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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 20-F

oREGISTRATION 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 1934For the fiscal year ended December 31, 2002

OR

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

Commission file
No.333-8948

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:

YESx           NO

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

ITEM 17ITEM 18X

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TABLE OF CONTENTS

|         |                                                                | Page 
|-------- | -------------------------------------------------------------- | -----
|         |                                                                |      
|PART
  I |                                                                |      
|         |                                                                |      
|         | Item 1.  IDENTITY OF DIRECTORS, SENIOR OFFICERS AND
  ADVISERS | 5    
|         |                                                                |      
|         | Item 2.  OFFER STATISTICS AND EXPECTED TIMETABLE               | 5    
|         |                                                                |      
|         | Item 3.  KEY INFORMATION                                       | 6-16 
|         |                                                                |      
|         | A. Selected
  Financial Data                                   | 6-7  
|         |                                                                |      
|         | B.
  Capitalization and Indebtedness                           | 7    
|         |                                                                |      
|         | C. Reasons
  for the Offer and Use of Proceeds.                | 7    
|         |                                                                |      
|         | D. Risk
  Factors.                                             | 7-16 
|         |                                                                |      
|         | Item 4.  INFORMATION ON THE COMPANY                            | 16-30
|         |                                                                |      
|         | A. History
  and Development of the Company.                   | 16-20
|         |                                                                |      
|         | B. Business
  Overview.                                        | 20   
|         |                                                                |      
|         | C.
  Organizational Structure                                  | 29   
|         |                                                                |      
|         | D. Property,
  Plants and Equipment                            | 29-30
|         |                                                                |      
|         | Item 5.  OPERATING AND FINANCIAL REVIEW AND
  PROSPECTS        | 30-50
|         |                                                                |      
|         | A. Operating
  Results.                                        | 39-45
|         |                                                                |      
|         | B. Liquidity
  and Capital Resources.                          | 45-47
|         |                                                                |      
|         | C. Research
  and Development, Patents and Licenses            | 49   
|         |                                                                |      
|         | D. Trend Information.                                          | 50   
|         |                                                                |      
|         | Item 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES            | 50-58
|         |                                                                |      
|         | A. Directors
  and Senior Management.                          | 50-52
|         |                                                                |      
|         | B.
  Compensation.                                             | 52-53
|         |                                                                |      
|         | C. Board
  Practices.                                          | 53-55
|         |                                                                |      
|         | D.
  Employees.                                                | 55-56
|         |                                                                |      
|         | E. Share
  Ownership.                                          | 56-58
|         |                                                                |      
|         | Item 7.
  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS    | 58-59
|         |                                                                |      
|         | A. Major
  Shareholders.                                       | 58-59
|         |                                                                |      
|         | B. Related
  Party Transactions                                | 59   
|         |                                                                |      

2

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|        | C. Interests
  of Expert and Counsel.                                                                                  | 59   
|------- | ---------------------------------------------------------------------------------------------------------------------- | -----
|        |                                                                                                                        |      
|        | Item 8.  FINANCIAL INFORMATION                                                                                         | 59-60
|        |                                                                                                                        |      
|        | A.
  Consolidated Statements and Other Financial Information.                                                          | 59-60
|        |                                                                                                                        |      
|        | B. Significant Changes .                                                                                               | 60   
|        |                                                                                                                        |      
|        | Item 9.  THE OFFER AND LISTING                                                                                         | 60-62
|        |                                                                                                                        |      
|        | A. Offer and
  Listing Details.                                                                                        | 60-61
|        |                                                                                                                        |      
|        | B. Plan of
  Distribution.                                                                                             | 62   
|        |                                                                                                                        |      
|        | C. Markets.                                                                                                            | 62   
|        |                                                                                                                        |      
|        | D. Selling
  Shareholders.                                                                                             | 62   
|        |                                                                                                                        |      
|        | E. Dilution.                                                                                                           | 62   
|        |                                                                                                                        |      
|        | F. Expenses
  of the Issue.                                                                                            | 62   
|        |                                                                                                                        |      
|        | Item 10.
  ADDITIONAL INFORMATION                                                                                      | 62-78
|        |                                                                                                                        |      
|        | A. Share
  Capital.                                                                                                    | 62   
|        |                                                                                                                        |      
|        | B.
  Memorandum and Articles of Association.                                                                           | 62-67
|        |                                                                                                                        |      
|        | C. Material
  Contracts.                                                                                               | 68   
|        |                                                                                                                        |      
|        | D. Exchange
  Controls.                                                                                                | 68   
|        |                                                                                                                        |      
|        | E. Taxation                                                                                                            | 68-77
|        |                                                                                                                        |      
|        | F. Dividends
  and Paying Agents.                                                                                      | 77   
|        |                                                                                                                        |      
|        | G. Statement
  by Experts.                                                                                             | 77   
|        |                                                                                                                        |      
|        | H. Documents
  on Display.                                                                                             | 77   
|        |                                                                                                                        |      
|        | I.  Subsidiary Information                                                                                             | 77   
|        |                                                                                                                        |      
|        | Item 11.
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 
                          MARKET
  RISK                     | 78-79
|        |                                                                                                                        |      
|        | Item
  12.  DESCRIPTION OF SECURITIES OTHER
  THAN EQUITY SECURITIES                                                   | 79   
|        |                                                                                                                        |      
|PART II |                                                                                                                        |      
|        | Item
  13.  DEFAULTS, DIVIDEND ARREARAGES AND
  DELINQUENCIES                                                          | 80   
|        |                                                                                                                        |      
|        | Item
  14.  MATERIAL MODIFICATIONS TO THE
  RIGHTS OF SECURITY
                          HOLDERS
  AND USE OF PROCEEDS | 80   
|        |                                                                                                                        |      
|        | Item
  15.  CONTROLS AND PROCEDURES                                                                                    | 80   
|        |                                                                                                                        |      
|        | Item
  16.  Reserved                                                                                                   | 80   
|        |                                                                                                                        |      

3

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| | Item
  17.  FINANCIAL STATEMENTS | 80
| | -------------------------------- | --
| |                                  |   
| | Item
  18.  FINANCIAL STATEMENTS | 80
| |                                  |   
| | Item
  19.  EXHIBITS             | 81

4

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PART I

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

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.

5

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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.  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.

|                                                                   |  | Year ended
  December 31,             |       
|------------------------------------------------------------------ |  | ------------------------------------- | ------
|                                                                   |  |                                       |       
|                                                                   |  | 1998                                  |       
|                                                                   |  |                                       |       
|                                                                   |  | (in thousands, except per share data) |       
|Consolidated statement of income data                              |  |                                       |       
|                                                                   |  |                                       |       
|Revenues:                                                          |  |                                       |       
|Product
  sales                                                    |  | $                                     | 10,267
|Services
  and projects                                            |  |                                       | 6,365 
|                                                                   |  |                                       |       
|Total
  revenues                                                   |  |                                       | 16,632
|                                                                   |  |                                       |       
|Cost of revenues:                                                  |  |                                       |       
|Cost
  of product sales                                            |  |                                       | 1,045 
|Cost
  of services and projects                                    |  |                                       | 2,531 
|                                                                   |  |                                       |       
|Total
  cost of revenues                                           |  |                                       | 3,576 
|                                                                   |  |                                       |       
|Gross profit                                                       |  |                                       | 13,056
|                                                                   |  |                                       |       
|Operating income
  (expenses):                                     |  |                                       |       
|Research
  and development expenses,
            net               |  |                                       | (3,617
|Sales
  and marketing expenses, net                                |  |                                       | (2,625
|General
  and administrative expenses                              |  |                                       | (2,213
|Other
  general income (expenses)                                  |  |                                       |      
|                                                                   |  |                                       |       
|Total
  operating expenses                                         |  |                                       | 8,455 
|                                                                   |  |                                       |       
|Income (loss) from
  operations                                    |  |                                       | 4,601 
|                                                                   |  |                                       |       
|Financial income
  (expenses), net                                 |  |                                       | 419   
|Gain arising from issuance
  of shares by a
       subsidiary      |  |                                       |      
|Other expenses                                                     |  |                                       |      
|                                                                   |  |                                       |       
|Income (loss) before income
  taxes                                |  |                                       | 5,020 
|Taxes on income                                                    |  |                                       | 1,032 
|Share in losses of an
  associated
       company                  |  |                                       |      
|                                                                   |  |                                       |       
|Income (loss) before
  minority interests                          |  |                                       | 3,988 
|Minority interest in losses
  of
       subsidiaries               |  |                                       | 127   
|                                                                   |  |                                       |       
|Net income (loss)                                                  |  | $                                     | 4,115 
|                                                                   |  |                                       |       
|                                                                   |  |                                       |       
|Earnings (loss) per share -                                        |  |                                       |       
|Basic                                                              |  | $                                     | 0.42  
|                                                                   |  |                                       |       
|Diluted                                                            |  | $                                     | 0.42  
|                                                                   |  |                                       |       
|                                                                   |  |                                       |       
|Weighted average number of
  shares
       used in computation(1): |  |                                       |       
|Basic                                                              |  |                                       | 9,641 
|Diluted                                                            |  |                                       | 9,731 

6

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|                                |  | December
  31, |       
|------------------------------- |  | -------------- | ------
|                                |  |                |       
|                                |  | 1998           |       
|                                |  |                |       
|                                |  | (in thousands) |       
|Consolidated balance sheet data |  |                |       
|Cash and cash equivalents       |  | $              | 11,164
|Working capital                 |  |                | 24,859
|Total assets                    |  |                | 34,627
|Shareholders equity            |  |                | 27,867

|(1) | See Note 14d 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

B.
Capitalization and Indebtedness

Not
applicable.

C. Reasons for Offer and Use of Proceeds

Not
applicable.

D. Risk Factors

You should consider carefully the risks described
below together with all of the other information included in or incorporated by
reference into this annual report.  If
any one or some combination of the following risks actually occur, our
business, financial condition or results of operations could be materially and
adversely affected.  In these
circumstances, the trading price of our ordinary shares could decline, and you
may lose all or part of your investment.

Risks Related To Our BusinessThe 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.                                                                             

7

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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.

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.

8

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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.

9

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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.

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.

10

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---

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.

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.

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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.

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.                                                                               

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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.

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.

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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.

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.

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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 150% 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.

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.

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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 1999, 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.

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 Albertsons, Publix and Costco in the USA and Tesco, J.
Sainsbury, Delhaize and IKEA food services in Europe.

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.

In
the future, we plan to continue our expansion and acquisition strategies.  We will take advantage of our new scalable
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 and by offering a broad set of ASP applications to fulfill the
needs of 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 history 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.

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
support continued growth in our point-of-sale software business as these
markets adopt our browser-based applications. 
Moreover, we believe these initiatives will provide us with a powerful
mechanism to create communities of retailers sufficiently large to attract food
suppliers and manufacturers.  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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Acquisitions, joint ventures and investments during recent
years

PalmPoint Ltd.

In
March 1999, we acquired a majority interest in PalmPoint Ltd. (PalmPoint) for
$250,000.  Under the acquisition
agreement, we also loaned PalmPoint $150,000 for working capital.  PalmPoint is an Israeli company that engages
in the development of software solutions for hand-held devices like Palm and PC
pocket computers supporting in-store retail applications, which include
ordering, receiving and inventory management. 
These devices also provide applications for suppliers, which include
pre-sales, van-sales and maintenance management.  According to an investment agreement signed on September 3, 2000
between us and the minority shareholders of Palm Point, which defines
additional investments by the shareholders in Palm Point, we converted an
inter-company account of $ 900,000 into share capital representing
additional 32.12% of the shares of PalmPoint. As a result, we held 82.14% of
the shares of Palm Point. The excess cost of investment, an amount of
approximately $221,000 was attributed to goodwill.  In April 2001, we converted an additional inter-company account
of  $ 450,000 into additional share
capital representing 4.34% of the shares of PalmPoint. The excess cost was
attributed to goodwill.

In
September 2001, we converted an additional amount of $ 350,000 of an
inter-company account for additional 2.16% of the shares of PalmPoint. As a
result, we held 88.64% of the shares of PalmPoint. The acquisition was
accounted for under the purchase method. 
According to an additional agreement signed on October 1, 2001 between
us and a minority shareholder of PalmPoint, we acquired additional shares of
Palm Point from such shareholder. As a result, we held 93.18% of the shares of
PalmPoint.

During
2002, we acquired from another minority shareholder additional shares in
PalmPoint in consideration for the issuance by us of shares at a total value of
approximately $66,000. As a result, we held 96.18% of the shares of PalmPoint.

During
the first quarter of 2003, we acquired from the last minority shareholder the
remaining minority interest shares and increased our holdings in PalmPoint to
100%, in consideration for the issuance by us of shares at a total value of
approximately $138,000.

Tamar
Industries M.R. Electronics (1985) Ltd. and StoreAlliance.com Ltd.

In
September 1999, we acquired Tamar Industries M.R. Electronics (1985) Ltd. for
approximately $1.7 million.  Tamar,
which is based in Israel, develops and sells automated software solutions and
technologies for check-out terminals and in-store management for independent
food stores and small chains. At that time, Tamar held a 52% interest in
StoreAlliance.com Ltd., which currently engages in the operation of our
e-marketplace initiative in Israel.

