of dividends and during the whole of its prior taxable year, if any,
  and provided that not more than 25% of the Israeli companys gross income
  consists of interest or dividends. When dividends are paid from income derived
  during any period for which the Israeli company is entitled to the reduced tax
  rate applicable to an Approved Enterprise, then the tax will be 15% if the conditions
  in the preceding sentence are met.

# F.  Dividends
  and Paying Agents

Not applicable.

# G.  Statements
  by Experts

Not applicable.

67

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**H.  Documents
  on Display**

We are subject to the informational
  requirements of the Securities Exchange Act of 1934, as amended, applicable
  to foreign private issuers and fulfill the obligations with respect to such
  requirements by filing reports with the Securities and Exchange Commission.
  You may read and copy any document we file with the Securities and Exchange
  Commission without charge at the Securities and Exchange Commissions public
  reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of
  such material may be obtained by mail from the Public Reference Branch of the
  Securities and Exchange Commission at such address, at prescribed rates. Please
  call the Securities and Exchange Commission 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 Securities and Exchange Commission as frequently or as promptly as United
  States companies whose securities are registered under the Exchange Act.

# I.  Subsidiary
  Information

Not applicable.

68

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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 FAS 133. During 2002, we entered into one
  foreign currency forward contract for conversion of British Pounds Sterling
  into a notional amount of dollars of approximately $2,318,000. The fair value
  of that contract as of December 31, 2002 reflects a liability in the amount
  of $89,700, which was charges to financial expenses.
Other then 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, 2002.

(In thousands, except percentages)

|                                                                                              |                    | Maturity |       |      
|--------------------------------------------------------------------------------------------- | ------------------ | -------- | ----- | -----
|                                                                                              |                    | 2003     | 2004  | 2005 
|Corporate
        securities
        bearing
        fixed
        interest
        rate      | Book
        value | $2,596   | $243  | $98  
|WAYM
      *                                                                                  | 8.97%              | 8.10%    | 5.24% | 6.21%
|Dollar
        linked
        money
        market
        funds
        and
        deposits | Book
        value | $25,260  | -     | -    
|WAIR**                                                                                        | 1.68%              | -        | -     | -    
|New
        Israeli
        Shekels
        Linked
        deposits                           | Book
        value | $1,894   | -     | -    
|WAIR**                                                                                        | 8.24%              | -        | -     | -    
|British
        Pounds
        Sterling
        linked
        deposits                       | Book
        value | $252     | -     | -    
|WAIR**                                                                                        | 3.18%              | -        | -     | -    
|Total                                                                                         | Book
        value | $30,002  | $243  | $98  
|WAI***                                                                                        | 2.74%              | 8.10%    | 5.24% | 6.21%

* Weighted average yield
  to maturity** Weighted average
  interest rate*** Weighted average
  yield

69

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# Foreign Currency
  Risk

The majority of our revenues
  is denominated in US dollars and or linked to the US dollar, and our financing
  is mostly in US dollars, and thus the US dollar is our functional currency.
  In addition, part of our revenues is denominated in pounds sterling or the Euro,
  and some of our expenses are denominated in New Israeli Shekels (NIS). This
  situation exposes us from time to time, to fluctuations between the exchange
  rates of the dollar and the NIS, the British Pound Sterling and the Euro. We
  hold most of our financial assets in dollar or dollar linked investment channels.
  In addition, we tend from time to time, to take NIS or sterling loans from banks
  attempting to maintain a similar level of assets and liabilities in any given
  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, 2002:

(thousands)

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

# Interest Rate
  Risk

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

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

# ITEM 12 -
  DESCRIPTION OF SECURITIES OTHER THEN EQUITY SECURITIES

Not applicable.

# PART II

# ITEM 13 -
  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not applicable.

70

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

# Modification
  of Rights

Not applicable.

# Use of Proceeds

The net proceeds of our initial
  public offering in 1994 were $1.8 million. The net proceeds of our offering
  on the Nasdaq National Market in 1998 were $12.9 million. These proceeds were
  invested in cash, cash equivalents and in short term bank deposits and marketable
  securities. Only a small portion of these proceeds was used to finance current
  business operations of the company.

# PART III

# ITEM 15 
  CONTROLS AND PROCEDURES

# Evaluation of
  Disclosure Controls and Procedures

Based on their evaluation
  as of a date within 90 days of the filing date of this Report, our Chief Executive
  Officer and Chief Financial Officer have concluded that our disclosure controls
  and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
  Exchange Act of 1934 (the Exchange Act)) are effective to ensure
  that information required to be disclosed by the Company in reports that it
  files or submits under the Exchange Act is recorded, processed, summarized and
  reported in a timely manner.

# Changes in internal
  controls

There were no significant
  changes in the Companys internal controls or in other factors that could
  significantly affect these controls subsequent to the date of their evaluation,
  including any corrective actions with regard to significant deficiencies and
  material weaknesses.

# ITEM 16 
  RESERVED

# 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.

71

---

---

# ITEM 19 -
  EXHIBITS

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

| | 1. | Report
      of Independent Auditors                                 
| | -- | ---------------------------------------------------------------------
|
| | 2. | Consolidated Balance
      Sheets                                    
| |    |                                                                      
| | 3. | Consolidated Statements
      of Income                              
| |    |                                                                      
| | 4. | Statements of Changes
      in Shareholders Equity                  
| |    |                                                                      
| | 5. | Consolidated Statements
      of Cash Flows                          
| |    |                                                                      
| | 6. | Notes to Consolidated
      Financial Statements                     
| |    |                                                                      
| | 7. | Reports of Independent
      Auditors of Certain Associated Companies

| | (b) | Exhibits          
| | --- | ------------------
| |     |                   
| |     | Exhibit
      No. 
| |     |                   
| |     | *1.1              
| |     | *1.2              
| |     | **4.1             
| |     | **4.2             
| |     | 8.1               
| |     | 10.1              
| |     | 10.2              
| |     | 10.3              
| |     | 10.4              
| |     | 12.1              
| |     | 12.2              
| |     | 13.1              
| |     | 13.2              
| |     | __________________

| | *  | Previously
      filed as an exhibit to Retalixs annual report on Form 20-F for the
      fiscal year ended December 31, 2001, and incorporated herein by reference.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                      
| | ** | 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.

72

---

---

**Reports
  of Independent Auditors of Certain Associated Companies**

INDEPENDENT
  AUDITORS REPORT

To the Board of
  Directors **Retalix USA, Inc.**

We have audited the accompanying
  balance sheet of Retalix USA, Inc. (a California corporation) as of December
  31, 2000, and the related statement of income and accumulated deficit, and cash
  flows for the year then ended. These financial statements are the responsibility
  of the Companys management. Our responsibility is to express an opinion
  on these financial statements based on our audit.

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

In our opinion, the financial
  statements referred to above present fairly, in all material respects, the financial
  position of Retalix USA, Inc. as of December 31, 2000, and the results of its
  operations and its cash flows for the year then ended in conformity with generally
  accepted accounting principles.

By: /S/ Nation
  Smith Hermes Diamond

San Diego, CaliforniaJanuary 24, 2001

---

---

INDEPENDENT
  AUDITORS REPORT

To the Board of
  Directors**Retalix USA,
  Inc. and Subsidiary**Warrendale, Pennsylvania

We have audited the accompanying
  consolidated balance sheet of Retalix USA, Inc. and Subsidiary (a Texas
  corporation) as of December 31, 2001, and the related consolidated statements
  of income and retained earnings, and cash flows for the year then ended. These
  consolidated financial statements are the responsibility of the Companys
  management. Our responsibility is to express an opinion on these consolidated
  financial statements based on our audit. We did not audit the financial statements
  of BASS, Inc., a wholly-owned subsidiary, which statements reflect total assets
  of approximately $ 3,519,000 as of December 31, 2001, and total revenues of
  approximately $ 3,454,000 for the four-month period then ended. Those statements
  were audited by other-auditors whose report has been furnished to us, and our
  opinion, insofar as it relates to the amounts included for BASS, Inc., is based
  solely on the report of the other auditors.

We conducted our audit in
  accordance with auditing standards generally accepted in the United States of
  America. Those standards require that we plan and perform the audit to obtain
  reasonable assurance about whether the consolidated financial statements are
  free of material misstatement. An audit includes examining, on a test basis,
  evidence supporting the amounts and disclosures in the consolidated financial
  statements. An audit also includes assessing the accounting principles used
  and significant estimates made by management, as well as evaluating the overall
  consolidated financial statement presentation. We believe that our audit and
  the report of other auditors provide a reasonable basis for our opinion.

In our opinion, based on
  our audit and the report of other auditors, the consolidated financial statements
  referred to above present fairly, in all material respects, the financial position
  of Retalix USA, Inc., and Subsidiaryas of December 31, 2001, and the
  results of its operations and its cash flows for the year then ended in conformity
  with accounting principles generally accepted in the United States of America.

By: /S/ Nation
  Smith Hermes Diamond

San Diego, CaliforniaFebruary 5, 2002

---

---

INDEPENDENT
  AUDITORS REPORT

To the Stockholder**Retalix Holdings,
  Inc. and Subsidiaries**Plano, Texas

We have audited the accompanying
  consolidated balance sheets of Retalix Holdings, Inc. and Subsidiaries
  (the Company) (see Note 1 to the consolidated financial statements) as
  of December 31, 2002, and the related consolidated statements of income and
  retained earnings, and cash flows for the year then ended. These consolidated
  financial statements are the responsibility of the Companys management.
  Our responsibility is to express an opinion on these consolidated financial
  statements based on our audits. We did not audit the financial statements of
  StoreNext Retail Solutions, LLC, a majority-owned subsidiary, which statements
  reflect total assets of approximately $ 5,468,000 as of December 31, 2002, and
  total revenues of approximately $ 10,144,000 for the six-month period then ended.
  Those statements were audited by other auditors whose report has been furnished
  to us, and our opinion, insofar as it relates to the amounts included for StoreNext
  Retail Solutions, LLC, is based solely on the report of the other auditors.

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

In our opinion, based on
  our audit and the report of the auditors, the consolidated financial statements
  referred to above present fairly, in all material respects, the consolidated
  financial position of Retalix Holdings, Inc. and Subsidiariesas of December
  31, 2002, and the consolidated results of their operations and their cash flows
  for the year then ended in conformity with accounting principles generally accepted
  in the United States of America.

By: /S/ Nation
  Smith Hermes Diamond

February 1, 2003San Diego, California

---

---

INDEPENDENT
  AUDITORS REPORT

Board of DirectorsBASS, Inc.

We have audited the accompanying
  balance sheet of BASS, Inc. as of December 31, 2001, and the related statements
  of operations, retained deficit and cash flows for the year then ended. These
  financial statements are the responsibility of the Companys management.
  Our responsibility is to express an opinion on these financial statements based
  on our audit.

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

In our opinion, the financial
  statements referred to above present fairly, in all material respects, the financial
  position of BASS, Inc. as of December 31, 2001, and the results of its operations
  and its cash flows for the year then ended in conformity with accounting principles
  generally accepted in the United States of America.

By: /S/ Flagel,
  Huber, Flagel & Co.

Certified Public
  Accountants

Dayton, OhioJanuary 18, 2002

---

---

INDEPENDENT
  AUDITORS REPORT

To the Board of
  Directors and Stockholders ofRetail Control Systems,
  Inc. (dba Retalix East)

We have audited the accompanying
  balance sheets of Retail Control Systems, Inc. (dba Retalix East) as of December
  31, 2001 and 2000, and the related statements of operations and retained earnings
  and cash flows for the year ended December 31, 2001 and for the three months
  ended December 31, 2000. These financial statements are the responsibility of
  the Companys management. Our responsibility is to express an opinion on
  these financial statements based on our audit.

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

In our opinion, the financial
  statements referred to above present fairly, in all material respects, the financial
  position of Retail Control Systems, Inc. (dba Retalix East) as of December 31,
  2001 and 2000 and the results of its operations and its cash flows for the year
  ended December 31, 2001 and for the three months ended December 31, 2000 in
  conformity with accounting principles generally accepted in the United States
  of America.

By: /S/ Grossman
  Yanak & Ford LLP

Certified Public
  Accountants

Pittsburgh, PennsylvaniaJanuary 16, 2002

---

---



RETALIX LTD.

2002 ANNUAL
  REPORT







---

---

RETALIX LTD.(An Israeli Corporation)2002 ANNUAL REPORT

TABLE OF CONTENTS

|                                                    |  |  | **Page** |  | 
|--------------------------------------------------- |  |  | -------- |  | 
|**REPORT
      OF INDEPENDENT AUDITORS**            |  |  | II       |  | 
|**CONSOLIDATED
      FINANCIAL STATEMENTS:**        |  | 
|Balance
      sheets                                |  |  | III-IV   |  | 
|Statements
      of income (loss)                   |  |  | V        |  | 
|Statements
      of changes in shareholders equity |  |  | VI       |  | 
|Statements
      of cash flows                      |  |  | VII-IX   |  | 
|Notes
      to financial statements                 |  |  | X-XLII   |  | 
|**EXHIBIT
      - DETAILS OF SUBSIDIARIES**         |  |  | XLIII    |  | 

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

|
|
|
|

---

---

REPORT OF INDEPENDENT AUDITORS

To the shareholders ofRETALIX LTD.