In
September 2000, we acquired the remaining shares of StoreAlliance.com,
representing 48% of its outstanding share capital, in exchange for the issuance
of 60,000 of our ordinary shares (partly issued in 2001) to the sellers, equal
at the date of the agreement, to approximately $1,014,000.  The acquisition was accounted for under the
purchase method. The excess cost of investment, an amount of approximately
$1,013,000 was attributed to goodwill. 
In December 2000, StoreAlliance.com signed an agreement with the Central
Manufacturing Company for Soft Drinks (Coca Cola - Israel), providing for the
issuance to Coca Cola  Israel of one-third of StoreAlliance.coms shares, and
the grant to Coca Cola - Israel of rights to use StoreAlliance.coms special
marketing and advertising channels.  Under
this agreement, Coca Cola  Israel invested $3.5 million in StoreAlliance.com,
in consideration for 33% of its outstanding shares.

In
April 2001, StoreAlliance.com signed an agreement with Discount Investments
Limited under which StoreAlliance.com will acquire from Discount Investments
100% of the shares of its subsidiary, TradaNet Electronic Commerce Services
Ltd., in consideration for the issuance by StoreAlliance.com to Discount
Investments of shares equivalent to 11.25% of its issued share capital. The
excess cost of investment, an amount of approximately $1,205,000 was attributed
to property and equipment and identified intangible assets to be amortized over
their estimated useful life (seven years). In June 2001, Discount Investments
acquired an additional 5% interest in StoreAlliance.com from Coca Cola 
Israel.  Currently, we hold, directly
and through Tamar, 59.17% of StoreAlliance.coms outstanding shares.

17

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In
March 2002, StoreAlliance.com established IREX  Israeli Retail Exchange Ltd.
(IREX). IREX intends to provide online collaboration services between large
Israeli grocery chains and their suppliers.

In
March 2003, StoreAlliance.com established Cell-Time Ltd. (Cell-Time) together
with Lipman Electronic Engineering Ltd. and Dai Telecom Ltd (Dai).  Cell-Time is held equally by its three
founders and is intended to operate a venture, which simplifies the sales and
purchasing processes of pre-paid cellular air-time and other pre-paid products.
In consideration for its share in Cell-Time, Dai has committed to invest  $1.25 million in the company of which
$250,000 is conditional upon the company meeting certain predetermined business
criteria. As of June 15, 2003, Dai invested $400,000.

Net Point Ltd.

In
January 2000, we acquired an additional 14.16% of the shares of Net Point Ltd.
for an aggregate purchase price of $ 112,500. 
In June 2000, we acquired an additional 4.69% of the shares of Net Point
for an aggregate purchase price of  $
350,000. As a result, we then held 75.86% of Net Points outstanding shares.
The excess cost of investment, an amount of approximately $311,000, was
attributed to goodwill.  According to an
agreement signed in 2001 between us and a minority shareholder of Net Point, we
acquired additional shares of Net Point from such shareholder, and as a result
we now hold 95% of Net Points outstanding shares.

C-StoreMatrix.com,
Inc.

In
August 2000, we entered into an agreement to establish C-StoreMatrix.com, Inc.
together with i2 Technologies and the U.S. National Association of Convenience
Stores (NACS).  C-StoreMatrix.com was
intended to supply ASP services for the convenience store community in the
United States.  We received 25% of the
shares of C-StoreMatrix.com and granted C-StoreMatrix.com a non-exclusive, non
transferable right to use our ASP technology, as well as our names, trademarks
and service marks and those of our subsidiaries.  C-StoreMatrix.com ceased operations in 2001, before commencing
any material operations. As a result, we wrote-off a $500,000 loan granted to
C-StoreMatrix.com.

Retail
Control Systems, Inc.

In
September 2000, we acquired all of the shares of Retail Control Systems, Inc.,
or RCS, which is headquartered in Pittsburgh, Pennsylvania.  RCS designs, develops and sells a wide range
of corporate and store level software solutions for the mid- and small-size
independent supermarket sectors in the United States.  In connection with this acquisition, we issued 178,660 of our
ordinary shares equal at the date of the transaction to approximately $4.56
million to the sellers and made a cash payment to the sellers of $4.14
million.  In addition we incurred
related costs of approximately $0.3 million. 
The excess cost of investment, an amount of approximately $7,716,000 was
attributed to goodwill and identified intangible assets to be amortized over their
estimated useful life (four to eight years). RCS, which is now operating as
Retalix Pittsburgh, employs approximately 90 people in Pennsylvania, Ohio,
Tennessee and Washington, provides affordable, integrated store- and host-level
software solutions.  Its flagship
product, RCS ScanMaster Solution Series, is a flexible retail checkout system
built on Microsoft platforms. 
ScanMaster is distributed primarily through NCR Corporations dealer
channel.

Retalix
(UK) Limited

During
the second half of 2000, we established PointofSale (UK) Limited which engages
in the distribution of our products (including our subsidiaries products) in
European markets, and in performing maintenance and support services to our
customers and our subsidiaries customers in these markets.

18

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Kohav
Orion Advertising and Information Ltd. and Orlan Orion Systems Ltd.

In
September 2000, we acquired all of the shares of Kohav Orion Advertising and
Information Ltd. and Orlan Orion Ltd., both Israeli companies, which engage in
services, development and supply of products and applications in the area of
management and control of proceeds in supermarket chains and independent retail
grocery stores in Israel. In exchange for these acquisitions, we issued 18,560
of our shares to the sellers equal at the date of the transaction to
approximately $464,000. These acquisitions were accounted for under the
purchase method. The excess cost of investment, an amount of approximately
$454,000 was attributed to goodwill of which $397,000 was also attributed to
identified intangible assets to be amortized over their estimated useful life
(six years).

Fujitsu
Transaction Solutions Inc. (formerly- Fujitsu ICL Systems, Inc.)

In
November 2000, we entered into an agreement with Fujitsu Transaction Solutions
Inc. (formerly Fujitsu  ICL Systems
Inc.), or Fujitsu, a distributor of our products to grocery chains in North
America, Canada and South America, to acquire its direct sales activities
relating to our products. In consideration for the acquired activities, we
issued 209,836 of our ordinary shares to Fujitsu equal at the date of the
transaction to approximately $3.92 million, and paid an additional $1.6 million
in cash. The acquisitions was accounted for under the purchase method. The
excess cost of investment, an amount of approximately $5,514,000 was attributed
to goodwill and identified intangible assets to be amortized over their
estimated useful life (four to eight years).

Retalix
S.A. PTY Ltd.

During
the first half of 2001, we established Retalix S.A. (PTY) Ltd., which is planed
to engage in distributing our products in South Africa, and to perform
maintenance and support services for our customers in this market. The company
hasnt yet commenced business operations.

Retalix
Australia PTY Ltd.

During
the second half of 2001, we established Retalix Australia PTY Ltd., which is
planed to engage in distributing our products in Australia, and to perform
maintenance and support services for our customers in this market. The company
hasnt yet commenced operations.

BASS
Inc.

In September 2001, our wholly-owned subsidiary
Retalix U.S.A Inc., acquired all of the outstanding shares of BASS Inc., or
BASS, in consideration for 95,216 of our ordinary shares, reflecting at the
date of the transaction a purchase price of $1,393,000. As part of the
acquisition, we also paid the outstanding balance BASS under a shareholders
loan in the amount of $550,000 by issuing an additional 37,594 of our ordinary
shares to such shareholders. The excess cost of investment, an amount of
approximately $5,484,000 was attributed to goodwill and identified intangible
assets to be amortized over their estimated useful life (three to five
years).BASS, which is headquartered in
Dayton Ohio, employs approximately 80 employees and is a provider of retail
automation technology, primarily to tier 2 grocery operators in the United
States.

StoreNext
Retail Technologies LLC

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.

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

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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 USA, 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 scalable 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 and by offering a broad set of ASP applications to fulfill the
needs of 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 history 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.

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
support continued growth in our point-of-sale software business as these
markets adopt our browser-based applications. 
Moreover, we believe these initiatives will provide us with a powerful
mechanism to create communities of retailers sufficiently large to attract food
suppliers and manufacturers.  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
markets to four tiers in the grocery sector that are characterized by revenue
levels. Tier 1 grocery chains are retailers with annual revenues of over $5B.
Tier 2 chains typically range between $500m and $5B revenues. Tier 3 chains
typically range between $50M and $500M revenues, and Tier 4 retailers are in
the $5M and $50M revenue bracket.

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 is at a level of its 1.7% of 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 multiple formats across market segments 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.

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, purchasing,
merchandising, pricing, promotions and shrinkage control.  They can also implement price changes
simultaneously throughout an enterprise and rapidly initiate targeted marketing
programs.

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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.

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 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.

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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.

Expanding our application offerings to new
and existing customers

In
the past, we have sold our point-of-sale applications to mid-sized and smaller
chains 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 mid-sized and
smaller retailers.  We also plan on
offering our applications to retailers on a rental basis.  The benefits of rentals to the retailer
include lower internal hardware costs, the elimination of complex software
upgrades and the ability to obtain data from any location.  Rentals also reduce the costs associated
with IT professionals that are needed to build and maintain an in-house IT
infrastructure.  We believe that by
renting IT services over the Internet for a low monthly fee, as opposed to
paying high up-front licensing and maintenance fees, small retailers can remain
competitive and profitable.

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 US independent grocery market.  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 as well as many large grocery retailers.  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.

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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 and Services

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.

Supermarket software 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
Brothersduring 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.

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ScanMaster, developed and marketed by Retalix Pittsburgh (formerly RCS
Technologies), and distributed by NCR, is 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.

BASSpoint,developed and marketed by Retalix Dayton (formerly BASS Inc.), and
distributed through a network of dealers in North America, is also tailored to
fit the needs of the small chain and single store supermarkets and includes a
variety of custom utilities required for this market.

Convenience store, fuel and food service
solutions

Our
software solutions for the convenience store, fuel and food service sectors are
based on our StorePoint product
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.

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 was 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 retail e-marketplaces that serve
large numbers of small retailers. ReMAs application set includes pricebook,
advanced 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.

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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                    |  | Convenience Stores            |  | Others                        
|------------------------------- |  | ----------------------------- |  | ------------------------------
|                                |  |                               |  |                               
|Albertsons (US)                 |  | Husky Oil (US)                |  | Ikea
  (Eur & IL)             
|Big Y (US)                      |  | Welcome Break (UK)            |  | Superpharm (IL)               
|Costco (US)                     |  | Caseys General Stores
  (US) |  | The Clicks Organization
  (SA)
|DelHaize Group (Bel)            |  | Pilot Corporation (US)        |  |                               
|Tesco Stores (UK)               |  | Tesoro (US)                   |  |                               
|Sainsburys (UK)                |  | Narvesen (Nor)                |  |                               
|Metro Cash & Carry (SA
  & Aus) |  | Irving Oil (US)               |  |                               
|Spar (SA)                       |  | Quick Chek (US)               |  |                               
|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.

Direct Sales

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.

OEMs and Distributors

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.

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Marketing Alliances

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.

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.

Dealer Sales

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.

Professional Services

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.

Technology

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.

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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.

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.

Competition

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.

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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.

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                                                      

(1)
Held through our wholly-owned subsidiary, Retalix Holdings Inc.(2) Held through
our wholly-owned subsidiary, Retalix USA Inc.(3) Ceased operations.
(4) During the
first quarter of 2003 the portion of our ownership and voting power increased
from 96.2% to 100%.(5) Holds 30.8%
of the issued share capital of StoreAlliance.Com, Ltd.(6) Including
holdings through our wholly-owned subsidiary, Tamar Industries M. R. Electronic
(1985) Ltd.(7) Wholly owned
by our subsidiary, StoreAlliance.com Ltd.(8)
Established in 2003. 33% owned by our subsidiary, StoreAlliance.com Ltd.

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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.

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.

ITEM 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS

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.

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 USA, 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 scalable 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 and by offering a broad set of ASP applications to fulfill the
needs of 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 history 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.

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Recent Accounting Policies and Pronouncements

FAS 143

In July 2001, the Financial Accounty Standards
Board of the United States (FASB) issued Statement of Financial Accounting
Standards (FAS) No. 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 us). We do not expect the adoption of
FAS 143 to have a material effect on our consolidated financial statements.

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 (FAS 145).  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. We do not expect
the adoption of this standard to have a material effect on our consolidated
financial statements.

FAS 146

In June 2002, the FASB issued FAS No. 146,
Accounting for Costs Associated with Exit or Disposal activities (FAS
146).  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 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. 
We do not expect the adoption of this standard to have a material effect
on our consolidated financial statements.

FAS
148

In December 2002, the FASB issued FAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123.  FAS 148 amends FAS
123, (1) to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation
and (2) to require prominent disclosures in the financial statements about the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results. 
The transition guidance and annual disclosure provisions of FAS 148 are
effective for financial statements issued for the fiscal years ending after
December 15, 2002.  We elected to continue
accounting for employee stock based compensation in accordance with APB 25 and
related interpretations and applied the disclosure provisions in FAS 148 in the
consolidated financial statements included in this Annual Report.

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FAS 149

In April 2003, the FASB issued FAS No. 149 Amendment of Statement 133
on Derivative Instruments and Hedging Activities. FAS 133 (Accounting for
Derivative Instruments and Hedging Activities) and FAS 138 (Accounting for
Certain Derivative Instruments and Certain Hedging Activities) establish
accounting and reporting standards for derivative instruments including
derivatives embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. FAS 149 amends FAS 133 for certain
decisions made as part of the Derivatives Implementation Group (DIG) process.
FAS 149 also contains amendments relating to FASB Concepts Statement No. 7
(Using Cash Flow Information and Present Value in Accounting Measurements),
FAS 65 (Accounting for Certain Mortgage Banking Activities), FAS 91
(Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases), FAS 95 (Statement of
Cash Flows), and FAS 126 (Exemption from Certain Required Disclosures about
Financial Instruments for Certain Nonpublic Entities). At this stage, we are
examining the effect of FAS 150 on our consolidated financial
statements.