We have audited the consolidated balance sheets of Retalix Ltd. (the Company) and
its subsidiaries as of December 31, 2002 and 2001 and the related consolidated statements of
income (loss), changes in shareholders equity and cash flows for each of the three years in
the period ended December 31, 2002. These financial statements are the responsibility of the
Companys Board of Directors and management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We did not audit the financial statements of certain consolidated subsidiaries whose assets constitute
approximately 26.2% and 18.2% of total consolidated assets as of December 31, 2002 and 2001, respectively,
and whose revenues constitute approximately 35.2%, 36.2% and 19.2% of total consolidated revenues
for the year ended December 31, 2002, 2001 and 2000, respectively. The financial statements of the
above subsidiaries were audited by other independent auditors, whose reports have been furnished
to us and our opinion, insofar as it relates to amounts included for those subsidiaries, is based
solely on the reports of the other  independent auditors.

We conducted our audits in accordance with auditing standards generally accepted in Israel and in the
United States of America, including those prescribed by the Israeli Auditors (Mode of Performance)
Regulations, 1973. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by
the Companys Board of Directors and management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of the other independent auditors
provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of the other independent auditors, the financial
statements referred to above present fairly, in all material respects, the consolidated financial
position of the Company and its subsidiaries as of December 31, 2002 and 2001 and the consolidated
results of their operations, changes in shareholders equity and their cash flows for each of
the three years in the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.

As described in note 1h to the consolidated financial statements, effective January 1, 2002 the Company
and its subsidiaries adopted FASB Statement of Financial Accounting Standards No. 142 Goodwill
and other intangible Assets, in its entirety and changed method of accounting for goodwill.

As discussed in
  Note 1a the Company has restated its consolidated financial statements at December
  31, 2002 and 2001 and for the years ended December 31, 2002 and 2001 to correct
  the value assigned to shares issued by a subsidiary.

|Tel-Aviv, Israel                            
|--------------------------------------------
|February
      12, 2003 except for Note 1a, 
|as
      to which the date is March 18, 2004

II

---

---

RETALIX LTD.CONSOLIDATED BALANCE
  SHEETS(Restated, Note 1a)

|                                                        | December 31
|------------------------------------------------------- | -----------
|
|
|**A
      s s e t s**                                   |            
|**CURRENT
      ASSETS** (note 11):                     |            
|Cash
      and cash equivalents                         |            
|Short-term
      bank deposits                          |            
|Marketable
      securities                             |            
|Accounts
      receivable (note 12a):                   |            
|Trade                                                   |            
|Other                                                   |            
|Deferred
      income taxes (note 10g)                  |            
|Inventories
      (note 12b)                            |            
|                                                        |            
|T
      o t a l  current assets                         |            
|                                                        |            
|**NON-CURRENT
      ASSETS** (note 11):                 |            
|Marketable
      securities - bonds (note 12c)          |            
|Deferred
      income taxes (note 10g)                  |            
|Long-term
      bank deposit                            |            
|Long-term
      loans to employees (note 12e)           |            
|Amounts
      funded in respect of employee rights upon |            
|retirement
      (note 7)                               |            
|Other                                                   |            
|                                                        |            
|                                                        |            
|                                                        |            
|**PROPERTY,
      PLANT AND EQUIPMENT**, net (note 3)   |            
|                                                        |            
|**GOODWILL**                                            |            
|                                                        |            
|                                                        |            
|**OTHER
      INTANGIBLE ASSETS,** net of accumulated   |            
|amortization
      (note 4)                             |            
|                                                        |            
|                                                        |            
|                                                        |            

|___________________________                                                                        | ___________________________                      
|-------------------------------------------------------------------------------------------------- | -------------------------------------------------
|**Barry Shaked
      Chairman of the Board
      of Directors and 
      Chief Executive Officer** | **Danny Moshaioff
      Chief Financial Officer**

III

---

---

|                                                               | December 31
|-------------------------------------------------------------- | -----------
|
|
|**Liabilities
      and shareholders equity**                 |            
|**CURRENT
      LIABILITIES** (note 11):                       |            
|Short-term
      bank credit                                   |            
|Current
      maturities of long-term bank loans (note 5)      |            
|Accounts
      payable and accruals:                           |            
|Trade                                                          |            
|Employees
      and employee institutions                      |            
|Current
      maturities of other liabilities (note 6)         |            
|Other                                                          |            
|Deferred
      revenues                                        |            
|                                                               |            
|T
      o t a l  current liabilities                           |            
|                                                               |            
|**LONG-TERM
      LIABILITIES:**                               |            
|Long-term
      bank loans, net of current maturities (note 5) |            
|Employee
      rights upon retirement (note 7)                 |            
|Other
      liabilities, net of current maturities (note 6)    |            
|                                                               |            
|T
      o t a l  long-term liabilities                         |            
|                                                               |            
|**COMMITMENTS
      AND CONTINGENT**                           |            
|**LIABILITIES**
      (note 8)                                 |            
|                                                               |            
|T
      o t a l  liabilities                                   |            
|                                                               |            
|**MINORITY
      INTERESTS**                                   |            
|                                                               |            
|**SHAREHOLDERS
      EQUITY** (note 9):                       |            
|Share
      capital - ordinary shares of NIS 1.00              |            
|par
      value (authorized: 25,000,000                        |            
|shares;
      issued and outstanding:                          |            
|December
      31, 2002 - 11,993,404 shares;                   |            
|December
      31, 2001 - 11,721,229 shares)                   |            
|Additional
      paid in capital                               |            
|Retained
      earnings                                        |            
|                                                               |            
|T
      o t a l  shareholders equity                          |            
|                                                               |            
|                                                               |            
|                                                               |            

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

IV

---

---

RETALIX LTD.CONSOLIDATED STATEMENTS
  OF INCOME (LOSS)

|                                                       | Year ended
      December 31
|------------------------------------------------------ | ----------------------------
|
|
|**REVENUES**
      (note 14a):                         |                             
|Product
      sales                                    |                             
|Services
      and projects                            |                             
|                                                       |                             
|T
      o t a l  revenues                              |                             
|                                                       |                             
|**COST
      OF REVENUES:**                            |                             
|Cost
      of product sold                             |                             
|Cost
      of services and projects                    |                             
|                                                       |                             
|T
      o t a l  cost of revenues                      |                             
|                                                       |                             
|**GROSS
      PROFIT**                                 |                             
|                                                       |                             
|**OPERATING
      INCOME (EXPENSES):**                 |                             
|Research
      and development expenses - net          |                             
|Selling
      and marketing expenses - net             |                             
|General
      and administrative expenses (note 15a)   |                             
|Other
      general income - net (note 15c)            |                             
|                                                       |                             
|T
      o t a l  operating expenses                    |                             
|                                                       |                             
|**INCOME
      (LOSS) FROM OPERATIONS**                |                             
|F**INANCIAL
      INCOME (EXPENSES) -** net (note 15b) |                             
|**GAIN
      ARISING FROM ISSUANCE OF SHARES BY**      |                             
|**A
      SUBSIDIARY** **(note 2b)**                   |                             
|**OTHER
      EXPENSES**                               |                             
|                                                       |                             
|**INCOME
      (LOSS) BEFORE TAXES ON INCOME**         |                             
|**TAXES
      ON INCOME** (note 10)                    |                             
|                                                       |                             
|**INCOME
      (LOSS) BEFORE MINORITY INTERESTS**      |                             
|**MINORITY
      INTERESTS IN LOSSES OF**              |                             
|**SUBSIDIARIES**                                       |                             
|                                                       |                             
|**NET
      INCOME (LOSS)**                            |                             
|                                                       |                             
|**EARNINGS
      (LOSS) PER SHARE** (note 15d):        |                             
|Basic                                                  |                             
|                                                       |                             
|Diluted                                                |                             
|                                                       |                             
|**WEIGHTED
      AVERAGE NUMBER OF SHARES USED**       |                             
|**IN
      COMPUTATION OF EARNINGS (LOSS) PER**        |                             
|**SHARE
      - IN THOUSANDS** (note 15d):             |                             
|Basic                                                  |                             
|                                                       |                             
|Diluted                                                |                             
|                                                       |                             

* Restated, Note 1a

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

V

---

---

RETALIX LTD.(An Israeli Corporation)STATEMENTS OF CHANGES
  IN SHAREHOLDERS EQUITY

|                                                                          |  | **Share
      capital**
      **Ordinary
      shares** |  |                                                            |                                             |  |  | **Loans****granted
      to****Employees****to
      finance****acquisition of
      Company
      shares** |  |  |     |   |  |                                             |   |  |                             |  
|------------------------------------------------------------------------- |  | ------------------------------------------------------- |  | ---------------------------------------------------------- | ------------------------------------------- |  |  | ----------------------------------------------------------------------------------------------------------- |  |  | --- | - |  | ------------------------------------------- | - |  | --------------------------- | -
|                                                                          |  |                                                         |  |                                                            | **Additional
      paid -in
      capital** |  |  |                                                                                                             |  |  |     |   |  |                                             |   |  |                            
|                                                                          |  | **Number
      of
      shares in
      Thousands**     |  |                                                            |                                             |  |  |                                                                                                             |  |  |     |   |  | **Deferred
      stock
      compensation** |   |  | **Retained
      earnings** |  
|                                                                          |  |                                                         |  | **Amount**                                                 |                                             |  |  |                                                                                                             |  |  |     |   |  |                                             |   |  | **Total**                   |  
|                                                                          |  |                                                         |  |                                                            |                                             |  |  |                                                                                                             |  |  |     |   |  |                                             |   |  |                             |  
|                                                                          |  |                                                         |  | **U  . S  .    $  
      i  n    t  h o  u s  a  n  d  s** |                                            
|                                                                          |  |                                                         |  |                                                            |                                             |  |  |                                                                                                             |  |  |     |   |  |                                             |   |  |                             |  
|**BALANCE
      AT JANUARY 1, 2000**                                      |  | 10,805                                                  |  |                                                            | 3,206                                       |  |  | 16,073                                                                                                      |  |  | (67 | ) |  | (6                                          | ) |  | 14,125                      |  
|**CHANGES
      DURING 2000:**                                           
|Net
      loss                                                            |  |                                                         |  |                                                            |                                             |  |  |                                                                                                             |  |  |     |   |  |                                             |   |  | (1,801                      | )
|Issuance
      of share capital in respect of acquisition of subsidiaries |  | 447                                                     |  |                                                            | 109                                         |  |  | *9,848                                                                                                      |  |  |     |   |  |                                             |   |  |                             |  
|Issuance
      of share capital to employees resulting from              
|exercise
      of options                                                 |  | 61                                                      |  |                                                            | 16                                          |  |  | *253                                                                                                        |  |  |     |   |  |                                             |   |  |                             |  
|Collection
      of loans granted to employees                            |  |                                                         |  |                                                            |                                             |  |  |                                                                                                             |  |  | 67  |   |  |                                             |   |  |                             |  
|Amortization
      of deferred compensation related to employee          
|stock
      option grants                                                 |  |                                                         |  |                                                            |                                             |  |  |                                                                                                             |  |  |     |   |  | 6                                           |   |  |                             |  
|                                                                          |  |                                                         |  |                                                            |                                             |  |  |                                                                                                             |  |  |     |   |  |                                            
|**BALANCE
      AT DECEMBER 31, 2000**                                    |  | 11,313                                                  |  |                                                            | 3,331                                       |  |  | 26,174                                                                                                      |  |  | -,- |   |  | -,-                                         |   |  | 12,324                      |  
|                                                                          |  |                                                         |  |                                                            |                                             |  |  |                                                                                                             |  |  |     |   |  |                                             |   |  |                             |  
|**CHANGES
      DURING 2001:**                                           
|Net
      income **                                                       |  |                                                         |  |                                                            |                                             |  |  |                                                                                                             |  |  |     |   |  |                                             |   |  | 3,764                       |  
|Issuance
      of share capital in respect of acquisition of subsidiaries |  | 153                                                     |  |                                                            | 36                                          |  |  | *1,907                                                                                                      |  |  |     |   |  |                                             |   |  |                             |  
|Issuance
      of share capital to employees resulting from              
|exercise
      of options                                                 |  | 255                                                     |  |                                                            | 60                                          |  |  | *1,145                                                                                                      |  |  |     |   |  |                                             |   |  |                             |  
|Surplus
      arising from issuance of options                            |  |                                                         |  |                                                            |                                             |  |  | 9                                                                                                           |  |  |     |   |  |                                             |   |  |                             |  
|Deferred
      compensation related to employee stock option plan         |  |                                                         |  |                                                            |                                             |  |  | 29                                                                                                          |  |  |     |   |  |                                             |   |  |                             |  
|                                                                          |  |                                                         |  |                                                            |                                             |  |  |                                                                                                             |  |  |     |   |  |                                             |   | 
|**BALANCE
      AT DECEMBER 31, 2001 ****                                 |  | 11,721                                                  |  |                                                            | 3,427                                       |  |  | 29,264                                                                                                      |  |  |     |   |  |                                             |   |  | 16,088                      |  
|**CHANGES
      DURING 2002:**                                           
|Net
      income *                                                        |  |                                                         |  |                                                            |                                             |  |  |                                                                                                             |  |  |     |   |  |                                             |   |  | 5,705                       |  
|Issuance
      of share capital in respect of acquisition of minority    
|interest
      of subsidiary                                              |  | 5                                                       |  |                                                            | 1                                           |  |  | 65                                                                                                          |  |  |     |   |  |                                             |   |  |                             |  
|Issuance
      of share capital to employees resulting from exercise     
|of
      options                                                          |  | 267                                                     |  |                                                            | 55                                          |  |  | *1,923                                                                                                      |  |  |     |   |  |                                             |   |  |                             |  
|                                                                          |  |                                                         |  |                                                            |                                             |  |  |                                                                                                             |  |  |     |   |  |                                             |   | 
|**BALANCE
      AT DECEMBER 31, 2002 ****                                 |  | 11,993                                                  |  |                                                            | 3,483                                       |  |  | 31,252                                                                                                      |  |  |     |   |  |                                             |   |  | 21,793                      |  
|                                                                          |  |                                                         |  |                                                            |                                             |  |  |                                                                                                             |  |  |     |   |  |                                             |   | 