FAS 150

In May 2003, the FASB issued FAS No. 150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity.  FAS 150 establishes standards
for classification and measurement in the statement of financial position of
certain financial instruments with characteristics of both liabilities and
equity. It requires classification of a financial instrument that is within its
scope as a liability (or an asset in some circumstances) because that financial
instrument embodies an obligation of the issuer. FAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise shall be effective on September 1, 2003. At this stage, we are
examining the effect of FAS 150 on our consolidated financial
statements.

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).  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. No additional disclosures were made in our
financial statements attached herewith as a result of the FIN 45 disclosure
requirements that are effective as from 2002.

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, we are examining the
effect of FIN 45 on our consolidated financial statements.

FIN 46

In January 2003, the FASB issued FASB Interpretation No. 46  Consolidation of Variable Interest
Entities (FIN 46). Under FIN 46 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. FIN 46 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.

FIN 46 is effective as follows: for variable interests in variable
interest entities created after January 31, 2003 FIN 46 shall apply
immediately, for variable interests in variable interest entities created
before that date, FIN 46 shall apply - for public entities - as of the
beginning of the first interim or annual reporting period beginning after June
15, 2003.  We do not expect the adoption
of FIN 46 to have a material effect on our consolidated financial statements.

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Critical Accounting Policies

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

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.

Capitalized software research and
development costs

Our policy on capitalized software costs
determines the timing of our recognition of certain development costs. Management
is required to use professional judgment in determining whether development
costs meet the criteria for immediate expense or capitalization.

Valuation of intangible assets

We review the carrying values of our long-lived
assets, including goodwill and identifiable intangibles, whenever events or
changes in circumstances indicate that such carrying values may not be
recoverable and annually for goodwill as required by FAS No. 142, Goodwill and
Other Intangible Assets  (FAS 142).
Unforeseen events, changes in circumstances and market conditions and material
differences in the value of intangible assets due to changes in estimates of
future cash flows could negatively affect the fair value of our assets and
result in a non-cash impairment charge. Some factors considered important which
could trigger an impairment review include the following: significant
underperformance relative to expected historical or projected future operating
results, significant changes in the manner of our use of acquired assets, the
strategy for our overall business and significant negative industry or economic
trends. Fair value is the amount at which the asset could be bought or sold in
a current transaction between willing parties and may be estimated using a
number of techniques, including quoted market prices or valuations by third
parties, present value techniques based on estimates of cash flow, or multiples
of earnings or revenue performance measures. The fair value of the asset could
be different using different estimates and assumptions in these valuation
techniques.

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As required by FAS 142, goodwill must be tested
for impairment at the reporting unit level upon adoption and at least annually
thereafter, utilizing a two-step methodology. The initial step requires us to
determine the fair value of each reporting unit and compare it to the carrying
value, including goodwill, of such unit. We determined the fair value of each
reporting unit by using the undiscounted cash flows technique and compared it
to each reporting units carrying value. If the fair value exceeds the carrying
value, no impairment loss would be recognized. However, if the carrying value
of the reporting unit exceeds its fair value, the goodwill of this unit may be
impaired. The amount, if any, of the impairment would then be measured in the
second step by using a discounted cash flows technique or market price if such
is available. We completed the first step during 2002, which indicated that no
goodwill should be impaired and updated this review at year end as required by
FAS 142 and identified no additional impairment of goodwill. See Note 4a of our
consolidated financial statements for additional discussion of the adoption of
FAS 142.

Using the same technique, we assessed the value of
goodwill related to a recent sale of a dealership made by one of our U.S.
subsidiaries.

Securities Held to maturity

We invested in marketable bonds, which we intend
to hold to maturity. Accordingly this investment is stated in our consolidated
financial statements at amortized cost.

Segment reporting

Under FAS No.
131, Disclosures about Segments of an Enterprise and Related Information,
companies should disclose in their financial statements, segment reporting
information based on management approach, meaning that reports presented to the
chief operating decision maker (CODM) of the company should be the basis for
the segment determination. Besides the disclosure information needed in the
financial statements, the segment determination affects the goodwill impairment
test under FAS 142.

We evaluate
performance based on revenue which is presented for each geographical segment.
Segment assets information is not presented in our financial statements, since
we do not evaluate performance based on such assets.  Based on the criteria above, our reportable segments are: Israel,
U.S.A. and International.

Tax provision

We operate in a
number of countries and, as such, fall under the jurisdiction of a number of
tax authorities.  These different tax
regimes could result in tax complications, which might take us a substantial
time to unravel.  In our opinion,
sufficient tax provisions have been included in our consolidated financial
statements in respect of the years which 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.

Contingencies

As discussed in
Note 7 to our consolidated financial statements, we, and some of our
subsidiaries are involved in legal proceedings. We recorded no liabilities for
these legal proceedings, in accordance with FAS No. 5, Accounting for
Contingencies (FAS 5), as we believe, based on advice of our legal counsel,
that we have meritorious defenses to these proceedings. FAS 5 requires a
liability to be recorded based on the companys estimates of the probable cost
of the resolution of a contingency. The actual resolution of these
contingencies may differ from our estimates and an appropriate adjustment to
income could be required in a future period.

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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 a 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 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 will 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.

Acquisitions, joint ventures and investments during recent
years

PalmPoint Ltd.

In
March 1999, we acquired a majority interest in PalmPoint Ltd. (PalmPoint) for
$250,000.  Under the acquisition
agreement, we also loaned PalmPoint $150,000 for working capital.  PalmPoint is an Israeli company that engages
in the development of software solutions for hand-held devices like Palm and PC
pocket computers supporting in-store retail applications, which include
ordering, receiving and inventory management. 
These devices also provide applications for suppliers, which include
pre-sales, van-sales and maintenance management.  According to an investment agreement signed on September 3, 2000
between us and the minority shareholders of Palm Point, which defines
additional investments by the shareholders in Palm Point, we converted an
inter-company account of $ 900,000 into share capital representing 32.12%
of the shares of PalmPoint. As a result, we held 82.14% of the shares of Palm
Point. The excess cost of investment, an amount of approximately $221,000 was
attributed to goodwill.  In April 2001,
we converted an additional inter-company account of  $ 450,000 into additional share capital representing 4.34% of the
shares of PalmPoint. The excess cost was attributed to goodwill.

In
September 2001, we converted an additional amount of $ 350,000 of an
inter-company account for additional 2.16% of the shares of PalmPoint. As a
result, we held 88.64% of the shares of PalmPoint. The acquisition was
accounted for under the purchase method. 
According to an additional agreement signed on October 1, 2001 between
us and a minority shareholder of PalmPoint, we acquired additional shares of
Palm Point from such shareholder. As a result, we held 93.18% of the shares of
PalmPoint.

During
2002, we acquired from another minority shareholder additional shares in
PalmPoint in consideration for the issuance by us of shares at a total value of
approximately $66,000. As a result, we held 96.18% of the shares of PalmPoint.

During
the first quarter of 2003, we acquired from the last minority shareholder the
remaining minority interest shares and increased our holdings in PalmPoint to
100%, in consideration for the issuance by us of shares at a total value of
approximately $138,000.

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Tamar
Industries M.R. Electronics (1985) Ltd. and StoreAlliance.com Ltd.

In
September 1999, we acquired Tamar Industries M.R. Electronics (1985) Ltd. for
approximately $1.7 million.  Tamar, which
is based in Israel, develops and sells automated software solutions and
technologies for check-out terminals and in-store management for independent
food stores and small chains. At that time, Tamar held a 52% interest in
StoreAlliance.com Ltd., which currently engages in the operation of our
e-marketplace initiative in Israel.

In
September 2000, we acquired the remaining shares of StoreAlliance.com,
representing 48% of its outstanding share capital, in exchange for the issuance
of 60,000 of our ordinary shares (partly issued in 2001) to the sellers, equal
at the date of the agreement, to approximately $1,014,000.  The acquisition was accounted for under the
purchase method. The excess cost of investment, an amount of approximately
$1,013,000 was attributed to goodwill. 
In December 2000, StoreAlliance.com signed an agreement with the Central
Manufacturing Company for Soft Drinks (Coca Cola - Israel), providing for the
issuance to Coca Cola  Israel of one-third of StoreAlliance.coms shares, and
the grant to Coca Cola - Israel of rights to use StoreAlliance.coms special
marketing and advertising channels. 
Under this agreement, Coca Cola  Israel invested $3.5 million in
StoreAlliance.com, in consideration for 33% of its outstanding shares.

In
April 2001, StoreAlliance.com signed an agreement with Discount Investments
Limited under which StoreAlliance.com will acquire from Discount Investments
100% of the shares of its subsidiary, TradaNet Electronic Commerce Services
Ltd., in consideration for the issuance by StoreAlliance.com to Discount
Investments of shares equivalent to 11.25% of its issued share capital. The
excess cost of investment, an amount of approximately $1,205,000 was attributed
to property and equipment and identified intangible assets to be amortized over
their estimated useful life (seven years). In June 2001, Discount Investments
acquired an additional 5% interest in StoreAlliance.com from Coca Cola 
Israel.  Currently, we hold, directly
and through Tamar, 59.17% of StoreAlliance.coms outstanding shares.

In
March 2002, StoreAlliance.com established IREX  Israeli Retail Exchange Ltd.
(IREX). IREX intends to provide online collaboration services between large
Israeli grocery chains and their suppliers.

In
March 2003, StoreAlliance.com established Cell-Time Ltd. (Cell-Time) together
with Lipman Electronic Engineering Ltd. and Dai Telecom Ltd (Dai).  Cell-Time is held equally by its three
founders and is intended to operate a venture, which simplifies the sales and
purchasing processes of pre-paid cellular air-time and other pre-paid products.
In consideration for its share in Cell-Time, Dai has committed to invest  $1.25 million in the company of which
$250,000 is conditional upon the company meeting certain predetermined business
criteria. As of June 15, 2003 Dai invested $400,000.

Net Point Ltd.

In
January 2000, we acquired an additional 14.16% of the shares of Net Point Ltd.
for an aggregate purchase price of $ 112,500. 
In June 2000, we acquired an additional 4.69% of the shares of Net Point
for an aggregate purchase price of  $
350,000. As a result, we then held 75.86% of Net Points outstanding
shares.  The excess cost of investment,
an amount of approximately $311,000, was attributed to goodwill. According to
an agreement signed in 2001 between us and a minority shareholder of Net Point,
we acquired additional shares of Net Point from such shareholder, and as a
result we now hold 95% of Net Points outstanding shares.

C-StoreMatrix.com,
Inc.

In
August 2000, we entered into an agreement to establish C-StoreMatrix.com, Inc.
together with i2 Technologies and the U.S. National Association of Convenience
Stores (NACS).  C-StoreMatrix.com was
intended to supply ASP services for the convenience store community in the
United States.  We received 25% of the
shares of C-StoreMatrix.com and granted C-StoreMatrix.com a non-exclusive, non
transferable right to use our ASP technology, as well as our names, trademarks
and service marks and those of our subsidiaries.  C-StoreMatrix.com ceased operations in 2001, before commencing
any material operations. As a result, we wrote-off a $500,000 loan granted to
C-StoreMatrix.com.

36

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Retail
Control Systems, Inc.

In
September 2000, we acquired all of the shares of Retail Control Systems, Inc.,
or RCS, which is headquartered in Pittsburgh, Pennsylvania.  RCS designs, develops and sells a wide range
of corporate and store level software solutions for the mid- and small-size
independent supermarket sectors in the United States.  In connection with this acquisition, we issued 178,660 of our
ordinary shares equal at the date of the transaction to approximately $4.56
million to the sellers and made a cash payment to the sellers of $4.14
million.  In addition we incurred
related costs of approximately $0.3 million. 
The excess cost of investment, an amount of approximately $7,716,000 was
attributed to goodwill and identified intangible assets to be amortized over
their estimated useful life (four to eight years). RCS, which is now operating
as Retalix Pittsburgh, employs approximately 90 people in Pennsylvania, Ohio,
Tennessee and Washington, provides affordable, integrated store- and host-level
software solutions.  Its flagship
product, RCS ScanMaster Solution Series, is a flexible retail checkout system
built on Microsoft platforms. 
ScanMaster is distributed primarily through NCR Corporations dealer
channel.

Retalix
(UK) Limited

During
the second half of 2000, we established PointofSale (UK) Limited which engages
in the distribution of our products (including our subsidiaries products) in
European markets, and in performing maintenance and support services to our
customers and our subsidiaries customers in these markets.

Kohav
Orion Advertising and Information Ltd. and Orlan Orion Systems Ltd.

In
September 2000, we acquired all of the shares of Kohav Orion Advertising and
Information Ltd. and Orlan Orion Ltd., both Israeli companies, which engage in
services, development and supply of products and applications in the area of
management and control of proceeds in supermarket chains and independent retail
grocery stores in Israel. In exchange for these acquisitions, we issued 18,560
of our shares to the sellers equal at the date of the transaction to
approximately $464,000. These acquisitions were accounted for under the
purchase method. The excess cost of investment, an amount of approximately
$454,000 was attributed to goodwill of which $397,000 was also attributed to
identified intangible assets to be amortized over their estimated useful life
(six years).

Fujitsu
Transaction Solutions Inc. (formerly - FujitsuICL Systems, Inc.)

In
November 2000, we entered into an agreement with Fujitsu Transaction Solutions
Inc., or Fujitsu, a distributor of our products to grocery chains in North
America, Canada and South America, to acquire its direct sales activities
relating to our products. In consideration for the acquired activities, we
issued 209,836 of our ordinary shares to Fujitsu equal at the date of the
transaction to approximately $3.92 million, and paid an additional $1.6 million
in cash. The acquisitions was accounted for under the purchase method. The
excess cost of investment, an amount of approximately $5,514,000 was attributed
to goodwill and identified intangible assets to be amortized over their
estimated useful life (four to eight years).

Retalix
S.A. PTY Ltd.

During
the first half of 2001, we established Retalix S.A. (PTY) Ltd., which is planed
to engage in distributing our products in South Africa, and performs
maintenance and support services for our customers in this market. The company
hasnt yet commenced business operations.

Retalix
Australia PTY Ltd.

During
the second half of 2001, we established Retalix Australia PTY Ltd., which is
planed to engage in distributing our products in Australia, and to perform maintenance
and support services for our customers in this market. The company hasnt yet
commenced operations.

37

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BASS
Inc.

In September 2001, our wholly-owned subsidiary
Retalix U.S.A Inc., acquired all of the outstanding shares of BASS Inc., or
BASS, in consideration for 95,216 of our ordinary shares, reflecting at the
date of the transaction a purchase price of $1,393,000. As part of the
acquisition, we also paid the outstanding balance BASS under a shareholders
loan in the amount of $550,000 by issuing an additional 37,594 of our ordinary
shares to such shareholders. The excess cost of investment, an amount of
approximately $5,484,000 was attributed to goodwill and identified intangible
assets to be amortized over their estimated useful life (three to five years).
BASS, which is headquartered in
Dayton Ohio, employs approximately 80 employees and is a provider of retail
automation technology, primarily to tier 2 grocery operators in the United
States.

StoreNext
Retail Technologies LLC

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.

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

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.

38

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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, |      
|------------------------------------------------------------- |  | ------------------------- | -----
|                                                              |  |                           |      
|                                                              |  |                           | 2000 
|                                                              |  |                           |      
|Revenues:                                                     |  |                           |      
|Product
  sales                                               |  |                           | 62.3 
|Services
  and projects                                       |  |                           | 37.7 
|                                                              |  |                           |      
|Total
  revenues                                              |  |                           | 100.0
|Cost of revenues:                                             |  |                           |      
|Cost
  of product sales                                       |  |                           | 13.6 
|Cost
  of services and projects                               |  |                           | 12.0 
|                                                              |  |                           |      
|Total
  cost of revenues                                      |  |                           | 25.6 
|                                                              |  |                           |      
|Gross profit                                                  |  |                           | 74.4 
|Operating expenses:                                           |  |                           |      
|Research
  and development expenses, net                      |  |                           | (33.4
|Sales
  and marketing expenses, net                           |  |                           | (27.3
|General
  and administrative expenses                         |  |                           | (19.2
|Other
  general income - net                                  |  |                           |      
|                                                              |  |                           |      
|Total
  operating expenses                                    |  |                           | 79.9 
|                                                              |  |                           |      
|Operating income (loss)                                       |  |                           | (5.5 
|Financial income (expenses),
  net                            |  |                           | 0.4  
|Gain arising from issuance
  of shares by a
       subsidiary |  |                           |      
|Other expenses, net                                           |  |                           |      
|                                                              |  |                           |      
|Income (loss) before income
  taxes                           |  |                           | (5.1 
|Income taxes                                                  |  |                           | 0.3  
|                                                              |  |                           |      
|Income (loss) before
  minority interests                     |  |                           | (5.4 
|Minority interests in
  losses of subsidiaries                |  |                           | 0.4  
|                                                              |  |                           |      
|Net income (loss)                                             |  |                           | (5.0 
|                                                              |  |                           |      
|                                                              |  |                           |      

Year Ended December 31, 2002 Compared to Year Ended December
31, 2001

Our operating results in 2002 continued to reflect
significant commitment and expenditures with regard to our e-marketplace
initiatives as well as our new joint venture with Fujitsu  StoreNext USA.

Revenues

Revenues consist primarily of product sales and
revenues generated by services and projects. 
We derive our revenues primarily from the licensing of integrated
software products and provision of related maintenance, customization and
implementation and support services.  In
addition, we provide market information and messaging services.

Revenues increased from $59.3 million in 2001 to
$76.5 million in 2002, or approximately 29%. 
This resulted primarily from an increase in sales to customers in the
United States both in the supermarket and convenience stores sectors, and a
considerable increase in our international sales primarily in the supermarket
sector.  Revenues from customers in the
United States increased from $37.0 million to $48.8 million, or approximately 32%.  Revenues from international customers
including Europe, South Africa, Australia and the Far East increased from $11.6
million in 2001 to $18.0 million in 2002.

Product Sales.  Product
sales primarily consist of the sale of software through license agreements with
distributors, dealers and direct customers. These sales are occasionally
bundled with hardware. We recognize revenues from sales of our software
products upon delivery, when the sales price is fixed or determinable,  when our ability to collect payment is
probable and 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.  Revenues from product sales
increased from $34.3 million in 2001 to $47.3 million in 2002, or approximately
37.7%, as a result of increased revenues derived primarily from sales in the
United States.

39

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Services and Projects.  Service and
project revenues are generated primarily from customization and implementation
of products, support, maintenance and market information services, and
messaging and other services.  Revenues
from services and projects increased from $25.0 million in 2001 to $29.2
million in 2002, or approximately 16.9%, primarily due to the increase in
revenues associated with project work for customers in the United States.

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. Cost of product sales increased from $7.1
million in 2001 to $12.0 million in 2002, or approximately 67.8%.  This increase as well as the increase in
this item as percentage of product revenues resulted primarily from an increase
in hardware associated sales.

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.  Cost of services and projects
increased from $8.8 million in 2001 to $10.2 million in 2002, or approximately
15.5%, which is more or less consistent with the increase in revenues from
services and projects.

Operating Expenses

Operating expenses consist of research and
development expenses, net, sales 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.  As of November
1, 1996, we ceased capitalizing research and development expenses, and
commenced amortizing the amount of capitalized expenses, which were fully
amortized by November 1999.  Since
November 1996, we have expensed all research and development expenses.

Research and development expenses, net, increased
from $14.6 million in 2001 to $17.0 million in 2002, or approximately 16.9%.
The increase was primarily a result of the increase in development resources
used for new and enhanced solutions, and the efforts invested in modifying
existing and new products to new technology environments, new combinations of
retail formats and market requirements as set by leading chains.  We continued to invest significant
development resources in our new e-marketplace and browser based technologies.

Sales and Marketing Expenses

Sales and marketing expenses, net, consist
primarily of salaries, travel, trade shows, public relations and promotional
expenses.

We presently compensate our sales force through
salaries and incentives.  As we focus
our efforts on selling our products directly, we also pay some of our sales
personnel commissions.  Sales 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.

40

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Sales and marketing expenses, net, increased from
$14.5 million in 2001 to $18.1 million in 2002, or approximately 24.8%. The
increase was primarily a result of our intensified efforts in our new
business-to-business initiatives and also due to the strengthening of sales and
marketing infrastructure as part of the objective to market our products in new
markets. In addition during 2002, we strengthened our sales and marketing force
in the United States recruiting highly experienced industry personnel in order
to improve our ability to accommodate new opportunities primarily in the
grocery sector in this market. We anticipate that sales and marketing expenses,
net, will continue to increase in absolute dollars to the extent 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.

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 its 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. Goodwill which
was previously amortized within general and administrative expenses on a
straight-line basis over periods of four to seven years benefited, is no longer
being amortized to earnings, but instead is subject to periodic testing for
impairment.

General and administrative expenses increased from
$12.1 million in 2001 to $12.5 million in 2002, or approximately 3.8%. As
percentage of revenues, these expenses decreased from 20.3% of revenues in 2001
to 16.4% in 2002. We anticipate that general and administrative expenses may
increase in absolute dollar amounts to the extent that we expand our
operations.

Other general Income, Net

Other general income, net, consists primarily of
gain attributable to the sale of a small dealership activity in the United
States as well as the disposition of equipment.

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. Financial income
(expenses), net, totaled an expense of $499,000 for 2002 compared to $365,000
for 2001.

Minority Interest in Losses of Subsidiaries

This amount reflects our pro rata minority share
in losses of our subsidiaries. For 2002, the minority interest in losses of our
subsidiaries was $574,000, compared to $205,000 for 2001.

Year Ended December 31, 2001 Compared to Year Ended December
31, 2000

Our operating results in 2001 continued to reflect
significant expenditures with regard to our new  e-marketplace initiatives, as well as recent acquisitions.

Revenues

Revenues consist primarily of product sales and
revenues generated by services and projects. 
We derive our revenues primarily from the licensing of integrated
software products and provision of related maintenance, customization and
implementation and support services.  In
addition, we provide market information and messaging services.

41

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Revenues increased from $36.1 million in 2000 to
$59.3 million in 2001, or approximately 64%. 
This resulted primarily from an increase in sales to customers in the
United States both in the supermarket and convenience stores sectors.  Revenues from customers in the United States
increased from $14.6 million in 2000 to $37.0 million in 2001, or approximately
153%.  Revenues from customers in
Israel, Europe and the rest of the world increased from $21.5 million in 2000
to $22.3 million in 2001.

Product Sales.  Product
sales primarily consist of the sale of software through license agreements with
distributors, dealers and direct customers. These sales are occasionally bundled
with hardware. We recognize revenues from sales of our software products upon
delivery, when the sales price is fixed or determinable,  when our ability to collect payment is
probable and 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.
Revenues from product sales increased from $22.5 million in 2000 to $34.3
million in 2001, or approximately 52.9%, as a result of increased revenues
derived primarily from sales in the United States.

ServicesandProjects.   Service and
project revenues are generated primarily from customization and implementation
of products, support, maintenance and market information services, and
messaging and other services.  Revenues
from services and projects increased from $13.6 million in 2000 to $25.0
million in 2001, or approximately 83.3%, primarily due to the increase in
revenues associated with project work for customers in the United States.

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.

Cost of Product Sales.   Cost of product sales consists of costs related to
product installation and hardware. Cost of product sales increased from $4.9
million in 2000 to $7.1 million in 2001, or approximately 45%.  This increase resulted primarily from an
increase in product sales.  The slight
decrease in cost of product sales as percentage of revenues was 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.

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.

Cost of services and projects increased from $4.3
million in 2000 to $8.8 million in 2001, or approximately 104%.  The increase was primarily due to an
increase in the number of personnel associated with rendering support and
professional services in new projects to customers in the United States and in
Europe, as well as additional cost of services associated with the rendering of
messaging and market information services.

Operating Expenses

Operating expenses consist of research and
development expenses, net, sales 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.  As of November
1, 1996, we ceased capitalizing research and development expenses, and
commenced amortizing the amount of capitalized expenses, which were fully
amortized by November 1999.  Since
November 1996, we have expensed all research and development expenses.

42

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---

Research and development expenses, net, increased
from $12.1 million in 2000 to $14.6 million in 2001, or approximately 20.7%.
The increase was primarily a result of the increase in development resources
used for new and enhanced solutions, and the efforts invested in modifying
existing and new products to new technology environments, new retail formats
and market requirements as set by leading chains.  We continued to invest significant development resources in our
new e-marketplace and browser based technologies.

Sales and Marketing Expenses

Sales and marketing expenses, net, consist
primarily of salaries, travel, trade shows, public relations and promotional
expenses.

We presently compensate our sales force through
salaries and incentives.  As we focus
our efforts on selling our products directly, we also pay some of our sales
personnel commissions.  Sales 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.

Sales and marketing expenses, net, increased from
$9.9 million in 2000 to $14.5 million in 2001, or approximately 47.1%. The
increase was primarily a result of our intensified efforts in our new
business-to-business initiatives and also due to the strengthening of sales and
marketing infrastructure as part of the objective to market our products in new
markets. We anticipate that sales and marketing expenses, net, will continue to
increase in absolute dollars to the extent 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.

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 and the amortization
of goodwill associated with these acquisitions.

General and administrative expenses increased from
$6.9 million in 2000 to $12.1 million in 2001, or approximately 75.3%. As
percentage of revenues, these expenses increased slightly from 19.2% of
revenues in 2000 to 20.3% in 2001. We anticipate that general and
administrative expenses may increase in absolute dollars to the extent that we
expand our operations.

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. Financial income
(expenses), net, totaled an expense of $365,000 for 2001 compared to $140,000
of income for 2000. The change 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

Our effective tax rate was 29.4% in 2002 with a
tax expense of $2.1 million and a pre-tax income of $7.2 million. In 2001 our
tax expense amounted to $706,000 with a pre-tax income of $4.5 million, an
effective tax rate of 15.5%. In 2000 we suffered a pre-tax loss of $1.8 million
and our tax expenses amounted to $124,000. These low tax rates are primarily a
result of the fact that our investment programs were granted the status of an
approved enterprise under Israels Law for Encouragement of Capital
Investments, 1959, pursuant to which we are entitled to an alternate package of
tax benefits.  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.

43

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Minority Interest in Losses of Subsidiaries

This amount reflects our pro rata minority share
in losses of our subsidiaries. For 2001, the minority interest in losses of our
subsidiaries was $205,000, compared to $145,000 for 2000.

Quarterly Results of Operations

The following
tables set forth certain unaudited quarterly financial data for each of our
last eight quarters and this data is 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.