* Net of share issuance expenses** Restated, Note 1a

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

VI

---

---

(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 or loss to      
|net
      cash provided by or used in operating activities:        
|Minority
      interests in losses of subsidiaries                 
|                                                                    |                             
|Change
      in minority interests                                  |                             
|Depreciation
      and amortization, net                            |                             
|Gain
      arising from issuance of shares by a subsidiary         
|                                                                    |                             
|Capital
      gain from sale of dealership activity                 |                             
|Write-off
      of a loan to associated company                     |                             
|Compensation
      expenses resulting from shares and              
|options
      granted to employees                                  |                             
|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                 |                             
|Amortization
      of premium on securities                         |                             
|Other                                                               |                             
|Changes
      in operating assets and liability items:             
|Decrease
      (increase) in accounts receivable:                  
|Trade                                                               |                             
|Other                                                               |                             
|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 |                             
|                                                                    |                             

VII

---

---

(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:**                
|Investment
      in long-term deposit                           |                             
|Proceeds
      from disposal of an investment in               
|long-term
      bank deposit                                    |                             
|Short-term
      bank deposits  net                            |                             
|Investment
      in marketable securities                       |                             
|Acquisition
      of subsidiaries consolidated for             
|the
      first time (a)                                        |                             
|Loan
      to an associated company                             |                             
|Purchase
      of property, equipment and other assets          |                             
|Proceeds
      from sale of dealership activity and from       
|disposal
      of property and equipment                        |                             
|Amounts
      withdrawal (funded) in respect of employee rights
|upon
      retirement, net                                      |                             
|Long-term
      loans granted to employees                      |                             
|Collection
      of long-term loans from employees              |                             
|                                                                |                             
|Net
      cash provided by (used in) investing activities       |                             
|                                                                |                             
|**CASH
      FLOWS FROM FINANCING ACTIVITIES:**                
|Long-term
      bank loan received                              |                             
|Proceeds
      from issuance of shares of subsidiary to a       |                             
|third
      party                                               |                             
|Repayment
      of long-term bank loan                          |                             
|Issuance
      of share capital to employees                    |                             
|Short-term
      bank credit  net                              |                             
|Issuance
      of share capital to minority shareholders in    
|consolidated
      subsidiary                                   |                             
|Minority
      investment in shares of subsidiary               |                             
|Collection
      of loans granted to employees                 
|to
      finance acquisition of Company shares                  |                             
|                                                                |                             
|Net
      cash provided by (used in) financing activities       |                             
|                                                                |                             
|**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**                                        |                             
|                                                                |                             

VIII

---

---

(Concluded) - 3

RETALIX LTD.CONSOLIDATED STATEMENTS
  OF CASH FLOWS

SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:

|                                                                           | Year ended
      December 31
|-------------------------------------------------------------------------- | ----------------------------
|
|
|**(a)
      Acquisition of subsidiaries consolidated for the first time:** |                             
|Assets
      and liabilities of the subsidiaries at the date of            |                             
|acquisition:                                                               |                             
|Working
      capital (excluding cash and cash equivalents)                |                             
|Long-term
      debt                                                       |                             
|Fixed
      assets - net                                                   |                             
|Other
      assets                                                         |                             
|Amounts
      funded in respect of employee rights upon                    |                             
|retirement                                                                 |                             
|Accrued
      liability for employee rights upon retirement                |                             
|Long-term
      loan                                                       |                             
|Minority
      interests in subsidiaries                                   |                             
|Goodwill
      and other intangible assets arising on acquisition          |                             
|Issuance
      of the Companys share capital                              |                             
|                                                                           |                             
|                                                                           |                             
|                                                                           |                             
|                                                                           |                             
|**(b)
      Supplementary disclosure of cash flow information -**          |                             
|cash
      paid during the year for:                                       |                             
|Interest                                                                   |                             
|                                                                           |                             
|Income
      tax                                                           |                             
|                                                                           |                             

* Restated, Note 1a

(c) Supplementary information on investing activities not involving cash flows:

| | (1) | In 2002 the Company
      acquired shares from minority shareholders of a subsidiary in consideration
      of issuance of share capital of the Company at a total value of approximately
      $ 66,000.          
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                    
| | (2) | In 2001, the Company
      acquired shares of a subsidiary and a loan from its shareholders in consideration
      of issuance of share capital of the Company at a total value of approximately
      $ 1,373,000.
| |     |                                                                                                                                                                                                                    
| | (3) | In 2000, the Company
      acquired shares of several subsidiaries in consideration of issuance of
      share capital of the Company in a total value of approximately $10,000,000.                               

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

IX

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING
  POLICIES

|**a.** | **Restatement
      of financial statements**
|------ | ---------------------------------------------
|       |                                              

| | Retalix Ltd. (the Company)
      has restated its consolidated financial statements for the years ended December
      31, 2002 and 2001, to correct the value assigned to shares issued by its
      subsidiary, Store Alliance.Com Ltd. (Store Alliance in April
      2001 in an exchange for shares in TradaNet Electronic Commerce Services
      Ltd(Tradanet).  That transaction was accounted for
      as a business combination.In the Companys previously issued financial
      statements the aggregate value assigned to the shares issued was approximately
      $ 1,901,000, or $5.56 per share.  These financial statements have been
      restated to reflect an aggregate value of approximately $ 1,331,000, or
      $3.89 per share. The price of $3.89 was determined based on a separate cash
      transaction involving issuance of Store Alliance shares, which closely preceded
      the Tradanet transaction.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The effect of the restatement
      on the Companys
      net income for the years ended, and
      retained earnings at, December 31, 2002 and 2001, is shown below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| | Year ended
      December 31, 
| | ------------------------------
|
|
| | Net income
      - as reported
| | Effect of
      restatement   
| |                               
| | Net income
      - as restated
| |                               
| | Earnings
      per share:     
| | Basic
      - as reported     
| | Effect
      of restatement   
| |                               
| | Basic
      - restated        
| |                               
| | Diluted
      - as reported   
| | Effect
      of restatement   
| |                               
| | Diluted
      - restated      
| |                               

| | December 31,                                      
| | --------------------------------------------------
|
|
| |                                                   
| | Shareholders
      equity - retained earnings - as
| | reported                                          
| | Effect of
      restatement                       
| |                                                   
| | Shareholders
      equity - retained earnings -   
| | restated                                          
| |                                                   

X

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING
  POLICIES (continued):

| | The significant
      accounting policies, applied on a consistent basis, except for the change
      in the accounting policy for goodwill as described in h. below, are as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                      

|b. | General:
|-- | --------
|   |         

| | 1) | Nature
      of operations:
| | -- | ---------------------------
| |    |                            

| | (a) | The Company,
      an Israeli corporation whose shares are listed on the Nasdaq National Market
      (symbol RTLX) and on the Tel-Aviv Stock Exchange (TASE),
      alone and together with its subsidiaries (the Group), develops,
      manufactures and markets complete, enterprise-wide, open software solutions
      for food retailers in the supermarket, convenience stores and restaurant
      markets.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                           

| | (b) | As to the
      Groups geographical segments and principal customers, see note 14.
| | --- | -----------------------------------------------------------------------------------
| |     |                                                                                    
| | (c) | Subsidiary
      - a company controlled to the extent of over 50%  - see Exhibit.  
| |     |                                                                                    

| | 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 (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 and the reported amounts of revenues
      and expenses during the reporting years. Actual results could differ from
      those estimates.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| | 3) | Functional
      currency
| | -- | -------------------------
| |    |                          

| | The
      currency of the primary economic environment in which the operations of
      the Group and each member of the Group are conducted is the U.S. dollar
      (dollar; $). Most of the Groups revenues are
      recorded in dollars or in Israeli currency linked to the dollar (see note
      14a). 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.

XI

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING
  POLICIES (continued):

|c. | Principles
      of consolidation:
|-- | ----------------------------------
|   |                                   

| | 1) | The consolidated
      financial statements include the accounts of the Company and its subsidiaries.
      The companies included in consolidation are listed in the Exhibit.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                               

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

|d. | Cash
      equivalents
|-- | ----------------------
|   |                       

| | The Group
      considers all highly liquid investments, which include short-term bank deposits
      (up to three months from date of deposit) that are not restricted as to
      withdrawal or use, to be cash equivalents.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                               

|e. | Marketable
      securities
|-- | ---------------------------
|   |                            

| | Investment
      in marketable bonds  which the Group intends to hold to maturity,
      are stated at amortized cost.                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                   
| | Investment
      in other 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.
| |                                                                                                                                                                                                                                   

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

| | Inventories
      are valued at the lower of cost or market. Cost is determined as follows:
| | -------------------------------------------------------------------------------------------
| |                                                                                            

| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Raw materials
      and supplies - on first-in, first-out basis.                                                                                           
| |                                                                                                                                                              
| | Products
      in process and finished products - on basis of production costs - raw materials
      and supplies component - on first-in, first-out basis.
| |                                                                                                                                                              

XII

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING
  POLICIES (continued):

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

| | 1) | These assets
      are stated at cost; assets of 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 |  |  |  | 33    | 
|Vehicles                                 |  |  |  | 15    | 
|Office furniture
      and equipment     |  |  |  | 6-10  | 
|Building                                 |  |  |  | 4     | 

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

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

| | Software
      rights and website development costs are stated at cost and amortized in
      three to five equal annual installments. Other intangible assets are amortized
      over a period of five to seven years. As for software development costs
      see l. below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 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 Company adopted Statement of Financial Accounting Standards (FAS)
      No. 142 of the Financial Accounting Standards Board of the United States
      (FASB), Goodwill and other Intangible Assets and
      FAS No. 141 business combinations in its entirety as of January
      1, 2002 except for acquisition the Group entered into as of September 2001
      for which the Group applied the provisions of FAS 141 and FAS 142 as of
      the acquisition date. Goodwill which was previously amortized on a straight-line
      basis over periods of four to seven years benefited, is no longer being
      amortized to earnings, but instead is subject periodic testing for impairment.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

XIII

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING
  POLICIES (continued):

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

| | 1)     
      As to impairment of goodwill, see note 4.
| | -------------------------------------------------------
| |                                                        

| | 2) | The Company
      has adopted FAS 144, Accounting for the Impairment or Disposal of
      Long-Lived Assets effective January 1, 2002. FAS 144 requires that
      long-lived assets, to be held and used by an entity be reviewed for impairment
      whenever events or changes in circumstances indicate that the carrying amount
      of the assets may not be recoverable. Under FAS 144, if the sum of
      the expected future cash flows (undiscounted and without interest charges)
      of the long-lived assets is less than the carrying amount of such assets,
      an impairment loss would be recognized, and the assets would be written
      down to their estimated fair values.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

| | The adoption
      of FAS 144 did not have any material impact on the consolidated financial
      position and consolidated results of operations of the Company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                   

|j. | Income
      taxes:
|-- | -------------------
|   |                    

| | 1) | Deferred
      income taxes are computed in respect of differences between the assets and
      liabilities as measured in the financial statements and for tax purposes,
      at the tax rates expected to be in effect at time of release to income from
      the deferred tax accounts. Valuation allowances are provided for deferred
      tax assets when it is more likely than not that all or a portion of the
      deferred tax assets will not be realized. As to the main factors in respect
      of which deferred taxes have been included - see note 9g.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

| | 2) | Upon the
      distribution of dividends from the tax-exempt income of approved enterprises
      (see also note 9a), the amount distributed will be subject to tax at
      the rate that would have been applicable had the Company and some of its
      Israeli subsidiaries (the companies) not been exempted from
      payment thereof. The companies intend to permanently reinvest the amounts
      of tax exempt income and they do 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 intercompany 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 an 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.                                                                                       