Consolidated Statement of Income
Data (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                                                      |  | $                 | 8,221  |                 | $ | 8,346           |   | $               | 8,843  |                   | $ | 8,923        |   | $               | 9,356  |                 | $
|Services
  and projects                                              |  |                   | 6,035  |                 |   | 6,157           |   |                 | 6,213  |                   |   | 6,548        |   |                 | 6,875  |                 |  
|                                                                     |  |                   |        |                 |   |                 |   |                 |        |                   |   |              |   |                 |        |                 |  
|Total
  revenues                                                     |  |                   | 14,256 |                 |   | 14,503          |   |                 | 15,056 |                   |   | 15,471       |   |                 | 16,231 |                 |  
|Cost of
  revenues:                                                  |  |                   |        |                 |   |                 |   |                 |        |                   |   |              |   |                 |        |                 |  
|Cost
  of product sales                                              |  |                   | 1,910  |                 |   | 1,663           |   |                 | 1,711  |                   |   | 1,851        |   |                 | 1,998  |                 |  
|Cost
  of services and          projects                             |  |                   | 2,109  |                 |   | 2,209           |   |                 | 2,285  |                   |   | 2,228        |   |                 | 2,320  |                 |  
|                                                                     |  |                   |        |                 |   |                 |   |                 |        |                   |   |              |   |                 |        |                 |  
|Total
  cost of                    revenues                          |  |                   | 4,019  |                 |   | 3,872           |   |                 | 3,996  |                   |   | 4,079        |   |                 | 4,318  |                 |  
|                                                                     |  |                   |        |                 |   |                 |   |                 |        |                   |   |              |   |                 |        |                 |  
|Gross profit                                                         |  |                   | 10,237 |                 |   | 10,631          |   |                 | 11,060 |                   |   | 11,392       |   |                 | 11,913 |                 |  
|Operating
  expenses:                                                |  |                   |        |                 |   |                 |   |                 |        |                   |   |              |   |                 |        |                 |  
|Research
  and
            development
            expenses, net     |  |                   | (3,619 | )               |   | (3,603          | ) |                 | (3,636 | )                 |   | (3,713       | ) |                 | (3,966 | )               |  
|Sales
  and marketing
            expenses, net                      |  |                   | (3,410 | )               |   | (3,571          | ) |                 | (3,692 | )                 |   | (3,833       | ) |                 | (4,058 | )               |  
|General
  and
            administrative          expenses,
  net    |  |                   | (2,746 | )               |   | (2,952          | ) |                 | (3,163 | )                 |   | (3,202       | ) |                 | (2,624 | )               |  
|Other
  general income
            (expenses),
            net       |  |                   | 3      |                 |   | (18             | ) |                 | 3      |                   |   | 29           |   |                 | 20     |                 |  
|                                                                     |  |                   |        |                 |   |                 |   |                 |        |                   |   |              |   |                 |        |                 |  
|Total
  operating
            expenses                               |  |                   | 9,772  |                 |   | 10,144          |   |                 | 10,488 |                   |   | 10,719       |   |                 | 10,628 |                 |  
|                                                                     |  |                   |        |                 |   |                 |   |                 |        |                   |   |              |   |                 |        |                 |  
|Operating
  income (loss)                                            |  |                   | 465    |                 |   | 487             |   |                 | 572    |                   |   | 673          |   |                 | 1,285  |                 |  
|Financial
  income
       (expenses), net                            |  |                   | (367   | )               |   | 69              |   |                 | (73    | )                 |   | 6            |   |                 | (238   | )               |  
|Gain arising
  from issuance of
       shares by a
       subsidiary |  |                   | 2,391  |                 |   | 824             |   |                 |        |                   |   |              |   |                 |        |                 |  
|Other
  expenses                                                     |  |                   |        |                 |   | (501            | ) |                 |        |                   |   |              |   |                 |        |                 |  
|                                                                     |  |                   |        |                 |   |                 |   |                 |        |                   |   |              |   |                 |        |                 |  
|Income
  (loss) before
       income taxes                           |  |                   | 2,489  |                 |   | 879             |   |                 | 499    |                   |   | 679          |   |                 | 1,047  |                 |  
|Income taxes                                                         |  |                   | 2      |                 |   | 210             |   |                 | 253    |                   |   | 241          |   |                 | 393    |                 |  
|                                                                     |  |                   |        |                 |   |                 |   |                 |        |                   |   |              |   |                 |        |                 |  
|Income
  (loss) before
       minority interests                     |  |                   | 2,487  |                 |   | 669             |   |                 | 246    |                   |   | 438          |   |                 | 654    |                 |  
|Minority
  interest in losses
       (profits) of subsidiaries       |  |                   | (285   | )               |   | 177             |   |                 | 116    |                   |   | 197          |   |                 | 165    |                 |  
|                                                                     |  |                   |        |                 |   |                 |   |                 |        |                   |   |              |   |                 |        |                 |  
|Net income
  (loss)                                                  |  | $                 | 2,202  |                 | $ | 846             |   | $               | 362    |                   | $ | 635          |   | $               | 819    |                 | $
|                                                                     |  |                   |        |                 |   |                 |   |                 |        |                   |   |              |   |                 |        |                 |  

44

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---

|                                                                                                                     |  | 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   |                 | $ | 0.07            |  | $               | 0.03   |                   | $ | 0.06            |  | $               | 0.07   |                 | $
|                                                                                                                     |  |                   |        |                 |   |                 |  |                 |        |                   |   |                 |  |                 |        |                 |  
|Diluted                                                                                                              |  | $                 | 0.18   |                 | $ | 0.07            |  | $               | 0.03   |                   | $ | 0.05            |  | $               | 0.06   |                 | $
|                                                                                                                     |  |                   |        |                 |   |                 |  |                 |        |                   |   |                 |  |                 |        |                 |  
|Weighted
  average
            number of shares
            used in  computation
            of earning per
  share: |  |                   |        |                 |   |                 |  |                 |        |                   |   |                 |  |                 |        |                 |  
|Basic                                                                                                                |  |                   | 11,319 |                 |   | 11,371          |  |                 | 11,523 |                   |   | 11,536          |  |                 | 11,740 |                 |  
|Diluted                                                                                                              |  |                   | 11,827 |                 |   | 12,108          |  |                 | 12,271 |                   |   | 12,427          |  |                 | 12,622 |                 |  

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            | % |                 | 58.7  | %                 |  | 57.7            | % |                 | 57.6  | %               | 
|Services
  and projects                                              |  |                   | 42.3  |                 |  | 42.5            |   |                 | 41.3  |                   |  | 42.3            |   |                 | 42.4  |                 | 
|                                                                     |  |                   |       |                 |  |                 |   |                 |       |                   |  |                 |   |                 |       |                 | 
|                                                                     |  |                   | 100.0 |                 |  | 100.0           |   |                 | 100.0 |                   |  | 100.0           |   |                 | 100.0 |                 | 
|Cost of
  revenues:                                                  |  |                   |       |                 |  |                 |   |                 |       |                   |  |                 |   |                 |       |                 | 
|Cost
  of product sales                                              |  |                   | 13.4  |                 |  | 11.5            |   |                 | 11.4  |                   |  | 12.0            |   |                 | 12.3  |                 | 
|Cost
  of services and
            projects                          |  |                   | 14.8  |                 |  | 15.2            |   |                 | 15.2  |                   |  | 14.4            |   |                 | 14.3  |                 | 
|                                                                     |  |                   |       |                 |  |                 |   |                 |       |                   |  |                 |   |                 |       |                 | 
|Total cost
  of revenues                                             |  |                   | 28.2  |                 |  | 26.7            |   |                 | 26.6  |                   |  | 26.4            |   |                 | 26.6  |                 | 
|                                                                     |  |                   |       |                 |  |                 |   |                 |       |                   |  |                 |   |                 |       |                 | 
|Gross profit                                                         |  |                   | 71.8  |                 |  | 73.3            |   |                 | 73.4  |                   |  | 73.6            |   |                 | 73.4  |                 | 
|Operating
  expenses:                                                |  |                   |       |                 |  |                 |   |                 |       |                   |  |                 |   |                 |       |                 | 
|Research
  and
            development
            expenses, net     |  |                   | (25.4 | )               |  | (24.8           | ) |                 | (24.1 | )                 |  | (24.0           | ) |                 | (24.4 | )               | 
|Sales
  and marketing
            expenses, net                      |  |                   | (23.9 | )               |  | (24.6           | ) |                 | (24.5 | )                 |  | (24.8           | ) |                 | (25.0 | )               | 
|General
  and
            administrative
            expenses        |  |                   | (19.3 | )               |  | (20.4           | ) |                 | (21.0 | )                 |  | (20.7           | ) |                 | (16.2 | )               | 
|Other
  general income
            (expenses),
            net       |  |                   |       |                 |  | (0.1            | ) |                 |       |                   |  | 0.2             |   |                 | 0.1   |                 | 
|                                                                     |  |                   |       |                 |  |                 |   |                 |       |                   |  |                 |   |                 |       |                 | 
|Total
  operating
            expenses                               |  |                   | 68.6  |                 |  | 69.9            |   |                 | 69.6  |                   |  | 69.3            |   |                 | 65.5  |                 | 
|                                                                     |  |                   |       |                 |  |                 |   |                 |       |                   |  |                 |   |                 |       |                 | 
|Operating
  income (loss)                                            |  |                   | 3.2   |                 |  | 3.4             |   |                 | 3.8   |                   |  | 4.3             |   |                 | 7.9   |                 | 
|Financial
  income
       (expenses), net                            |  |                   | (2.6  | )               |  | 0.5             |   |                 | (0.5  | )                 |  |                 |   |                 | (1.5  | )               | 
|Gain
  arising from issuance of
       shares by a
       subsidiary |  |                   | 16.8  |                 |  | 5.7             |   |                 |       |                   |  |                 |   |                 |       |                 | 
|Other
  expenses                                                     |  |                   |       |                 |  | (3.5            | ) |                 |       |                   |  |                 |   |                 |       |                 | 
|                                                                     |  |                   |       |                 |  |                 |   |                 |       |                   |  |                 |   |                 |       |                 | 
|Income
  (loss) before
       income taxes                           |  |                   | 17.4  |                 |  | 6.1             |   |                 | 3.3   |                   |  | 4.3             |   |                 | 6.4   |                 | 
|Income taxes                                                         |  |                   |      |                 |  | 1.4             |   |                 | 1.7   |                   |  | 1.6             |   |                 | 2.4   |                 | 
|                                                                     |  |                   |       |                 |  |                 |   |                 |       |                   |  |                 |   |                 |       |                 | 
|Income
  (loss) before
       minority
  interests                   |  |                   | 17.4  |                 |  | 4.7             |   |                 | 1.6   |                   |  | 2.7             |   |                 | 4.0   |                 | 
|Minority
  interest in losses
       (profits) of
  subsidiaries     |  |                   | (2.0  | )               |  | 1.1             |   |                 | 0.8   |                   |  | 1.3             |   |                 | 1.0   |                 | 
|                                                                     |  |                   |       |                 |  |                 |   |                 |       |                   |  |                 |   |                 |       |                 | 
|Net income
  (loss)                                                  |  |                   | 15.4  |                 |  | 5.8             |   |                 | 2.4   |                   |  | 4.0             |   |                 | 5.0   |                 | 
|                                                                     |  |                   |       |                 |  |                 |   |                 |       |                   |  |                 |   |                 |       |                 | 

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.

45

---

---

Net cash provided by operating activities was
approximately $10.1 million in 2002. Net cash provided by  operating activities in 2001 was
approximately $5.6 million. Net cash used in operating activities in 2000 was
approximately $8.9 million.

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 maturity of short-term bank deposits and proceeds
from the sale of a dealership activity in the United States, net of investments
in marketable securities and acquisitions of fixed assets.

Net cash used in financing activities in 2002 was
$1.9 million, primarily attributable to repayment of long term bank loans net
of proceeds from issuance of share capital with regard to options exercised by
employees. In 2001 and 2000, net cash provided by financing activities was
approximately $4.6 million and $16.0 million, respectively, primarily
attributable to a long term bank loan received and in 2001 also to proceeds
from the issuance of shares of a subsidiary to a third party.

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.

In June 1998, we entered into a mortgage with Bank
Leumi for approximately $2.5 million to finance the purchase of our Raanana
facility.  As of December 31, 2002, the
outstanding principal balance of this bank loan was approximately $1.8
million.  The mortgage bears interest
annually at the London Interbank Offered Rate plus 0.675%.  The mortgage is secured by a lien on the
property underlying the mortgage.

In January 2000, we entered into an additional
mortgage with Bank Leumi for approximately $1.7 million to finance additional
office space in the same building in Raanana. 
As of December 31, 2002, the outstanding principal balance of this bank
loan was approximately $700,000.  The
mortgage bears interest annually at the London Interbank Offered Rate plus
0.45%.  The mortgage is secured by a
lien on our securities portfolio.

Additional loans we received which were used
primarily to finance recent acquisitions and to some extent also current
operations:

In August 2000, we borrowed $10.0 million from
Bank Leumi.  Borrowings under this loan
bear interest at the London Interbank Offered Rate plus 0.5%. As of December
31, 2002, the outstanding principal balance of this bank loan was approximately
$5.5 million.

In December 2000, we borrowed $5.0 million from
the United Mizrahi Bank.  Borrowings
under this loan bear interest at the London Interbank Offered Rate plus 0.5%.
As of December 31, 2002, the outstanding principal balance of this bank loan
was approximately $2.75 million.

In December 2001, we borrowed a loan denominated
in New Israeli Shekels from Bank Leumi in the amount of $2.3 million.  Borrowings under this loan bear interest at
the Prime Rate minus 0.3%. As of December 31, 2002, the outstanding principal
balance of this bank loan was $2.1 million.

In April 2002, we borrowed a loan denominated in
New Israeli Shekels from Bank Leumi in the amount of $824,000.  Borrowings under this loan bear interest at
a fixed rate of 6.9%. As of December 31, 2002, the outstanding principal balance
of the loan was its original balance, which was repaid at maturity in April
2003.

In April 2002, we borrowed a loan denominated in
New Israeli Shekels from Bank Hapoalim in the amount of $1.06 million.  Borrowings under this loan bear interest at
the Prime Rate minus 0.7%. As of December 31, 2002, the outstanding principal
balance of the loan was its original balance, which is to be repaid at maturity
in July 2003.

In April 2002, we borrowed a loan denominated in
British Pounds Sterling from Bank Leumi in the amount of $888,000.  Borrowings under this loan bear interest at
the London Interbank Offered Rate plus 0.8%. As of December 31, 2002, the
outstanding principal balance of the loan was its original balance, which was
repaid at maturity in April 2003.

46

---

---

Other then 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  (FAS 133).

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 $2,318,000.  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.

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 |  | 10,003           |  | 5,618     |  | 171      
| | Capital
  Lease Obligations with
  regard to offices and facilities |  | 3,692  |  | 1,072            |  | 1,640     |  | 980      

*
See also the notes to our consolidated financial statements attached at Item 18
to this annual report, and in particular, Notes 5 and 7 thereto.

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.

Market Risk

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

47

---

---

C. Research and Development, Patents and Licenses

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 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 through 2002, of which $311,000
has been repaid through a mandatory royalty based on revenues from products
developed with these grants.  This
support is conditional upon our ability to comply with certain applicable
requirements and conditions specified in the Chief Scientists program.

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

Grants from the
Office of the Chief Scientist; Recent Amendment

Office of the Chief Scientist

Under
the law for the Encouragement of Industrial Research and Development, 1984 (the
Research and Development Law), research and development programs that meet
specified criteria and are approved by a committee of the Chief Scientist, are
eligible for grants of up to 50% of the programs expenses, as defined by the
committee. Under the provisions of Israeli law in effect until 1996, royalties
of 2%-3% of the revenues derived in connection with products developed
according to, or as a result of, a research and development program funded by
the Chief Scientist must be paid to the State of Israel. Pursuant to an
amendment effected in 1996 effective with respect to Chief Scientist programs
funded in or after 1994, royalties generally at the rate of 3% during the first
three years, 4% over the following three years and 5% in or after the seventh
year of the revenues derived in connection with products developed according to
such programs are payable to the State of Israel. The maximum aggregate
royalties will not exceed 100% (for funding prior to 1994, 100%-150%) of the
dollar-linked value of the total grants received. Pursuant to an amendment
effected in 2000, effective with respect to Chief Scientist programs funded in
or after 2000, the royalty rates described above were updated to 3% during the
first three years and 3.5% in or after the fourth year, of the revenues derived
in connection with products developed under such programs. Pursuant to an
amendment effected on January 1, 1999, effective with respect to Chief
Scientist programs approved in or after 1999, funds received from the Chief
Scientist bear annual interest at a rate equal to LIBOR for twelve months.

Generally,
the Research Law requires that the manufacture of any product developed as a
result of research and development funded by the Israeli Government shall take
place in Israel. It also provides that know-how from the research and
development that is used to produce the product, may not be transferred to
third parties without the approval of a research committee. Such approval is
not required for the export of any products resulting from such research or
development.

However,
under the Regulations, in the event that any of the manufacturing volume is not
performed in Israel, if approved by the Chief Scientist, we would be required
to pay an increased royalty and the payback sum is 120%, 150% or 300% of the
grant if the manufacturing volume that is performed outside of Israel is less
than 50%, between 50% and 90% and more than 90%, respectively.

In
November 2002, the Israeli parliament approved an amendment to the Research and
Development Law.  The amendment became
effective on April 1, 2003.

48

---

---

As
opposed to the Research and Development Law prior to the amendment, which
requires an undertaking in the application that all manufacturing will be
performed in Israel, the amendment to the Research and Development Law allows
for the approval of grants in cases in which the applicant declares that part
of the manufacturing will not be performed in Israel.  This declaration is required to include details regarding the
locations in which the manufacture of the product will be performed in Israel
and out of Israel, the manufacture activities to be performed in such locations
(including the reasons for performing such manufacture activities out of
Israel) and the proportionate manufacturing expenditures in Israel and out of
Israel.  This declaration will be a
significant factor in the determination of the Office of Chief Scientist
whether to approve a plan and the amount and other terms of benefits to be
granted.

In
accordance with the amendment to the Research and Development Law, a plan will
be approved if the applicant is an Israeli corporation and as a result of the
plan the applicant will develop in Israel, by Israeli residents, a new product
or a significant improvement to an existing product, unless the Office of Chief
Scientist is convinced that it is essential for the execution of the plan that
part of it will be performed out of Israel or by non-Israeli residents.

The
amendment to the Research and Development Law further allows the Office of
Chief Scientist to provide grants for portions of 20%, 30%, 40% or 50% of
certain approved expenditures of a research and development.  The Research and Development Law prior to
the amendment only allowed for grants covering 50% of such expenditures.  This amendment and the budget of the Office
of the Chief Scientist may affect the rate of additional grants that may be
requested by us in the future.

The
amendment to the Research and Development Law adds reporting requirements with
respect to certain changes in the ownership of a grant recipient.  The amendment 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. 
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 and 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, absent an exemption, 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
proposed amendment to the Research and Development Law that would have allowed
in certain circumstances the transfer of the ownership of the technology
developed with the funding of the Office of the Chief Scientist to third
parties outside of Israel was not approved at this time.

Our
research and development expenses were reduced by grants from the Office of the
Chief Scientist which we recorded in the amounts of $1 million in 2001, and
$755,000 in 2002.  Of our total research
and development expenses, these grants accounted for 6.4% in 2001 and 4.2% in
2002.  Under Israeli law, royalties on
revenues derived from sales of products and services developed using grants
from the Chief Scientist are payable to the Israeli government, generally at
the rate of 3% during the first three years, 4% over the following three years,
and 5% in or after the seventh year.  As
of December 31, 2002, our contingent liability to the Office of the Chief
Scientist in respect of grants received was approximately $2.37 million.

The
funds available for Office of the Chief Scientist grants were reduced in 1998,
and the Israeli authorities have indicated 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.

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D. Trend Information.

We
do not have relevant trend information.

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        
|Pat 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.

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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.

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 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 September 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 Barry University in Italy in 1985 and a B.A. in Computer Science from
The Barry 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 October 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 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.

Under his current employment conditions, 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 October 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, any individual, whether or not such person is
then a member of the board of directors, to 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.  Such
alternate may act as the alternate for several directors and have the
corresponding number of votes.  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.

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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 any entity under the persons
control has or had during the two years preceding the date of appointment any
affiliation with:

| |  | 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.

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.

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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 demand that
the chairman of the audit committee convene an audit committee meeting, and 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 agreed to indemnify our office holders to
the fullest extent permitted under Israeli law.  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 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.

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%.

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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.

Vesting/expiration

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.

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.

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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.

57

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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 a subsidiary- 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.

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.

58

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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.

On
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.

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.

59

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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 9g 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 the audit committee thereof 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                      |  |      | 7.69  |     |  
|1999                      |  |      | 15.13 |     |  
|2000                      |  |      | 30.63 |     |  
|2001                      |  |      | 17.20 |     |  
|2002                      |  |      | 17.00 |     |  
|2001:                     |  |      |       |     |  
|First Quarter             |  | $    | 14.25 |     | $
|Second Quarter            |  |      | 16.00 |     |  
|Third Quarter             |  |      | 17.20 |     |  
|Fourth Quarter            |  |      | 16.43 |     |  
|2002:                     |  |      |       |     |  
|First Quarter             |  | $    | 17.00 |     | $
|Second Quarter            |  |      | 13.35 |     |  
|Third Quarter             |  |      | 12.49 |     |  
|Fourth Quarter            |  |      | 11.70 |     |  
|2003:                     |  |      |       |     |  
|First Quarter             |  | $    | 11.45 |     | $
|                          |  |      |       |     |  
|Most
  recent six months: |  |      |       |     |  
|May 2003                  |  |      | 16.27 |     |  
|April 2003                |  |      | 14.53 |     |  
|March 2003                |  |      | 11.45 |     |  
|February 2003             |  |      | 10.90 |     |  
|January 2003              |  |      | 9.74  |     |  
|December 2002             |  |      | 11.70 |     |  

On June 25, 2003, the last
reported sale price of our ordinary shares on the Nasdaq National Market was
$15.75 per share.

60

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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                      |  |   | 9.79  |  |   | 3.37  | 
|1999                      |  |   | 14.62 |  |   | 6.47  | 
|2000                      |  |   | 31.25 |  |   | 10.83 | 
|2001                      |  |   | 17.02 |  |   | 8.50  | 
|2002                      |  |   | 17.19 |  |   | 8.66  | 
|2001:                     |  |   |       |  |   |       | 
|First Quarter             |  | $ | 14.10 |  | $ | 8.50  | 
|Second Quarter            |  |   | 15.73 |  |   | 9.17  | 
|Third Quarter             |  |   | 17.02 |  |   | 11.60 | 
|Fourth Quarter            |  |   | 16.26 |  |   | 11.85 | 
|2002:                     |  |   |       |  |   |       | 
|First Quarter             |  | $ | 17.19 |  | $ | 12.21 | 
|Second Quarter            |  |   | 13.26 |  |   | 10.21 | 
|Third Quarter             |  |   | 12.29 |  |   | 9.44  | 
|Fourth Quarter            |  |   | 11.53 |  |   | 8.66  | 
|2002:                     |  |   |       |  |   |       | 
|First Quarter             |  | $ | 11.29 |  | $ | 9.09  | 
|                          |  |   |       |  |   |       | 
|Most
  recent six months: |  |   |       |  |   |       | 
|                          |  |   |       |  |   |       | 
|May 2003                  |  |   | 16.23 |  |   | 14.27 | 
|April 2003                |  |   | 14.73 |  |   | 11.46 | 
|March 2003                |  |   | 11.29 |  |   | 10.21 | 
|February 2003             |  |   | 10.75 |  |   | 9.09  | 
|January 2003              |  |   | 9.67  |  |   | 9.13  | 
|December 2002             |  |   | 11.53 |  |   | 9.05  | 

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

61

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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.

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.

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Election of Directors

Directors,
other than external directors, are elected by our shareholders at our annual
general meeting of shareholders, or 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 under certain circumstances.  There is no requirement that a director own
any of our shares.  Directors may
appoint alternate directors in their stead.

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.

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.

Dividends

Our board of directors may from time to time
declare and cause the payment of dividends as it views justified. Dividends may
be paid in assets or shares, debentures, or debentures stock of our company or
of other companies. Our board of directors may decide to distribute our profits
among our shareholders. Dividends that remain unclaimed after seven years will
be forfeited and returned to our company. Unless there are shareholders with
special dividend rights, any dividend declared will be distributed among our
shareholders in proportion to their respective holdings of our shares for which
the dividend is being declared.

Redeemable Shares

Our
articles of association allows 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.                                                                   

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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.

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.

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Changing the Rights Attached to Shares

We
may only change the rights of shares with the approval of a majority of the
holders 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
convene a special general meeting whenever it sees fit, at any place within or
outside of the State of Israel.

A
quorum in a general meeting consists of two or more holders of ordinary shares,
present in person or by proxy, and holding shares conferring in the aggregate
twenty-five percent (25%) or more of the voting power in our company (or any
higher percentage which may be required under applicable rules and
regulations). If there is no quorum within half an hour of the time set, the
meeting is postponed until the following week, or any other time that the
chairman of the board of directors and the shareholders present agree to.  At the postponed meeting, any two
shareholders present in person or by proxy will constitute a quorum.

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.

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.

65

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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:

| |  | 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
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                       
| |  | authorizing us to
  retroactively indemnify an office holder.                                                                                                                                                                                                                                                                                         

66

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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.

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.

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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.

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 representing10% 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.

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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.

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.

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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.

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.

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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.

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.

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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.

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

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| |  | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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.                                                                                                                                                                                                                                                                          

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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.

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).

74

---

---

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.

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;                                                                          
| |   |                                                                                                                                       
| |  | under specified
  conditions, an election to file consolidated tax returns with additional
  related Israeli Industrial Companies; and

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.

75

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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.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.

76

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F. Dividends and Paying Agents

Not
applicable.

G. Statements by Experts

Not
applicable.

H. Documents on Display

We
are subject to the informational requirements of the 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.

77

---

---

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

78

---

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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      |  | $  8,430           |  | $  2,892                    | 
|Liabilities |  | $  7,991           |  | $    961                    | 

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.

79

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PART II

ITEM 13 - DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not
applicable.

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

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, beginning on page F-1.

80

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---

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    

(b)     Exhibits

| | Exhibit No. |  | Exhibit                                                                                                                   
| | ----------- |  | --------------------------------------------------------------------------------------------------------------------------
| |             |  |                                                                                                                           
| |             |  |                                                                                                                           
| | *1.1        |  | Memorandum of Association
  of Registrant, as amended.                                                                    
| | *1.2        |  | Articles of Association of
  Registrant, as amended.                                                                      
| | **4.1       |  | Employment Agreement dated
  December 1, 1999, between Point of Sale Limited and Danny Moshaioff.                         
| | **4.2       |  | Agreement dated December
  30, 1999, between Point of Sale Limited and the Corex Development Company (C.
  D. C.) Limited.
| | 8.1         |  | Significant  subsidiaries of Retalix Ltd.                                                                                 
| | 10.1        |  | Consent of Kesselman &
  Kesselman, a member of PriceWaterhouseCoopers International Limited.                             
| | 99.1        |  | Certification pursuant to
  Section 906 of the Sarbanes-Oxley Act of 2002.                                                
| | 99.2        |  | Certification pursuant to
  Section 906 of the Sarbanes-Oxley Act of 2002                                                 

|*  | 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.