XIV

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING
  POLICIES (continued):

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

| | The Group
      derives its revenues from the following primary sources: products which
      include software licenses and software licenses with hardware, maintenance,
      other services which include customer software change requests, communication
      services, data analysis and supply chain information and projects.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Sales of
      products (i.e.: (1) software licenses and, (2) software licenses and hardware)
      are recognized when delivery has occurred, persuasive evidence that an arrangement
      exists, the sales price is fixed or determinable, collectibility is probable
      and the Group has no material obligations remaining under the selling agreements.
      Revenues from transactions involving resellers are recognized when the products
      are delivered to end-users. Sales of products under long-term arrangements
      for the sale of a limited number of software licenses over a limited term
      are recognized over the arrangement term.                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Services
      are primarily comprised of revenue from maintenance, communication services,
      data analysis and supply chain information.
      Maintenance arrangements provide for technical support for the Groups
      software products. Data analysis and supply chain information involve data
      the Group provides its customers for which the Group receives fees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Revenue
      from rendering services (such as maintenance services, communication services,
      data analysis and supply chain information) are recognized as the services
      are preformed or over the service period depending on the terms of the arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Short-term
      projects relates mainly to specific customer software change requests, that
      are subsequent to the delivery of the software license. The consideration
      for the work performed is predetermined as a fixed fee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Revenue
      from projects (customer software change requests) are recognized upon completion.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The Group
      recognizes revenue related to the delivered products and services only if:
      (1) the revenue recognition criteria are met, as above; (2) any undelivered
      products or services are not essential to the functionality of the delivered
      products or services; (3) payment for the delivered products or services
      is not contingent upon delivery of the remaining products or services; (4)
      the group has an enforceable claim to receive the amount due in the event
      it does not deliver the undelivered products or services; and (5) as discussed
      above, there is evidence of the fair value for each of the undelivered products
      or services.                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | With respect
      to multiple element arrangements, the Group generally uses the residual
      method to recognize revenues when evidence of the fair value of all
      undelivered elements exists. Under the residual method, the fair value of
      the undelivered elements (the service elements, such as customer software
      change requests and maintenance) based on vendor-specific objective evidence
      (VSOE) is deferred and the remaining portion of the arrangement fee is allocated
      to the delivered elements (i.e., software license).
      The Group determines VSOE of the fair value of the service elements revenues
      based upon its recent pricing for those services when sold separately. VSOE
      of the fair value of maintenance services may also be determined based on
      a substantive maintenance renewal clause, if any, within a customer contract.

XV

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING
  POLICIES (continued):

| | Whenever
      the Groups payment terms in a certain transaction exceeds the Groups
      normal and customary payment terms, revenue is recognized when payments
      come due.                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                    
| | The Group
      does not offer specified or unspecified upgrade rights to its customers
      in connection with software sales or the sale of extended warranty and support
      arrangements.                                   
| |                                                                                                                                                                                                                                    
| | The Group
      does not grant a right of return on products sold to customers and resellers.                                                                                                                                      
| |                                                                                                                                                                                                                                    
| | Deferred
      revenue primarily relates to software maintenance agreements billed to customers
      for which the services have not yet been provided and advances from customers
      for services that have not been provided.
| |                                                                                                                                                                                                                                    

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

| | 1) | Research
      and development expenses are charged to income as incurred. Participations
      received from the Government of Israel for development of approved projects
      are recognized as a reduction of expenses when the related cost is incurred.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                               

| | 2) | Upon the
      establishment of technological feasibility of the relevant product, software
      development costs are capitalized in accordance with the provisions of FAS
      No. 86. Accounting for the Costs of Computer Software to be Sold,
      Leased or Otherwise Marketed. Amortization of capitalized software
      development costs begins when the product is available for sale to customers.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                    

| | Annual
      amortization is computed by the straight-line method, over the remaining
      useful life of the product or based on the ratio of current gross revenues
      to current and anticipated future gross revenues, whichever is higher. Currently,
      amortization is computed over a period of three years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                            

|m. | Issuance
      of shares by investee companies
|-- | ----------------------------------------------
|   |                                               

| | Capital
      gains or losses arising from the issuance of shares by subsidiaries and
      associated companies to third parties are carried to income currently.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                   

|n. | Allowance
      for doubtful accounts
|-- | -------------------------------------
|   |                                      

| | The allowance
      for doubtful accounts is determined for specific debts doubtful of collection.
      In determining the allowance for doubtful accounts, the Group consider,
      among other things, its past experience with such customers, the economic
      environment, the industry in which such customers operates, financial information
      available on such customers.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

XVI

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING
  POLICIES (continued):

|o. | 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 2000, such effect was not included since it would have been anti-dilutive).
      The options of a subsidiary have no effect of 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|p. | Comprehensive
      income
|-- | --------------------------
|   |                           

| | The Company
      has no comprehensive income components other than net income or loss.
| | ---------------------------------------------------------------------------------------
| |                                                                                        

|q. | Stock based compensation
|-- | ------------------------
|   |                         

| | The Group
      accounts for employee stock based compensation in accordance with Accounting
      Principles Board Opinion (APB)  No. 25, Accounting
      for Stock Issued to Employees and related interpretations. Under APB
      25 compensation costs for employee stock option plans is measured using
      the intrinsic value based method of accounting.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                         
| | In accordance
      with FAS 123 - Accounting for Stock-Based Compensation (FAS
      123), the Group discloses pro-forma assuming the Group had accounted
      for employee stock option grants using the fair value-based method defined
      in FAS 123.                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                         
| | The following
      table illustrates the effect on net income (loss) and earning (loss) per
      share assuming the Group had applied the fair value recognition provisions
      of FAS 123 Accounting for Stock-Based Compensation  to
      its stock-based employee compensation:                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                         

|                                                 | Year ended
      December 31
|------------------------------------------------ | ----------------------------
|
|
|Net
      income (loss), as reported             |                             
|Add - stock
      based employee compensation    |                             
|expense,
      included in reported net income   |                             
|Deduct -
      stock based employee compensation |                             
|expense
      determined under fair value        |                             
|method
      for all awards                      |                             
|                                                 |                             
|Pro forma
      net income (loss)                |                             
|                                                 |                             
|Earnings
      per share:                        |                             
|Basic
      - as reported                        |                             
|                                                 |                             
|Basic
      - pro forma                          |                             
|                                                 |                             
|Diluted
      - as reported                      |                             
|                                                 |                             
|Diluted
      - pro forma                        |                             
|                                                 |                             



*Restated,
  Note 1a

XVII

---

---

RETALIX
  LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING
  POLICIES (continued):

|r. | Advertising
      expenses
|-- | --------------------------
|   |                           

| | These costs
      are charged to selling and marketing expenses as incurred. Advertising expenses
      totaled $ 456,000, $ 430,000 and $ 187,000 in the years ended December 31,
      2002, 2001 and 2000, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                            

|s. | Derivatives
      financial instruments
|-- | ---------------------------------------
|   |                                        

| | The Company
      adopted FAS 133, Accounting for Derivative Instruments and Hedging Activities,
      as of January 1, 2001. All derivatives are recognized on the balance sheet
      at their fair value. The Company has only limited involvement with foreign
      exchange derivative financial instruments (forward exchange contracts).
      These contracts do not qualify for hedge accounting under FAS 133. Being
      so, changes in the fair value of derivative are carried to the statements
      of income and included in financial income (expenses) - net.                                                                                                                                                                                                      
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Prior to
      the adoption of FAS 133, foreign currency derivatives were treated as hedges
      in the accounts when: (i) the item the Company had intended to hedge exposed
      it to risk; (ii) the derivative instrument reduced the exposure to risk
      and was inversely correlated to the item it was designated to hedge; and
      (iii) it was designated as a hedge from the outset.                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Gains and
      losses on derivatives that hedged existing assets or liabilities in currencies
      other than the functional currency were recognized in income commensurate
      with the results from those assets or liabilities. The net premium paid
      or received in respect of currency options were carried to the statements
      of income under financial expenses - net over the options terms. Foreign
      currency derivatives entered into to reduce the Groups foreign currency
      exposure with respect to anticipated transactions which did not meet the
      requirements for applying hedge accounting, were marked to market at each
      reporting period, with gains and losses recognized currently as financial
      income (expenses) - net.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | The adoption
      of FAS 133 did not have any material impact on the financial position and
      results of operations of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|t. | Recently
      issued accounting pronouncements in the United States:
|-- | ---------------------------------------------------------------------
|   |                                                                      

| | 1) | FAS 143
| | -- | -------
| |    |        

| | In July
      2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations.(FAS
      143) . FAS 143 prescribes the accounting for retirement obligations
      associated with tangible long-lived assets, including the timing of liability
      recognition and initial measurement of the liability. FAS 143 requires that
      an asset retirement cost should be capitalized as part of the cost of the
      related long-lived asset and subsequently allocated to expense using a systematic
      and rational method. FAS 143 is effective for fiscal years beginning after
      June 15, 2002 (January 1, 2003 for the Company). The Company does not
      expect the adoption of FAS 143 to have material effect on its consolidated
      financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

XVIII

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING
  POLICIES (continued):

| | 2) | FAS 145
| | -- | -------
| |    |        

| | In April  2002,
      the FASB issued FAS No. 145, Revision of FASB Statements No. 4, 44
      and 64, Amendment of FASB Statement No. 13, and Technical Connections.
      Among other amendments and rescissions, FAS 145 eliminates the requirement
      that gains and losses from the extinguishment of debt be aggregated and,
      if material, classified as an extraordinary item, net of the related income
      tax effect, unless such gains and losses meet the criteria in paragraph
      20 of Accounting Principles Board Opinion No. 30, Reporting the Results
      of Operation - Reporting the Effects of Disposal of a Segment of a Business,
      and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
      FAS 145 is partially effective for transactions occurring after May 15,
      2002 and partially effective for fiscal years beginning after May 15,
      2002. The Company does not expect the adoption of this standard to have
      a material effect on its consolidated financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| | 3) | FAS 146
| | -- | -------
| |    |        

| | In June 2002,
      the FASB issued FAS No. 146, Accounting for Costs Associated with
      Exit or Disposal activities. FAS 146 addresses financial accounting
      and reporting for costs associated with exit or disposal activities and
      nullifies Emergency Issue Task Force (EITF) No. 94-3 Liability
      Recognition for Certain Employee Termination Benefits and other Costs to
      Exit an Activity (including Certain Costs Incurred in a restructuring).
      FAS 146 requires that a liability for a cost associated with an exit or
      disposal activity to be recognized when the liability is incurred. Under
      EITF 94-3, a liability for an exit cost as generally defined in EITF 94-3
      was recognized at the date of the commitment to an exit plan. FAS 146 states
      that a commitment to a plan, by itself, does not create an obligation that
      meets the definition of a liability. Therefore, FAS 146 eliminates the definition
      and requirements for recognition of exit costs in EITF 94-3. It also establishes
      that fair value is the objective for initial measurement of the liability.
      FAS 146 is to be applied prospectively to exit or disposal activities
      initiated after December 31. 2002.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The Company
      does not expect the adoption of this standard to have a material effect
      on its consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

| | 4) | FIN 45
| | -- | ------
| |    |       

| | In November
      2002, the FASB issued FASB Interpretation FIN No. 45, Guarantors
      Accounting and Disclosure Requirements for Guarantees, Including Indirect
      Guarantees of Indebtedness of Others. FIN 45 requires the guarantor
      to recognize, at the inception of a guarantee, a liability for the fair
      value of the obligation undertaken in issuing the guarantee. It also elaborates
      on the disclosures to be made by a guarantor in its financial statements
      about its obligations under certain guarantees that it has issued and to
      be made in regard of product warranties. As to the Group, no additional
      disclosures was made in these financial statements as a result of the FIN
      45 disclosure requirements that are effective as from 2002.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

XIX

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING
  POLICIES (continued):

| | Initial
      recognition and initial measurement provisions of this FIN are applicable
      on a prospective basis to guarantees issued or modified after December 31,
      2002.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                     
| | At this
      stage, the Company is examining the effect of FIN 45 on its consolidated
      financial statements.                                                                  
| |                                                                                                                                                                                     

| | 5) | FIN 46
| | -- | ------
| |    |       

| | In January
      2003, the FASB issued FASB Interpretation No. 46  Consolidation
      of Variable Interest Entities (FIN 46). Under this FIN entities are
      separated into two populations: (1) those for which voting interests are
      used to determine consolidation (this is the most common situation) and
      (2) those for which variable interests are used to determine consolidation.
      The FIN explains how to identify Variable Interest Entities  (VIE)
      and how to determine when a business enterprise should include the assets,
      liabilities, non-controlling interests, and results of activities of a VIE
      in its consolidated financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The FIN
      is effective as follows: for variable interests in variable interest entities
      created after January 31, 2003 the FIN shall apply immediately, for variable
      interests in variable interest entities created before that date, the FIN
      shall apply - for public entities - as of the beginning of the first interim
      or annual reporting period beginning after June 15, 2003.                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The Company
      does not expect the adoption of FIN 46 to have a material effect on its
      consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|u. | Reclassification
|-- | ----------------
|   |                 