81

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RETALIX LTD.(An Israeli Corporation)
2002 ANNUAL REPORT

TABLE OF CONTENTS

|                                   |                                                 | Page
|---------------------------------- | ----------------------------------------------- | ----
|REPORT OF INDEPENDENT AUDITORS     |                                                 | II  
|                                   |                                                 |     
|CONSOLIDATED FINANCIAL STATEMENTS: |                                                 |     
|                                   |                                                 |     
|                                   | Balance
  sheets                                |     
|                                   |                                                 |     
|                                   | Statements
  of income (loss)                   |     
|                                   |                                                 |     
|                                   | Statements
  of changes in shareholders equity |     
|                                   |                                                 |     
|                                   | Statements
  of cash flows                      |     
|                                   |                                                 |     
|                                   | Notes to
  financial statements                 |     
|                                   |                                                 |     
|EXHIBIT - DETAILS OF SUBSIDIARIES  |                                                 | XLII

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

---

---

---

I

---

---

|
|
|
|



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 1g 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.

/s/ Kesselman & Kesselman

Tel-Aviv, Israel     February 12, 2003

Kesselman & Kesselman is a member of PricewaterhouseCoopers
International Limited, a company limited by guarantee registered in England and
Wales.

---

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RETALIX LTD.CONSOLIDATED BALANCE SHEETS

|                                                                          |                                                                               | December 31         |       
|------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ------------------- | ------
|                                                                          |                                                                               |                     |       
|                                                                          |                                                                               | 2002                |       
|                                                                          |                                                                               |                     |       
|                                                                          |                                                                               | U.S. $ in thousands |       
|                                                                          |                                                                               |                     |       
|A 
  s  s  e  t  s                                                        |                                                                               |                     |       
|CURRENT
  ASSETS
  (note 10):                                             |                                                                               |                     |       
|                                                                          | Cash and
  cash equivalents                                                   |                     |       
|                                                                          | Short-term
  bank deposits                                                    |                     |       
|                                                                          | Marketable
  securities                                                       |                     |       
|                                                                          | Accounts
  receivable (note 11a):                                             |                     |       
|                                                                          | Trade                                                                         |                     |       
|                                                                          | Other                                                                         |                     |       
|                                                                          | Deferred
  income taxes (note 9g)                                             |                     |       
|                                                                          | Inventories (note 11b)                                                        |                     |       
|                                                                          |                                                                               |                     |       
|                                                                          | T o t a
  l  current assets                                                   |                     |       
|                                                                          |                                                                               |                     |       
|NON-CURRENT
  ASSETS(note 10):                                            |                                                                               |                     |       
|                                                                          | Marketable
  securities - bonds (note 11c)                                    |                     |       
|                                                                          | Deferred
  income taxes (note 9g)                                             |                     |       
|                                                                          | Long-term
  bank deposit                                                      |                     |       
|                                                                          | Long-term
  loans to employees (note 11e)                                     |                     |       
|                                                                          | Amounts
  funded in respect of employee rights upon
      retirement (note 6) |                     |       
|                                                                          | Other                                                                         |                     |       
|                                                                          |                                                                               |                     |       
|                                                                          |                                                                               |                     | 7,240 
|                                                                          |                                                                               |                     |       
|PROPERTY, PLANT AND EQUIPMENT,net  (note 3)                               |                                                                               |                     | 11,386
|                                                                          |                                                                               |                     |       
|GOODWILL                                                                  |                                                                               |                     | 16,856
|                                                                          |                                                                               |                     |       
|OTHER INTANGIBLE ASSETS, net of
  accumulated
      amortization (note 4) |                                                                               |                     | 3,288 
|                                                                          |                                                                               |                     |       
|                                                                          |                                                                               |                     | 94,774
|                                                                          |                                                                               |                     |       
|                                                                          |                                                                               |                     |       

|By: /s/ Barry Shaked                                                              |  | By: /s/ Danny Moshaioff                  
|--------------------------------------------------------------------------------- |  | -----------------------------------------
|                                                                                  |  |                                          
|Barry Shaked
  Chairman of the Board
  of Directors and
  Chief Executive Officer |  | Danny Moshaioff
  Chief Financial Officer

III

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|                                                  |                                                                                                                                                         | December 31         |       
|------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | ------
|                                                  |                                                                                                                                                         |                     |       
|                                                  |                                                                                                                                                         | 2002                |       
|                                                  |                                                                                                                                                         |                     |       
|                                                  |                                                                                                                                                         | U.S. $ in thousands |       
|                                                  |                                                                                                                                                         |                     |       
|Liabilities and shareholders equity              |                                                                                                                                                         |                     |       
|CURRENT
  LIABILITIES (note 10):                  |                                                                                                                                                         |                     |       
|                                                  | Short-term
  bank credit                                                                                                                                |                     |       
|                                                  | Current
  maturities of long-term bank 
  loans  (note 5)                                                                                               |                     |       
|                                                  | Accounts
  payable and accruals:                                                                                                                        |                     |       
|                                                  | Trade                                                                                                                                                   |                     |       
|                                                  | Employees
  and employee institutions                                                                                                                   |                     |       
|                                                  | 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 6)                                                                                                              |                     |       
|                                                  |                                                                                                                                                         |                     |       
|                                                  | T o t a
  l  long-term liabilities                                                                                                                      |                     |       
|                                                  |                                                                                                                                                         |                     |       
|COMMITMENTS  AND CONTINGENT   LIABILITIES(note 7) |                                                                                                                                                         |                     |       
|                                                  |                                                                                                                                                         |                     |       
|                                                  | T o t a
  l  liabilities                                                                                                                                |                     |       
|                                                  |                                                                                                                                                         |                     |       
|MINORITY INTERESTS                                |                                                                                                                                                         |                     | 1,260 
|                                                  |                                                                                                                                                         |                     |       
|SHAREHOLDERS EQUITY
  (note 8):                  |                                                                                                                                                         |                     |       
|                                                  | 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                                                                                                                       |                     |       
|                                                  |                                                                                                                                                         |                     |       
|                                                  |                                                                                                                                                         |                     | 94,774
|                                                  |                                                                                                                                                         |                     |       
|                                                  |                                                                                                                                                         |                     |       

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

IV

---

---

RETALIX LTD.CONSOLIDATED STATEMENTS OF INCOME (LOSS)

|                                              |                                                | Year ended December 31                     |       
|--------------------------------------------- | ---------------------------------------------- | ------------------------------------------ | ------
|                                              |                                                |                                            |       
|                                              |                                                | 2002                                       |       
|                                              |                                                |                                            |       
|                                              |                                                | U.S. $ in thousands(except per share data) |       
|                                              |                                                |                                            |       
|REVENUES (note 13a):                          |                                                |                                            |       
|                                              | 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                                  |                                                |                                            | 54,281
|                                              |                                                |                                            |       
|OPERATING INCOME (EXPENSES):                  |                                                |                                            |       
|                                              | Research and development expenses - net        |                                            |       
|                                              | Selling and marketing expenses - net           |                                            |       
|                                              | General and administrative expenses (note 14a) |                                            |       
|                                              | Other general income - net (note 14c)          |                                            |       
|                                              |                                                |                                            |       
|                                              | T o t a l  operating expenses                  |                                            |       
|                                              |                                                |                                            |       
|INCOME (LOSS) FROM OPERATIONS                 |                                                |                                            | 7,661 
|FINANCIAL INCOME (EXPENSES) -net
  (note 14b) |                                                |                                            | (499  
|GAIN ARISING FROM ISSUANCE OF SHARES BY       |                                                |                                            |       
|                                              | A SUBSIDIARY                                   |                                            |       
|OTHER EXPENSES                                |                                                |                                            |       
|                                              |                                                |                                            |       
|INCOME (LOSS) BEFORE TAXES ON INCOME          |                                                |                                            | 7,162 
|TAXES ON INCOME(note
  9)                     |                                                |                                            | 2,103 
|                                              |                                                |                                            |       
|INCOME (LOSS) BEFORE MINORITY INTERESTS       |                                                |                                            | 5,059 
|MINORITY INTERESTS IN LOSSES OF               |                                                |                                            |       
|                                              | SUBSIDIARIES                                   |                                            |       
|                                              |                                                |                                            |       
|NET INCOME (LOSS)                             |                                                |                                            | 5,633 
|                                              |                                                |                                            |       
|EARNINGS (LOSS) PER SHARE:                    |                                                |                                            |       
|                                              | (note 14d):                                    |                                            |       
|                                              | Basic                                          |                                            |       
|                                              |                                                |                                            |       
|                                              | Diluted                                        |                                            |       
|                                              |                                                |                                            |       
|WEIGHTED AVERAGE NUMBER OF SHARES USED        |                                                |                                            |       
|                                              | IN COMPUTATION OF EARNINGS (LOSS) PER          |                                            |       
|                                              | SHARE - IN THOUSANDS (note 14d):               |                                            |       
|                                              | Basic                                          |                                            |       
|                                              |                                                |                                            |       
|                                              | Diluted                                        |                                            |       
|                                              |                                                |                                            |       
|                                              |                                                |                                            |       

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

V

---

---

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

|                                  |                                                                                              | Share capital |        | Additional
  Paid -in
  capital |  | Loansgranted to
  employees
  to finance
  acquisition of
  Company
  shares |       | Deferred stock
  compensation |  | Retained
  earnings |        | Total 
|--------------------------------- | -------------------------------------------------------------------------------------------- | ------------- | ------ | ------------------------------- |  | ---------------------------------------------------------------------------- | ----- | ----------------------------- |  | ------------------- | ------ | ------
|                                 
|ordinary shares                  
|                                 
|Number of
  shares in
  thousands |                                                                                              | Amount       
|                                  |                                                                                              |               |        |                                 |  |                                                                              |       |                               |  |                     |        |       
|                                  |                                                                                              |               |        |                                 |  | U . S .  
  $  i n  t h o u s a  n d s                                      
|                                  |                                                                                              |               |        |                                 |  |                                                                             
|BALANCE AT JANUARY 1, 2000        |                                                                                              |               | 10,805 |                                 |  |                                                                              | 3,206 |                               |  |                     | 16,073 |       
|                                  |                                                                                              |               |        |                                 |  |                                                                              |       |                               |  |                     |        |       
|CHANGES DURING 2000:              |                                                                                              |               |        |                                 |  |                                                                              |       |                               |  |                     |        |       
|                                  | Net loss                                                                                     |               |        |                                 |  |                                                                              |       |                               |  |                     |        |       
|                                  | 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                                                   |               |        |                                 |  |                                                                              |       |                               |  |                     |        |       
|                                  | Amortization of deferred compensation related to employee
      stock option grants          |               |        |                                 |  |                                                                              |       |                               |  |                     |        |       
|                                  |                                                                                              |               |        |                                 |  |                                                                              |       |                               |  |                     |        |       
|BALANCE AT DECEMBER 31, 2000      |                                                                                              |               | 11,313 |                                 |  |                                                                              | 3,331 |                               |  |                     | 26,174 |       
|                                  |                                                                                              |               |        |                                 |  |                                                                              |       |                               |  |                     |        |       
|                                  |                                                                                              |               |        |                                 |  |                                                                              |       |                               |  |                     |        |       
|CHANGES DURING 2001:              |                                                                                              |               |        |                                 |  |                                                                              |       |                               |  |                     |        |       
|                                  | Net income                                                                                   |               |        |                                 |  |                                                                              |       |                               |  |                     |        |       
|                                  | 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 |       
|CHANGES
  DURING 2002:            |                                                                                              |               |        |                                 |  |                                                                              |       |                               |  |                     |        |       
|                                  | Net income                                                                                   |               |        |                                 |  |                                                                              |       |                               |  |                     |        |       
|                                  | 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 |       
|                                  |                                                                                              |               |        |                                 |  |                                                                              |       |                               |  |                     |        |       

* Net of share issuance expenses.The accompanying notes are
an integral part of the financial statements.

VI

---

---

(Continued) - 1

RETALIX LTD.CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                |                                                           | Year ended December 31 |       
|--------------------------------------------------------------- | --------------------------------------------------------- | ---------------------- | ------
|                                                                |                                                           |                        |       
|                                                                |                                                           | 2002                   |       
|                                                                |                                                           |                        |       
|                                                                |                                                           | U.S. $ in thousands    |       
|                                                                |                                                           |                        |       
|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                           |                        |       
|                                                                | 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 |                                                           |                        | 10,050
|                                                                |                                                           |                        |       
|                                                                |                                                           |                        |       

VII

---

---

(Continued)
- 2

RETALIX LTD.CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                      |                                                             | Year ended December 31 | 
|------------------------------------- | ----------------------------------------------------------- | ---------------------- | 
|                                      |                                                             |                        | 
|                                      |                                                             | 2002                   | 
|                                      |                                                             |                        | 
|                                      |                                                             | U.S. $ in thousands    | 
|                                      |                                                             |                        | 
|                                      | 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

SUPPLEMENTARYDISCLOSURE
OF CASH FLOW INFORMATION:



|                                                                 |                                                             | Year ended December 31 | 
|---------------------------------------------------------------- | ----------------------------------------------------------- | ---------------------- | 
|                                                                 |                                                             |                        | 
|                                                                 |                                                             | 2002                   | 
|                                                                 |                                                             |                        | 
|                                                                 |                                                             | U.S. $ in thousands    | 
|                                                                 |                                                             |                        | 
|(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
  arising on acquisition                           |                        | 
|                                                                 | Issuance of
  the Companys share capital                   |                        | 
|                                                                 |                                                             |                        | 
|                                                                 |                                                             |                        | 
|                                                                 |                                                             |                        | 
|                                                                 |                                                             |                        | 
|(b) Supplementarydisclosure of cash flow information -           |                                                             |                        | 
|                                                                 | cash paid
  during the year for:                            |                        | 
|                                                                 | Interest                                                    |                        | 
|                                                                 |                                                             |                        | 
|                                                                 | Income tax                                                  |                        | 
|                                                                 |                                                             |                        | 
|                                                                 |                                                             |                        | 

(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 $1,943,000.
| |     |                                                                                                                                                                                                       
| | (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 the financial
statements.