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

NOTE 2 - ACQUISITIONS:

|a. |  | In January
      2000, the Company acquired an additional 14.16% of the shares of Net Point
      Ltd. (Net Point) for an aggregate consideration of $ 112,500
      in cash. In June 2000, the Company acquired an additional 4.69% of the shares
      of Net Point for a consideration of  $ 350,000. As a result, the
      Company held 75.85% of Net Point. The acquisitions were accounted for under
      the purchase method. The excess cost of investment, an amount of  $ 311,000,
      was attributed to goodwill.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| | According
      to a settlement agreement signed in 2001 between the Company and a minority
      shareholder of Net Point, the Company received additional shares of Net
      Point which were held by the shareholder in consideration of options of
      the Company valued at $ 9,000. As a result, the Company holds 95% of Net
      Point shares.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

XX

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE 2 - ACQUISITIONS
   (continued):

|b. |  | In February
      2000, the Company signed a loan option agreement with Store
      Alliance. Under this agreement, the Company granted Store Alliance a  $
      500,000 loan, which is linked to the dollar and bears annual interest of
      LIBOR. The loan is convertible into shares of Store Alliance. Following
      the implementation of the loan option agreement, the Company
      was granted the right to appoint over 50% of the members of the board of
      directors of Store Alliance. Accordingly, the financial statements of Store
      Alliance have been consolidated with the financial statements of the Company
      as from January 1, 2000.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| | According
      to an agreement signed on August 14, 2000 between the Company and the minority
      shareholders of Store Alliance (minority shareholders), the
      Company issued the minority shareholders 60,000 ordinary shares of the Company
      (20,417 shares issued in 2001) equal, at the date of the agreement, to approximately
      $ 1,014,000 in respect of the shares of Store Alliance. As a result, the
      Company held 100 % of the shares of Store Alliance. The acquisition was
      accounted for under the purchase method. The excess cost of investment in
      an amount of $ 1,013,000 was attributed to goodwill.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | On December
      31, 2000, the Company signed an investment agreement with the Central Bottling
      Company Ltd. (Coca-Cola Israel) (Central Company). Under this
      agreement, Central Company invested $ 3,500,000 in Store Alliance in
      consideration of 900,000 (33.3%) of the shares of Store Alliance ($3.89
      per share). As a result of this investment the Company share in Store Alliance
      decreased from 100% to 66.7%.In April 2001,
      the Company signed an investment agreement with Discount Investment Corporation
      Ltd., which establishes the principles of the purchase of 100% of the shares
      of TradaNet Electronic Commerce Services Ltd. (Tradanet),a supplier
      of electronic commerce services in Israel by Store Alliance, in consideration
      of the issuance of 342,254 (11.25%) of the shares of Store Alliance to Discount
      Investment Corporation Ltd. The value of the shares issued was approximately
      $ 1,331,000 ($3.89 per share). As a result of this investment the Company
      share in Store Alliance decreased from 66.7% to 59.17% (see note 1a).
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | The excess
      of cost of investment, in the amount of approximately $ 635,000 was attributed
      to property and equipment and identified intangible assets to be amortized
      over its useful life (seven years).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | As a result
      of the investments the Group ownership in that subsidiary decreased to 59.17%
      of the shares of Store Alliance and recorded a gain in the statement of
      income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | As to employee
      stock option plan of Store Alliance, see note 9b(2).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|c. |  | On August
      9, 2001, the Company entered into an agreement to establish C-StoreMatrix.Com
      Inc.(C- Store) together with i2 Technologies Inc. and The National
      Association of Convenience Stores. The Company received 25% of the shares
      of C-Store. The Company granted C-Store a non-exclusive, non-transferable
      right to use the Companys technology to provide ASP services and the
      use of the names, trademarks and service marks of the Company and its subsidiaries.
      C-Store ceased operation in 2002. At the time of its formation the Company
      granted C-Store a $ 500,000 loan, which in accordance with the terms
      was to bear annual interest of PRIME. In  2001 the loan was written-off
      and was charged as other expense.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

XXI

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE 2 - ACQUISITIONS
   (continued):

|d. |  | According
      to an investment agreement signed on September 3, 2000 between the Company
      and the minority shareholders of Palm Point Ltd. (Palm Point),
      which defines additional investments by the shareholders in Palm Point,
      the Company converted an inter-company account of $ 900,000 into share
      capital for additional 32.12% of the shares of Palm Point. As a result,
      the Company held 82.14% of the shares of Palm Point. The acquisition was
      accounted for under the purchase method. The excess cost of investment in
      the amount of $ 221,000 was attributed to goodwill.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| | In
      April 2001, the Company converted an additional inter-company account of  $
      450,000 into share capital for additional 4.34% of the shares of Palm Point.
      The excess cost was attributed to goodwill.                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                 
| | In September
      2001, the Company converted an additional amount of $ 350,000 of an inter-company
      account for additional 2.16% of the shares of Palm Point. As a result, the
      Company held 88.64% of the shares of Palm Point. The acquisition was accounted
      for under the purchase method. 
| |                                                                                                                                                                                                                                                                                                                 
| | According
      to an additional agreement signed on October 1, 2001 between the Company
      and a minority shareholder of Palm Point, the Company received additional
      shares of Palm Point which were held by the shareholder. As a result, the
      Company holds 93.18% of the shares of Palm Point.
| |                                                                                                                                                                                                                                                                                                                 
| | In 2002,
      the Company acquired shares from minority shareholders in Palm-Point in
      consideration of issuance of share capital of the Company at a total value
      of approximately $ 66,000. As a result, the Company holds 96.18% of the
      shares of Palm-Point.                               
| |                                                                                                                                                                                                                                                                                                                 

|e. |  | Under an
      investment agreement dated September 28, 2000 between the Company and the
      shareholders of Kochav Orion Ltd.(Kochav), the Company issued
      the shareholders of Kochav 16,401 ordinary shares of the Company, equal,
      at the date of the agreement, to approximately $ 410,000, in consideration
      of 100% of the shares of Kochav. The acquisition was accounted for under
      the purchase method. The excess cost of investment, in the amount of $ 397,000
      was attributed to goodwill and identified intangible assets to be amortized
      over their estimated useful life (six years).
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|f. |  | Under an
      investment agreement dated September 28, 2000 between the Company and the
      shareholders of Orlan Orion Systems Ltd. (Orlan), the Company
      issued the shareholders of Orlan 2,159 ordinary shares of the Company equal,
      at the date of the agreement, to approximately $ 54,000, in consideration
      of 100% of the shares of Orlan. The acquisition was accounted for under
      the purchase method. The excess cost of investment, in the amount of $ 57,000
      was attributed to goodwill.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

XXII

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE 2 - ACQUISITIONS
   (continued):

|g. |  | On September
      8, 2000, the Company signed an agreement with the shareholders of Retail
      Control Systems Inc. (R.C.S), under which the Company issued
      the shareholders of R.C.S. 178,660 ordinary shares of the Company equal,
      at the date of the agreement, to approximately $ 4,561,000 and paid
      additional $ 4,140,000 in cash, in consideration of 100% of the shares of
      R.C.S. The excess cost of investment, in the amount of $ 7,716,000,
      was attributed to goodwill, identified intangible assets to be amortized
      over their estimated useful life (four to eight years) and executory unfavorable
      contracts to be amortized over the contracts terms.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|h. |  | On November
      3, 2000, the Company signed an agreement with Fujitsu - ICL Systems, Inc.
      (ICL), a distributor of the Companys products in North
      America, Canada and South America to acquire the direct distribution activity
      of the Companys products. Under this agreement, the Company issued
      ICL 209,836 ordinary shares of the Company equal, at the date of the agreement,
      to approximately $ 3,915,000 and paid an additional $ 1,600,000 in
      cash. The acquisition was accounted for under the purchase method. The excess
      cost of investment, in the amount of $ 5,514,000 was attributed to
      goodwill,identified intangible assets to be amortized over their estimated
      useful life (four to eight years) and executory unfavorable contracts to
      be amortized over the contracts terms.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|i. |  | In September
      2001, the subsidiary Retalix U.S.A  Inc. (Retalix U.S.A)
      acquired 100% of the shares of Bass Inc.(Bass) in consideration
      of share capital of the Company at a total value of $ 1,393,000. As part
      of the acquisition, the Company assumed a Bass shareholders loan (to
      Bass) in the amount of $ 550,000 by issuing additional shares in the
      same amount. The excess of cost of investment in the amount of approximately
      $ 5,484,000 was attributed to goodwill, identified intangible assets to
      be amortized over estimated useful life (three to five years) and executory
      unfavorable contracts to be amortized over the contracts terms.                                                                                                                                              
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

NOTE
  3 - PROPERTY, PLANT AND EQUIPMENT:

|a. |  | Composition
      of property, plant and equipment, grouped by major classification are as
      follows:
|-- |  | ---------------------------------------------------------------------------------------------------------
|   |  |                                                                                                          

|                                                   | December 31
|-------------------------------------------------- | -----------
|
|
|Computers
      and peripheral equipment           |            
|Vehicles                                           |            
|Office
      furniture and equipment               |            
|Leasehold
      improvements                       |            
|Land
      and building                            |            
|                                                   |            
|                                                   |            
|Less - accumulated
      depreciation and          |            
|amortization                                       |            
|                                                   |            
|                                                   |            
|                                                   |            
|                                                   |            
|*  Restated,
      Note 1a                         |            
|                                                   |            
|As for geographical
      locations, see note 14b. |            

XXIII

---

---

RETALIX
  LTD. NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS (continued)

NOTE
  3 - PROPERTY, PLANT AND EQUIPMENT(continued):

|c. |  | Depreciation and amortization
      expenses totaled $ 2,244,000, $ 2,056,000, and $ 1,198,000, in
      the years  ended December 31, 2002, 2001 and 2000, respectively.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                                          
|d. |  | As to pledges on property,
      plant and equipment, see note 8c.                                                                                                       
|   |  |                                                                                                                                                                          

NOTE
  4 - GOODWILL AND OTHER INTANGIBLE ASSETS:

|a. |  | In connection with the
      Companys adoption of FAS 142 on January 1, 2002, the Company reviewed
      the classification of its goodwill and other intangible asset, reassessed
      the useful lives previously assigned to other intangible assets a discontinued
      amortization of goodwill. The Company also tested goodwill for impairment
      by comparing the fair values of the Companys reporting units (see
      below) to their carrying values as of January 1, 2002 and determined that
      there was no goodwill impairment at that time. Based on this review, as
      of December 31, 2001, the Company classified $ 23.3 million as goodwill
      and $ 6.2 million as intangible assets. The Company did not identify any
      intangible assets having indefinite lives.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

| | The Company identified
      its various reporting units, which consist of geographical areas, and for
      which separately identifiable cash flow information is available. The Company
      expects future discounted cash flows to determine the fair value of the
      reporting units and whether any impairment of goodwill existed as of the
      date of adoption.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                
| | The Company conducted
      the required annual impairment review during the fourth quarter of fiscal
      2002.As to executory unfavorable
      contracts assumed in the purchase of certain subsidiaries, see note 6.                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                

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

| | The changes in the carrying
      amount of goodwill for the year ended December 31, 2002, are as follows:
| | ----------------------------------------------------------------------------------------------------------
| |                                                                                                           

|                                           | U.S.A. | *Israel | Total
|------------------------------------------ | ------ | ------- | -----
|
|
|Balance as
      of January 1, 2002        |        | 15,661  |      
|Goodwill
      attributed to business unit
|sold
      during the year                 |        | (35     | )    
|                                           |        |         |      
|Balance as
      of December 31, 2002      |        | 15,626  |      
|                                           |        |         |      
|                                           |        |         |      
|* Restated, Note 1a                        |        |         |      

XXIV

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE
  4 - GOODWILL AND OTHER INTANGIBLE ASSETS(continued):

|c. |  | Intangible assets:
|-- |  | ------------------
|   |  |                   

| | 1) | The following table
      presents the components of the Companys acquired intangible assets
      with definite lives, which are included in other assets in the consolidated
      balance sheets:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                      

|                                         | Weightedaverageamortization | Original
      amount | Amortized
      balance
|---------------------------------------- | --------------------------- | --------------------- | -----------------------
|
|
|
|
|                                         |                             |                      
|Software
      development costs         |                             | 3.0                   |                        
|Software
      rights and web site      
|development
      costs                  |                             | 3.0                   |                        
|Customer
      base                      |                             | 5.6                   |                        
|Maintenance
      agreements             |                             | 6.0                   |                        
|Acquired
      technology                |                             | 4.5                   |                        
|Distribution
      rights                |                             | 7.0                   |                        
|Other identified
      intangible assets |                             | 3.0                   |                        
|                                         |                             |                       |                        
|Total                                    |                             | 4.9                   |                        
|                                         |                             |                       |                        
|                                         |                             |                       |                        
|*
       Restated, Note 1a               |                             |                       |                        

| | 
| | 
| | 

| | 2) | Intangible assets amortization
      expenses totaled $ 1,972,000, $ 1,565,000 and $ 1,702,000 in 2002,
      2001 and 2000, respectively. Projected annual amortization expenses are
      approximately $ 1,862,000, $ 1,745,000, $ 1,362,000, $ 928,000 and $ 291,000
      in 2003, 2004, 2005, 2006 and 2007 respectively.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                
| | 3) | The following table
      summarizes the Companys reported results along with adjusted amounts
      as if the Company had adopted FAS 142 and discontinued goodwill amortization,
      as of January 1, 2000.                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                

|                                                                                                                                   | 2002 | 2001  | 2000
|---------------------------------------------------------------------------------------------------------------------------------- | ---- | ----- | ----
|
|
|Reported
      income*                                                                                                             |      | 5,705 |     
|Add back
      - goodwill amortization                                                                                             |      |       |     
|                                                                                                                                   |      |       |     
|Adjusted
      net income (loss)                                                                                                   |      | 5,705 |     
|                                                                                                                                   |      |       |     
|Earnings
      per share:                                                                                                         
|Basic:                                                                                                                            
|Reported
      income (loss)                                                                                                       |      | 0.48  |     
|                                                                                                                                   |      |       |     
|Adjusted
      net income (loss)                                                                                                   |      | 0.48  |     
|                                                                                                                                   |      |       |     
|Diluted:                                                                                                                          
|Reported
      income (loss)                                                                                                       |      | 0.46  |     
|                                                                                                                                   |      |       |     
|Adjusted
      net income (loss)                                                                                                   |      | 0.46  |     
|                                                                                                                                   |      |       |     
|                                                                                                                                   |      |       |     
|*  the
      reported income for 2001 includes gain arising from issuance of shares by
      a subsidiary amounted to $ 2,877,000.

XXV

---

---

RETALIX
  LTD. NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)



NOTE 5 - LONG-TERM BANK 
  LOANS:

|a. |  | Composed as follows:
|-- |  | --------------------
|   |  |                     

|                                             | Interest
      rate as of December 
      31, 2002 | December
      31
|-------------------------------------------- | -------------------------------------------------- | -----------------
|
|
|U.S Dollar                                   | LIBOR*
      + 0.45 to 0.675                       |                  
|Pound Sterling                               | LIBOR** +
      0.7                                |                  
|Israeli currency                             | Prime***-
      0.3 to - 0.7                       |                  
|                                             | or
      annual of 6.9                             |                  
|Other                                        | Up to 11.0                                         |                  
|Loan from
      shareholders of a subsidiary
|linked
      to the Israeli Consumer Price  
|Index
      (the Israeli CPI)              | 4.0                                                |                  
|                                             |                                                    |                  
|                                             |                                                    |                  
|Less - current
      maturities              |                                                    |                  
|                                             |                                                    |                  
|                                             |                                                    |                  
|                                             |                                                    |                  

|*   | The LIBOR $  rate
      as of  December 31, 2002 - 1.38%.             
|--- | ----------------------------------------------------------------------
|**  | The LIBOR Pound Sterling 
      rate as of  December 31, 2002 - 4.02%.
|*** | The PRIME rate as of
      December 31, 2002- 10.4%                   
|    |                                                                       

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

|                                | December
      31
|------------------------------- | -----------------
|
|
|Second
      year               |                  
|Third year                      |                  
|Fourth year                     |                  
|Fifth year
      and thereafter |                  
|                                |                  
|                                |                  
|                                |                  

|c. |  | As to pledges on assets
      to secure a $ 2.5 million loan, see note 8c.
|-- |  | --------------------------------------------------------------------------
|   |  |                                                                           

XXVI

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE
  6 - OTHER LIABILITIES

| | These liabilities are
      associated with executory unfavorable contracts assumed in the purchase
      of three of the Companys subsidiaries.
      These liabilities are to be amortized in the following years, based on the
      contracts terms, as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                      

|                                      | **December
      31,**2002
|------------------------------------- | --------------------------
|
|
|First year
      - current maturities |                           
|Second year                           |                           
|Third year                            |                           
|Fourth year                           |                           
|                                      |                           
|                                      |                           
|                                      |                           

NOTE
  7 - EMPLOYEE RIGHTS UPON RETIREMENT:

| | a. | Israeli labor law generally
      requires payment of severance pay upon dismissal of an employee or upon
      termination of employment in certain other circumstances. The severance
      pay liability of the Israeli companies 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 are presented among other 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. | Most of the Companys
      non-Israeli subsidiaries provide defined contribution plans for the benefit
      of their employees. Under these plans, contributions are based on special
      percentage of pay.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                 
| | c. | The severance pay expenses
      were $ 958,000, $ 758,000 and $ 933,000 in 2002, 2001 and 2000, respectively.                                                                                                  
| |    |                                                                                                                                                                                                                 
| | d. | The earnings (losses)
      on the amounts funded were $ (121,000), $ 127,000 and $ 72,000 in 2002,
      2001 and 2000, respectively.                                                                          
| |    |                                                                                                                                                                                                                 

NOTE
  8 - COMMITMENTS, PLEDGES AND  CONTINGENT LIABILITIES:

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

| | 1) | Lease agreements
| | -- | ----------------
| |    |                 

| | The Group has entered
      into operating lease agreements for the premises it uses; the last lease
      will expire in November 2006. The Group has options to renew some of the
      leases for additional periods, the last of which ends in 2009. The rental
      fees are linked mainly to the exchange rate of the dollar.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                     

XXVII

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE
  8 - COMMITMENTS, PLEDGES AND A CONTINGENT LIABILITY(continued):

| | The projected rental
      payments under the above leases, at rates in effect as of December 31,
      2002, are as follows:
| | -----------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                              

|                               | U.S. $
      in
      thousands
|------------------------------ | -------------------------------
|Year ending
      December 31: |                                
|2003                           |                                
|2004                           |                                
|2005                           |                                
|2006                           |                                
|2007                           |                                
|                               |                                
|                               |                                
|                               |                                

| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Rental expenses totaled
      $ 1,237,000, $ 1,059,000 and $ 902,000 in 2002, 2001 and 2000,
      respectively.
| |                                                                                                                 

| | 2) | Through March 1998,
      the Chief Executive Officer (the CEO) and the previous Vice
      President in charge of planning and control (the VPP) - both
      related parties and shareholders- were entitled to receive an annual bonus
      equal to 5% of the pre-bonus profits of the Company. In May 1998, the Board
      of Directors determined to change the terms of this bonus plan. Effective
      April 1, 1998, the bonus will be based on the Companys attaining certain
      performance milestones. For the first $ 1,000,000 of the Companys
      net income, the CEO and the previous VPP are each entitled to receive a
      bonus of $ 65,000. The bonus receivable for every subsequent $ 1,000,000
      of net income shall be $ 5,000 lower, but no less than $ 35,000
      for $ 7,000,000 of net income and for every $ 1,000,000 of net income thereafter.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| | As of June 30, 2001,
      the VPP ceased to be employed by the Company and accordingly will not be
      entitled to the benefits above.                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                 
| | In addition, the Company
      will grant annually to the CEO, a number of options equal to 1% of the issued
      share capital. The exercise price of the options will be equal to the market
      price of the shares on the day of grant. The options will have a lock up
      periods of 1,2 and 3 years.
| |                                                                                                                                                                                                                                                                                                                 

| | 3) | Royalty commitments:
| | -- | --------------------
| |    |                     

| | The Company and some
      of its subsidiaries are committed to pay royalties to the Government of
      Israel on proceeds from sales of products the research and development of
      which is partly financed by royalty-bearing participations from the Government.
      At the time the participations were received, successful development of
      the related projects was not assured. Under the terms of the Governments
      funding, royalties of 2%-5% are payable on sales of products developed from
      a project funded by such participations, up to 100%-150% of the amount of
      the participations received by the companies (dollar linked and commencing
      January 1, 1999 bearing annual interest at the LIBOR rate). In the case
      of failure of a project that was partly financed by royalty-bearing Government
      participations, the Group is not obligated to pay any such royalties to
      the Government.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| |  | As of December 31,
      2002, the maximum royalty amount payable by the Group is $ 2,367,000.
| |  | ----------------------------------------------------------------------------------------------
| |  |                                                                                               

XXVIII

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

|NOTE
      8 - COMMITMENTS, PLEDGES AND A CONTINGENT LIABILITY(continued):
|--------------------------------------------------------------------------

| | b.Contingent
      liabilities
| | ------------------------------
| |                               

| | Law
      suits against the Company and its subsidiaries:
| | ---------------------------------------------------------
| |                                                          

| | 1) | On August, 2000 the
      Company, together with its subsidiary, P.O.S (Restaurant Solutions) Ltd.
      (P.R.S.) filed a claim in the Tel-Aviv District Court asking
      for injunctions, accounts and damages (evaluated, for the purpose of court
      fees, at 3,000,000 NIS) against two shareholders of P.R.S. who own the minority
      interest in P.R.S. and who were also directors and employees of P.R.S. The
      Company and its subsidiary claim that the defendants caused them severe
      damages in the way they acted as employees and directors of P.R.S., during
      their employment, and by infringing their rights by developing Infringing
      Software. The Defendants filed a Statement of Defense. On January 2003,
      the District Court transferred the file to the Labor Court. The Company
      and its subsidiary are working on an appeal to this decision, which they
      intend to submit to High Court of Israel within a short time.
      On 2002 these minority shareholders of P.R.S. filled an opposite claim for
      an amount of $4,000,000. the company and its subsidiary are working on a
      Statement  of Defense as well as a counter claim, which they intend
      to submit within a short time. 
      The management of the Company is of the opinion that it has meritorious
      defenses against this claim and believes that the claim will not have a
      material effect on its financial statements. No provision has been made
      in respect of these claims.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| | 2) | On 1998, prior to the  acquisition
      of R.C.S. by the Company, a legal claim was filed against R.C.S by  a
      customer, for an amount of approximately $1,300,000, including consequential
      damages and loss of revenue. The suit claims that R.C.S breached its contract
      with the claimer and fraudulently misrepresented facts about the product
      sold to the claimer.
      An additional claim filed against R.C.S , prior to its acquisition by the
      Company, by a dealer who sold one of R.C.S  products early in
      1994, states that promised features and enhancements were never delivered.
      The damages claimed in this suit are in excess of $200,000. 
      These claims are handled by R.C.S Errors and Omissions Insurers. The
      limit of liability of the Companys relevant Errors and Omissions insurance
      was $1,000,000 per claim and in aggregate. The management of R.C.S  is
      of the opinion that it has meritorious defenses against these claims and
      believes that they will not have a material effect on its financial statements.
      No provision has been made in respect of these claims.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| | 3) | On December 2002, a
      legal claim for an amount of approximately $240,000, was lodged against
      the Companys subsidiary Palm Point, by a local customer. The claim
      allege for damages caused by services not duly provided by Palm Point. On
      February 2003, Palm Point filed a Statement of Defense that rejects the
      claim entirely.
      The management of Palm Point is of the opinion that Palm Point has meritorious
      defenses against the suits.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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

| | Part of the Companys
      premises are pledged to secure a $ 2.5 million loan.
| | --------------------------------------------------------------------------------

XXIX

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE
  9 - SHAREHOLDERS EQUITY:

| | a. | Share capital
| | -- | -------------
| |    |              

| | As
      to shares issued in consideration for acquisitions of subsidiaries, see
      note 2.
| | ----------------------------------------------------------------------------------------------
| |                                                                                               

| | b. | Option plans:
| | -- | -------------
| |    |              

| | 1) | Companys Option
      plan
| | -- | ---------------------------
| |    |                            

| | On March 5, 1998, the
      Companys Board of Directors approved the second 1998 share option
      plan (the Second 1998 Plan). Under the second 1998 plan (as
      amended in 2000 and 2001) up to 4,200,000 options were to be granted to
      employees, directors and consultants of the Company, to purchase ordinary
      shares of the Company. Each option could be exercised to purchase one ordinary
      share of the Company. The exercise price of the options will be at least
      equal to the fair value of the ordinary shares on the date of grant. Unless
      terminated earlier, the options will expire automatically in 2005. Through
      December 31, 2000, 1,641,700 options were granted to certain employees,
      the vesting period of the options is up to three years and the exercise
      price of each option range from $ 7.13 to $ 27.63.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | During 2002 and 2001,
      147,112 and 2,138,130 additional options were granted to employees, respectively
      (including 117,112 options and 113,130 Options, respectively granted to
      the CEO and to the previous VPP, mentioned in note 7a, and including 30,000
      options granted to directors in each of these years). The vesting periods
      of the options range from six months to three years and the exercise price
      of the options range from $ 8.25 to $ 16.43 per option.                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Compensation in respect
      of the CEO entitlement to options as from July 1, 2002, are - due to the
      CEOs change in employment status - determined based on the fair value
      of the options. Total expense in 2002 in respect of these options is $ 65,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Through December 31,
      2002, certain grantees exercised 605,401 options at exercise prices between
      $ 4.21 to $ 11.01.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

XXX

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE
  9 - SHAREHOLDERS EQUITY(continued):

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

|                                         | 2002 | 2001      | 2000
|---------------------------------------- | ---- | --------- | ----
|
|
|Options outstanding
      at beginning   |      |           |     
|of
      year                            |      | 3,963,655 |     
|Changes during
      the year:          
|Granted
      - at market value          |      | 147,112   |     
|Exercised                                |      | (273,438  | )   
|                                         |      |           |     
|Options outstanding
      at end of year |      | 3,837,329 |     
|                                         |      |           |     
|Options exercisable
      at year-end    |      | 2,293,663 |     
|                                         |      |           |     
|Weighted
      average fair value of    
|options
      granted during the year    |      |           |     
|                                         |      |           |     

|*The
      fair value of each option granted is estimated on the date of grant using
      the Black-Scholes option-pricing model with the following weighted average
      assumptions:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                        

|                                  | Year
      ended December 31
|--------------------------------- | ----------------------------
|                                  | 2002                        
|Dividend yield                    | 0%                          
|Expected volatility               | 37.88%-54.71%               
|Risk free interest
      rate     | 2%                          
|Expected holding
      period (in |                             
|years)                            | 1-3                         

XXXI

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE
  9 - SHAREHOLDERS EQUITY (continued):

| | The following table
      summarizes information about options under the Companys plans outstanding
      at December 31, 2002:
| | --------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                 

| | Options outstanding   | 
| | --------------------- | 
| | Exercise
      price$ | 
| | 8.25                  | 
| | 8.38                  | 
| | 10.00                 | 
| | 11.01                 | 
| | 11.53                 | 
| | 12.00                 | 
| | 14.88                 | 
| | 16.43                 | 
| | 17.11                 | 
| | 19.13                 | 
| | 25.06                 | 
| | 27.63                 | 
| |                       | 
| |                       | 
| |                       | 

| |    |                                        
| | -- | ---------------------------------------
| | 2) | Stock option plan of
      a subsidiary
| |    |                                        

| | 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 NIS 0.01 par value of the subsidiary are reserved
      for issuance upon the exercise of 270,000 options granted to some of the
      Companys and of the subsidiarys employees. The options vest
      as follows: 33.33% after the first year, another 33.33% after the second
      year and another 33.33% after the third year, provided the employee is still
      the subsidiarys or the Companys employee. 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 and (3) seven years from the
      date of grant.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 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 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 270,000 options to employees under the Subsidiarys Plan, at
      an exercise price per share of $ 0.01, and to one employee an exercise price
      of $5.55. During 2002, 13,934 of these options were forfeited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

XXXII

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE
  9 - SHAREHOLDERS EQUITY(continued):

| | 3) | The compensation expenses
      - in accordance with the provisions of APB 25 - that have been charged against
      income in the years ended December 31, 2002, 2001 and 2000 were $ 53,000,
      $ 38,000 and $ 6,000, respectively.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                         

| | c.Dividends:
| | ------------
| |             

| | 1) | In the event 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.                         
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | 2) | The distribution of
      $ 10.1 million from the retained earnings as of December 31, 2002 as
      cash dividends would subject the Company to a 25% tax on the amount
      distributed. The retained earnings are otherwise exempt from the 25% tax,
      due to the Companys approved enterprise status. Consequently, the
      amount of profits available for distribution will be reduced by the amount
      of the tax levied, see also note 10g(5).
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

NOTE
  10 - TAXES ON INCOME:

| | a.Tax
      benefits under the Law for the Encouragement of Capital Investments, 
      1959
| | --------------------------------------------------------------------------------------------
| |                                                                                             

| | Some production facilities
      of the Company and part of  its Israeli subsidiaries (the Companies)
      have been granted approved enterprise status under the above law.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                
| | The main tax benefits
      available to the companies are:                                                                                                                    
| |                                                                                                                                                                                

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

| | In respect of income
      derived from their approved enterprises, the Companies are entitled to 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 seven
      approved enterprises and each of  the Israeli subsidiaries has
      one approved enterprise.                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                     
| | Income derived from
      the approved enterprises is tax exempt during the first two years of the
      seven year tax benefit period as above (except for one approved enterprise
      of one of  the Israeli subsidiaries  which is tax exempt
      during a period of ten years), and is subject to a reduced tax rate of 25%
      during the remaining years of benefits.   
| |                                                                                                                                                                                                                                                                                                                                                                                     
| | The periods of benefits
      relating to four of the approved enterprises of the Company have already
      expired, the periods of benefits relating to its other approved enterprises
      will expire in 2003 and 2005. The period of benefits related to one of the
      approved enterprises of the Company has not yet commenced (it is restricted
      to the year 2016).
| |                                                                                                                                                                                                                                                                                                                                                                                     

XXXIII

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE
  10  - TAXES ON INCOME (continued):

| | In the event of distribution
      of cash dividends from income which was tax exempt as above, the companies
      would have to pay the 25% tax in respect of the amount distributed (the
      amount distributed for this purpose includes the amount of the tax that
      applies as a result of the distribution (see g(5) below and note 9c(2)).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                         

| | 2) | Accelerated depreciation
| | -- | ------------------------
| |    |                         

| | The companies are 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 Companies fulfillment of the
      conditions stipulated by the above law, the regulations published there
      under and the certificates of approval for the specific investments in approved
      enterprises. In the event that the companies fail to comply with these conditions,
      the benefits may be cancelled and the companies may be required to refund
      the amount of the benefits, in whole or in part, with the addition of linkage
      differences to the Israeli CPI and interest.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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

| | Under this law, results
      for tax purposes are measured in real terms, having regard to the changes
      in the Israeli CPI. The Israeli companies in the Group are taxed under this
      law. These financial statements are presented in dollars. The difference
      between the changes in the Israeli CPI and the exchange rate of the dollar,
      both on an annual and a cumulative basis, causes a difference between taxable
      income and income reflected in these financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| | c.Tax
      benefits under the Law for the Encouragement of Industry (Taxes), 1969
| | ----------------------------------------------------------------------------------
| |                                                                                   

| | Part of the Israeli
      companies in the Group are industrial companies as defined by
      this law and as such are entitled to certain tax benefits, consisting mainly
      of accelerated depreciation as prescribed by regulations published under
      the Inflationary Adjustments Law, the right to claim public issuance expenses
      as a deduction for tax purposes and amortization of patents and certain
      other intangible property rights.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| | d.Tax
      rates applicable to income from other sources
| | ---------------------------------------------------------
| |                                                          

| | Income of the Company
      and its Israeli subsidiaries, not eligible for approved enterprise benefits
      is taxed at the regular rate of 36%.
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                   

XXXIV

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE
  10  - TAXES ON INCOME (continued):

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

| | Carryforward tax losses
      of certain subsidiaries as of December 31, 2002 and 2001 aggregate approximately
      $ 3,248,000 and $ 4,646,000 respectively. A full valuation allowance was
      created against the deferred tax assets relating to these losses.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                      
| | Under the Inflationary
      Adjustments Law, carryforward tax losses are linked to the Israeli CPI.                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                      
| | Carryforward tax losses
      in Israel are utilizable indefinitely.                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                      

| | f. | Reform of the Israeli
      tax system
| | -- | --------------------------------------
| |    |                                       

| | In 2002, amendment to
      the Israeli Income Tax Ordinance (No. 132), 2002 (hereafter - the tax reform
      law) was published. The tax reform law comprehensively reforms certain parts
      of the Israeli tax system. The tax reform law comes into effect on January 1,
      2003, although certain provisions therein will only be applied from later
      dates. The Company expects that as a result of the implementation of the
      tax reform law it will slightly increase its tax liability.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| | g. | Deferred income taxes:
| | -- | ----------------------
| |    |                       

|                                     | December
      31,                         
|------------------------------------ | -------------------------------------------
|
|
|1)                                   | Provided
      in respect of the following:
|Provisions
      for employee rights |                                            
|Carryforward
      tax losses        |                                            
|Doubtful
      accounts              |                                            
|Other                                |                                            
|                                     |                                            
|                                     |                                            
|L
      e s s- valuation allowance   |                                            
|                                     |                                            
|                                     |                                            
|                                     |                                            

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

|                                              | December
      31,
|--------------------------------------------- | ------------------
|
|
|As
      a current asset                      |                   
|As a non-current asset                        |                   
|As
      current liability presented in other |                   
|accounts
      payable and accruals           |                   
|                                              |                   
|                                              |                   
|                                              |                   

XXXV

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE
  10 - TAXES ON INCOME(continued):

| | 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 mainly at the tax rates of 41%, 30% and 25%.                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 5) | As stated in a. above,
      part of the Companys and a certain Israeli subsidiaries 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
      (see note 9c). Accordingly, no deferred taxes have been provided in respect
      of such income in these financial statements.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| | The amount of tax that
      would be payable had such tax exempt income, earned through December 31,
      2002 and 2001, been distributed as dividends is approximately $ 2,530,000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                       

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

|                                | *2002                                       | *2001 | 2000
|------------------------------- | ------------------------------------------- | ----- | ----
|
|1)                              | Income (loss) before
      taxes on income: |       |     
|Israeli                         |                                             | (598  | )   
|Non-Israeli                     |                                             | 7,882 |     
|                                |                                             |       |     
|                                |                                             | 7,284 |     
|                                |                                             |       |     
|                                |                                             |       |     
|*Restated,
      Note 1a        |                                             |       |     
|                                |                                             |       |     
|2)                              | Income taxes included                       |       |     
|in
      the income statements: |                                             |       |     
|Current:                        |                                             |       |     
|Israeli                         | 2,328                                       |       | 531 
|Non-Israeli                     | 530                                         |       | 91  
|                                |                                             |       |     
|                                | 2,858                                       |       | 622 
|                                |                                             |       |     
|                                |                                             |       |     
|Deferred:                       |                                             |       |     
|Israeli                         | (310                                        | )     | 78  
|Non-Israeli                     | (445                                        | )     | 6   
|                                |                                             |       |     
|                                | (755                                        | )     | 84  
|                                |                                             |       |     
|                                | 2,103                                       |       | 706 
|                                |                                             |       |     

XXXVI

---

---

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 (36%) and the actual tax expense:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                   

|                                                                | *2002 | *2001 | 2000
|--------------------------------------------------------------- | ----- | ----- | ----
|
|Income before
      taxes on income, as reported                |       |       |     
|in
      the income statements                                  |       | 7,284 |     
|                                                                |       |       |     
|Theoretical
      tax expense (income)                          |       | 2,622 |     
|L e s s -
      tax benefits arising from                      
|approved
      enterprise status                                |       | 911   |     
|                                                                |       |       |     
|                                                                |       | 1,711 |     
|Increase
      (decrease) in taxes resulting from permanent    
|differences:                                                   
|Disallowable
      deductions                                   |       | 1,268 |     
|Tax
      exempt income                                         |       | (738  | )   
|Increase
      (decrease) in taxes resulting from different tax
|rates
      for non - Israeli subsidiaries                      |       | 98    |     
|Increase
      in taxes in respect of tax losses               
|incurred
      in the reported years for which                 
|a
      full valuation allowance has been recorded              |       | 264   |     
|Decrease
      in taxes resulting from utilization, in the     
|reported
      years, of deferred tax assets relating to       
|carryforward
      tax losses and expenses for which           
|deferred
      taxes were not created in previous years         |       | (911  | )   
|Increase
      (decrease) in taxes in respect of differences in
|measurement
      of income from marketable securities          |       |       |     
|Other, mainly
      differences between the basis of           
|measurement
      of income reported for tax purposes and      
|the
      basis of measurement of income for financial         
|reporting
      purposes - net, see b. above                    |       | 411   |     
|                                                                |       |       |     
|Income taxes
      for the reported years                       |       | 2,103 |     
|                                                                |       |       |     
|                                                                |       |       |     
|*Restated, Note 1a                                              |       |       |     

| |                                      
| | -------------------------------------
| | i.   
      Non- Israeli subsidiaries
| |                                      

| | Non Israeli subsidiaries
      are taxed under the laws of their countries of residence.
| | ----------------------------------------------------------------------------------------
| |                                                                                         

| | j.Tax
      assessments
| | -----------------------
| |                        

| | The Company has received
      final assessments through the year ended December 31, 1998.                                                                                                                                                                                                                                                 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Tamar Industries M.R
      Electronics 1985 Ltd. received final assessment through the year ended December
      31, 1997. Kochav, Orlan and P.O.S. (Restaurant Solutions) Ltd. (PRS)
      received final assessments through the year ended December 31, 1999. The
      other subsidiaries have not been assessed since incorporation.
| |                                                                                                                                                                                                                                                                                                                                            

XXXVII

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE 11 - MONETARY BALANCES
  IN NON-DOLLAR CURRENCIES:

|            | December 31,
      2002
|----------- | -----------------------
|
|
|
|Assets      |                        
|            |                        
|Liabilities |                        
|            |                        

NOTE
  12  - SUPPLEMENTARY BALANCE SHEET INFORMATION:

|                                     | December 31
|------------------------------------ | -----------
|
|
|**a.
       Accounts receivable:**   |            
|1) 
      Trade:                     |            
|Open
      accounts                  |            
|Less
      - allowance for doubtful  |            
|accounts                             |            
|                                     |            
|                                     |            
|                                     |            
|2)  Other:                           |            
|Israeli
      Government departments |            
|and
      agencies                   |            
|Employees                            |            
|Prepaid
      expenses               |            
|Sundry                               |            
|                                     |            
|                                     |            
|                                     |            
|**b.
       Inventories:**           |            
|Raw
      materials and supplies     |            
|Products
      in process            |            
|Finished
      products              |            
|                                     |            
|                                     |            
|                                     |            

XXXVIII

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE
  12  - SUPPLEMENTARY BALANCE SHEET INFORMATION (continued):

| | c.Marketable
      securities:
| | ------------------------------
| |                               

| | 1) | At December 31, 2002
      the amortized cost basis, aggregate fair value and the gross unrealized
      holding gains and losses by major security type were as follows:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                          

|Amortized
      cost | Unrealized
      gains | Unrealized
      losses | Aggregate
      fair value
|-------------------- | ---------------------- | ----------------------- | --------------------------
|
|                     | 5,164                  |                         |                           
|                     |                        |                         |                           

|The
      bonds mature as follows:  |  |  |  |       | 
|----------------------------------- |  |  |  | ----- | 
|                                    |  |  |  |       | 
|2003                                |  |  |  | 2,596 | 
|2004                                |  |  |  | 243   | 
|2005                                |  |  |  | 98    | 
|2006
      and thereafter (through) |  |  |  | 2,227 | 
|                                    |  | 
|                                    |  |  |  | 5,164 | 
|                                    |  | 

| | 2) | The marketable securities
      are presented in the balance sheets as follows:
| | -- | -------------------------------------------------------------------------------
| |    |                                                                                

|                            | December 31
|--------------------------- | -----------
|
|
|Among current
      assets: |            
|Tradings                    |            
|Held
      to maturity      |            
|                            |            
|                            |            
|                            |            
|As non current
      assets |            
|                            |            
|                            |            
|                            |            

| | d.Lines
      of credit
| | -----------------------
| |                        

| | The Company, through
      its U.S. subsidiaries, has several lines of credit totaled to $ 7,500,000.
      The interest is payable monthly at the prime rate. Certain credit lines
      amounted to $ 3,000,000 are collateralized by accounts receivable, inventories
      and equipment of certain subsidiaries. The utilized line of credit as of
      December 31, 2002, amounted to $100,000.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                       

XXXIX

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE
  12  - SUPPLEMENTARY BALANCE SHEET INFORMATION (continued):

| | e.Long-term
      loans to employees
| | ------------------------------------
| |                                     

| | Loans
      granted by the Company are linked to the Israeli CPI and bear interest at
      an annual rate of 2% to 4%. Repayment dates are up to four years from the
      date of grant.Loans
      granted by a U.S. subsidiary are demanded in dollars, bears an annual interest
      of 4% and are payable up to five years from the date of grant.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                          

NOTE
  13 - DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS:

| | a.Concentrations
      of credit risks - allowance for doubtful accounts
| | ------------------------------------------------------------------------
| |                                                                         

| | All
      of the Groups cash and cash equivalents deposits and marketable securities
      as of December 31, 2002 and 2001 were deposited with Israeli, U.K. and U.S  banks
      and with a company manages investment profile. Such securities represent
      mainly highly rated corporations. The Group is of the opinion that the credit
      risk in respect of these balances is remote.     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                         
| | Most
      of the Groups revenue has historically been from a large number of
      customers. Consequently, the exposure to credit risks relating to trade
      receivables is limited. The Group performs ongoing credit evaluations of
      its customers and generally does not require collateral. An appropriate
      allowance for doubtful accounts is included in the accounts receivables.
| |                                                                                                                                                                                                                                                                                                                                                                                                         
| | The
      allowance for doubtful debts is determined for specific debts doubtful of
      collection.                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                         

| | b.Fair value
      of financial instruments
| | -------------------------------------------
| |                                            

| | The
      fair value of the financial instruments included in working capital of the
      Group 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.
      The fair value and the carrying value of derivatives at December 31,
      2002 is approximately adjusted $ 89,700 and generally reflects the estimated
      amounts that the Group would receive or pay to terminate the contracts at
      the reporting dates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| | As
      to fair value of derivatives, see c. below. As to fair value of marketable
      securities, see note 12c.
| | -------------------------------------------------------------------------------------------------------------------

XL

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE
  13 - DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued):

| | c.**Derivative
      financial instruments**
| | --------------------------------------------
| |                                             

| | The Company has only
      limited involvement with derivative financial instruments. The Company carries
      out transactions involving foreign exchange derivative financial instruments
      (forward exchange contracts). These transactions do not qualify for hedge
      accounting order FAS 133.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                             
| | During 2002, the Company
      entered into one foreign currency forward contract for conversion of pounds
      sterling into a notional amount of dollars is approximately $ 2,318,000.                                                                                                                   
| |                                                                                                                                                                                                                                                                                                             
| | The fair value of that
      contract as of December 31, 2002 reflects a liability in amount of $ 89,700,
      which was charged to financial expenses.                                                                                                                                                    

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 location
      of customers.
      The Company evaluates performance based on revenue which is 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 reportable segments: Israel, U.S.A.
      and International.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | The accounting policies
      of the segments are the same as those described in the significant accounting
      policies.
| |                                                                                                                            

| |  | Geographic segments                                                                                
| |  | ---------------------------------------------------------------------------------------------------
| |  |                                                                                                    
| |  | Summarized financial
      information by geographic segment for 2002, 2001 and 2000 is as follows:

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

XLI

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE
  14 - SEGMENT INFORMATION (continued):

| | b.**Enterprise-Wide
      Disclosure**
| | --------------------------------------
| |                                       

| | The composition of the
      Groups property, plant and equipment based on the physical location
      of the assets is as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------

|                                                    | Depreciated
      balance at
      December 31
|--------------------------------------------------- | ----------------------------------------------
|
|Israel                                              |                                               
|U.S.                                                |                                               
|U.K                                                 |                                               
|                                                    |                                               
|                                                    |                                               
|                                                    |                                               
|                                                    |                                               
|* Restated,
      Note 1a                           |                                               
|                                                    |                                               
|As for goodwill
      and other assets, see note 4. |                                               

| | c.**Revenues
      from customers exceeding 10% of revenues:******
| | ------------------------------------------------------------------
| |                                                                   

|                 | 2001 | 2000
|---------------- | ---- | ----
|
|
|Customer
      A |      |     
|                 |      |     
|Customer
      B |      |     
|                 |      |     
|Customer
      C |      |     
|                 |      |     

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                  |                              
|                                            |                              
|Balance
      at end of year                |                              
|                                            |                              

XLII

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS (continued)

NOTE
  15 - SELECTED INCOME STATEMENT DATA (continued):

|                                                    | Year ended
      December 31,
|--------------------------------------------------- | -----------------------------
|
|
|**b.   Financial
      income (expenses) - net:**   |                              
|                                                    |                              
|Realized
      gain (loss) on marketable            |                              
|securities
      - net                              |                              
|Non-dollar
      currency gains (losses) - net      |                              
|Interest
      and bank commissions - net           |                              
|                                                    |                              
|                                                    |                              
|                                                    |                              
|**c.   Other
      general income - net:**          |                              
|Gain
      (loss) on sale of property and equipment |                              
|Gain
      on sale of dealership activity           |                              
|                                                    |                              
|                                                    |                              
|                                                    |                              

| | d.Earnings
      (loss) per share (EPS):
| | ------------------------------------------

| | Following are data relating
      to the nominal value of shares - basic and diluted used for the purpose
      of computing EPS:
| | ---------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                  

|                                             | 2002 | 2001 | 2000
|-------------------------------------------- | ---- | ---- | ----
|                                             |      |      |     
|Weighted
      average number of shares      |      |      |     
|issued
      and outstanding- used in        |      |     
|computation
      of basic earning per share |      |      |     
|Add incremental
      shares from assumed    |      |     
|exercise
      of options                    |      |      |     
|                                             |      |      |     
|Weighted
      average number of             |      |     
|shares
      used in computation             |      |     
|of
      diluted earnings per share          |      |      |     
|                                             |      |      |     

| | Diluted EPS for the
      year ended December 31, 2000 does not include 700,354 options, because of
      their anti-dilutive effect, since the Company had net loss.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

XLIII

---

---

Exhibit A


Retalix
  Ltd.

Details
  of subsidiaries

As of
  December 31, 2002

| | Retalix Holdings Inc.
      - a U.S. Corporation, wholly controlled and owned. Established in 2002.                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                   
| | Retalix U.S.A, Inc.
      formerly Store Point Inc. - a U.S. Corporation, wholly controlled and owned
      (from 1996 through December 4, 1997 - 80% and from December 4, 1997 through
      July 20, 1998 - 90%), established in 1996.                                                                                          
| |                                                                                                                                                                                                                                                                                                                                   
| | Retail Control Systems
      Inc. (R.C.S.) - a U.S. Corporation, wholly controlled and owned 
      (purchased in September 2000).                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                   
| | BASS Inc.- a U.S. Corporation,
      wholly-controlled and owned by Retalix U.S.A (purchased in September 2001).                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                   
| | StoreNext Retail Technology
      LLC - 50.01% controlled and owned. Established in 2002.                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                   
| | Net Point Ltd.- 95%
      controlled and owned (from 1996 through January 2000 - 57%, from January
      2000 through June 2000 - 71.16%, and from June 2000 through October 2001
      - 75.85%).                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                   
| | P.O.S. (Restaurant Solutions)
      Ltd. (PRS) - 69% controlled and owned (established in 1996).                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                   
| | Palm Point Ltd - 96.18%
      controlled and owned (from January 1999 through September 2000 - 50.02%,
      from September 2000 through March 2001 - 82.14%, from March 2001 through
      September 2001 - 86.48%, from September 2001 through November 2001 - 88.64%
      and from November 2001 through April 2002 - 93.18%).
| |                                                                                                                                                                                                                                                                                                                                   
| | Tamar Industries M.R
      Electronics 1985 Ltd. - 100% controlled and owned (purchased in 1999).                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                   
| | Store Alliance.Com Ltd.
      - 59.17% controlled and owned (in 1999, associated - 52% and consolidated
      from January 1, 2000 through September 3, 2000 - 52%, from September 4,
      2000 through December 31, 2000 - 100% and from January 1, 2001
      through April 2001 - 66.7%).                                     
| |                                                                                                                                                                                                                                                                                                                                   
| | Kochav Orion Ltd. -
      wholly controlled and owned (purchased in September 2000).                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                   
| | Orlan Orion Systems
      Ltd. - wholly controlled and owned (purchased in September 2000).                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                   
| | Store Next Ltd. - wholly
      controlled and owned by Store Alliance Israel (established in July 2002).                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                   
| | TradaNet Electronic
      Commerce Services Ltd. (Tradanet Ltd.) - wholly-controlled and
      owned by Store Alliance Israel (purchased in April 2001).                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                   
| | IREX Israel Retail Exchange
      Ltd.  wholly controlled and owned by Store Alliance Israel. Established
      in September 2001. Has not yet commenced operations.                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                   
| | Retalix (UK) Limited
      - a U.K. Corporation, wholly controlled and owned. Established in May 2000
      and commenced operations in September 2000.                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                   
| | Retalix SA PTY Ltd.
      - a South Africa Corporation, wholly controlled and owned. Established in
      March 2001 and commenced operations in April 2001.                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                   
| | Retalix Australia PTY
      Ltd- an Australian corporation, wholly controlled and owned. Established
      in July 2001, has not commenced operations yet.                                                                                                                                                                        

XLIV

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# SIGNATURES

Pursuant to the requirements
  of the Securities Exchange Act of 1934, the registrant hereby certifies that
  it has reasonable grounds to believe 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.

|                            |  | RETALIX
      LTD.
|--------------------------- |  | ------------------
|                            |  |                   
|                            |  |                   
|                            |  |                   
|Date:
      March 25 , 2004 |  |                   
|                            |  |                   
|                            |  |                   
|                            |  |                   
|Date: March 25 , 2004       |  |                   

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