IX

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

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

X

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

| | b. | Principles of consolidation :                                                                                                                                                                                         
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                       
| |    | 1)                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                       
| |    | 2)                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                       
| |    | 3)                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                       
| | c. | 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.    
| |    |                                                                                                                                                                                                                       
| | d. | 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.
| |    |                                                                                                                                                                                                                       
| | e. | Inventories                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                       
| |    | Inventories are valued at
  the lower of cost or market. Cost is determined as follows:                                                                                                                               
| |    |                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                       

XI

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES(continued):

| | f.                                   | Property, plant and equipment:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                      | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                      | 2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Computers
  and peripheral equipment |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Vehicles                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Office
  furniture and equipment     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Building                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | g.                                   | 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 k. 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.

XII

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES(continued):

| | h. | Impairment of assets:
| | -- | ---------------------
| |    |                      
| |    | 1)                   
| |    |                      
| |    | 2)                   
| |    |                      
| |    |                      
| |    |                      
| | i. | Income taxes:        
| |    |                      
| |    | 1)                   
| |    |                      
| |    | 2)                   
| |    |                      
| |    | 3)                   
| |    |                      
| |    | 4)                   

XIII

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES(continued):

| | j. | Revenue recognition                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Sales of
  products is recognized upon delivery (for hardware - i.e. the point of which
  the title passes to customer), 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.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The Group
  does not grant a right of return on products sold to customers and resellers.
  If uncertainties exist, such as the granting to the customer of a right of
  cancellation for up to thirty days, revenue is recognized when the
  uncertainties are resolved.                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Revenues
  from projects are recognized upon completion.                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Revenues
  from long-term agreements for the sale of an unfixed number of licenses,
  rendering maintenance services and services with regard to market information
  are recognized ratably over the agreement period or as services are
  performed.                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | k. | Research and development:                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | 2)                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | l. | 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.                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | m. | Allowance for doubtful accounts                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The allowance for doubtful accounts is determined for specific debts
  doubtful of collection.                                                                                                                                                                                                                                                                                                                                                        

XIV

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES(continued):

| | n. | 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 14d.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | o. | Comprehensive income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The Company
  has no comprehensive income components other than net income or loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | p. | 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                  |      
|------------------------------------------ | ---------------------------------------- | --------------------------------------- | -----
|                                           |                                          |                                         |      
|                                           |                                          | 2002                                    |      
|                                           |                                          |                                         |      
|                                           |                                          | In thousands, except for per share data |      
|                                           |                                          |                                         |      
|Net income (loss), as reported             |                                          |                                         | 5,633
|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)                |                                          |                                         | 675  
|                                           |                                          |                                         |      
|Earnings per share:                        |                                          |                                         |      
|                                           | Basic - as reported                      |                                         |      
|                                           |                                          |                                         |      
|                                           | Basic - pro forma                        |                                         |      
|                                           |                                          |                                         |      
|                                           | Diluted - as reported                    |                                         |      
|                                           |                                          |                                         |      
|                                           | Diluted - pro forma                      |                                         |      
|                                           |                                          |                                         |      

XV

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES(continued):

| | q. | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | r. | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | s. | Recently issued accounting pronouncements in the United States:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

XVI

---

---

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.                                                                                                                                                                                                                                                                                                                                                                                                                                                          

XVII

---

---

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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | t. | Reclassification                                                                                   
| |    |                                                                                                    
| |    | Certain
  comparative figures have been reclassified to confirm to the current year
  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.                                                                                                                                                                  

XVIII

---

---

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.Com
  Ltd. (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 (partly
  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 33.3% of the
  shares of Store Alliance.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | 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) by
  Store Alliance, in consideration of the issuance of 11.25% of the shares of
  Store Alliance to Discount Investment Corporation Ltd. The excess of cost of
  investment, in the amount of approximately $ 1,205,000 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 8b(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.

XIX

---

---

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.                                                                                               

XX

---

---

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 and identified intangible assets to be amortized over their
  estimated useful life (four to eight years).                                                                                                                                          
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 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 and identified
  intangible assets to be amortized over their estimated useful life (four to
  eight years).
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 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 and identified
  intangible assets to be amortized over estimated useful life (three to five
  years).                                                                                                                                       

NOTE
3 - PROPERTY, PLANT AND EQUIPMENT:

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

|                                                            |                                      | December 31           |       
|----------------------------------------------------------- | ------------------------------------ | --------------------- | ------
|                                                            |                                      |                       |       
|                                                            |                                      | 2002                  |       
|                                                            |                                      |                       |       
|                                                            |                                      | U.S. $ in
  thousands |       
|                                                            |                                      |                       |       
|                                                            | Computers
  and peripheral equipment |                       |       
|                                                            | Vehicles                             |                       |       
|                                                            | Office
  furniture and equipment     |                       |       
|                                                            | Leasehold
  improvements             |                       |       
|                                                            | Land and
  building                  |                       |       
|                                                            |                                      |                       |       
|                                                            |                                      |                       | 22,121
|Less -
  accumulated depreciation and          amortization |                                      |                       | 10,735
|                                                            |                                      |                       |       
|                                                            |                                      |                       | 11,386
|                                                            |                                      |                       |       

| | b. | As for
  geographical locations, see note 13b.
| | -- | ----------------------------------------------

XXI

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

| | c. | Depreciation
  and amortization expenses totaled $ 2,255,000, $ 2,064,000, 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 7c.                                                                                                     

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 $ 21.1 million
  as goodwill and $ 3.3 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 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 |      
|------------------------------------------------------------------ |  | --------------------------- | ------ | ------ |  | ----- | -----
|                                                                   |  |                             |        |        |  |       |      
|                                                                   |  | Adjusted U.S $ in thousands |       
|                                                                   |  |                             |       
|Balance as
  of January 1, 2002                                    |  |                             | 14,182 |        |  |       | 2,709
|Goodwill
  attributed to  business unit
      sold during the year |  |                             | (35    | )      |  |       |      
|                                                                   |  |                             |        |        |  |       |      
|Balance as
  of December 31, 2002                                  |  |                             | 14,147 |        |  |       | 2,709
|                                                                   |  |                             |        |        |  |       |      

XXII

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

| | c. | Intangible assets:
| | -- | ------------------
| |    |                   
| |    | 1)                

| |                                                      |  | Original amount       |       | Amortized balance     | 
| | ---------------------------------------------------- |  | --------------------- | ----- | --------------------- | 
| |                                                      |  |                       |       |                       | 
| |                                                      |  | December
  31         |       | December
  31         | 
| |                                                      |  |                       |       |                       | 
| |                                                      |  | 2002                  |       | 2001                  | 
| |                                                      |  |                       |       |                       | 
| |                                                      |  | U.S. $ in
  thousands |       | U.S. $ in
  thousands | 
| |                                                      |  |                       |       |                       | 
| | Software
  development costs                         |  |                       | 411   |                       | 
| | Software
  rights and web site
    development costs |  |                       | 2,197 |                       | 
| | Other
  identified intangible assets                 |  |                       | 3,534 |                       | 
| |                                                      |  |                       |       |                       | 
| |                                                      |  |                       | 6,142 |                       | 
| |                                                      |  |                       |       |                       | 

| |  | 2) | Intangible
  assets amortization expenses totaled $ 577,000, $ 3,068,000 and $ 1,969,000
  in 2002, 2001 and 2000, respectively. 
  Projected annual amortization expenses are approximately $ 85,000 for
  each of the following six years.
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                                                                                                                                                                                                                                             
| |  | 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 |      
| | -------------------------------- | -------------------------- | ------------------------- | ----- | ---- |  | ---- | -----
| |                                  |                            |                           |       |      |  |      |      
| |                                  |                            | U.S. $ In
  thousands     |      
| |                                  |                            | (except per
  share data) |      
| |                                  |                            |                           |      
| |                                  |                            |                           |       |      |  |      |      
| | Reported income*                 |                            |                           | 5,633 |      |  |      | 4,045
| | Add back - goodwill amortization |                            |                           |       |      |  |      | 2,834
| |                                  |                            |                           |       |      |  |      |      
| | Adjusted net income (loss)       |                            |                           | 5,633 |      |  |      | 6,879
| |                                  |                            |                           |       |      |  |      |      
| | Earnings per share:              |                            |                           |       |      |  |      |      
| |                                  | Basic:                     |                           |       |      |  |      |      
| |                                  | Reported income (loss)     |                           |       | 0.47 |  |      |      
| |                                  |                            |                           |       |      |  |      |      
| |                                  | Adjusted net income (loss) |                           |       | 0.47 |  |      |      
| |                                  |                            |                           |       |      |  |      |      
| | Diluted:                         |                            |                           |       |      |  |      |      
| |                                  | Reported income (loss)     |                           |       | 0.45 |  |      |      
| |                                  |                            |                           |       |      |  |      |      
| |                                  | Adjusted net income (loss) |                           |       | 0.45 |  |      |      
| |                                  |                            |                           |       |      |  |      |      
| |                                  |                            |                           |       |      |  |      |      

* the reported income for 2001 includes gain arising from issuance of
shares by a subsidiary amounted to $ 3,215,000.

XXIII

---

---

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         |       
| | ----------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ |  | --------------------- | ------
| |                                                                                                                   |  |                                            |  |                       |       
| |                                                                                                                   |  | %                                          |  | 2002                  |       
| |                                                                                                                   |  |                                            |  |                       |       
| |                                                                                                                   |  |                                            |  | U.S. $ in
  thousands |       
| |                                                                                                                   |  |                                            |  |                       |       
| | U.S Dollar                                                                                                        |  | LIBOR* + 0.45 to 0.675                     |  |                       | 10,742
| | Pound Sterling                                                                                                    |  | LIBOR** +
  0.7                            |  |                       | 888   
| | Israeli currency                                                                                                  |  | Prime***-
  0.3 to - 0.7  or annual of 6.9 |  |                       | 3,991 
| | Other                                                                                                             |  | Up to 11.0                                 |  |                       | 125   
| | Loan from shareholders of a subsidiary
      linked to the Israeli Consumer Price
      Index (the Israeli CPI) |  | 4.0                                        |  |                       | 171   
| |                                                                                                                   |  |                                            |  |                       |       
| |                                                                                                                   |  |                                            |  |                       | 15,792
| | Less - current maturities                                                                                         |  |                                            |  |                       | 10,003
| |                                                                                                                   |  |                                            |  |                       |       
| |                                                                                                                   |  |                                            |  |                       | 5,789 
| |                                                                                                                   |  |                                            |  |                       |       

| | *   | 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         |      
| | --------------------------- |  | ------------------- | -----
| |                             |  |                     |      
| |                             |  | 2002                |      
| |                             |  |                     |      
| |                             |  | U.S. $ in thousands |      
| |                             |  |                     |      
| | Second year                 |  |                     | 3,368
| | Third year                  |  |                     | 2,250
| | Fourth year                 |  |                     |      
| | Fifth year
  and thereafter |  |                     | 171  
| |                             |  |                     |      
| |                             |  |                     | 5,789
| |                             |  |                     |      

| | c. | As to pledges on assets to secure a $ 2.5 million loan, see note 7c.
| | -- | --------------------------------------------------------------------

XXIV

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 6 - EMPLOYEE RIGHTS UPON
  RETIREMENT:                
|-----------------------------------------------------------
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|NOTE 7
  - COMMITMENTS, PLEDGES AND CONTINGENT LIABILITIES:
|                                                           
|a.                                                         
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           

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

XXV

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 7
  - COMMITMENTS, PLEDGES AND A CONTINGENT LIABILITY(continued):
|----------------------------------------------------------------------
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      

| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

XXVI

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 7
  - COMMITMENTS, PLEDGES AND A CONTINGENT LIABILITY(continued):
|----------------------------------------------------------------------
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      

XXVII

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 8 - SHAREHOLDERS EQUITY:
|------------------------------
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              

XXVIII

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 8 - SHAREHOLDERS EQUITY(continued):
|-----------------------------------------
|                                         
|                                         

|                                                                      |                             | 2002   |           | 2001                                |   | 2000  
|--------------------------------------------------------------------- | --------------------------- | ------ | --------- | ----------------------------------- | - | ------
|                                                                      |                             |        |           |                                     |   |       
|                                                                      |                             | Number |           | Weighted average
  exercise
  price |   | Number
|                                                                      |                             |        |           |                                     |   |       
|                                                                      |                             |        |           |                                     |   |       
|                                                                      |                             |        |           |                                     |   |       
|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                    | 

XXIX

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 8 - SHAREHOLDERS EQUITY(continued):
|-----------------------------------------
|                                         

|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

XXX

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 8 - SHAREHOLDERS EQUITY(continued):
|-----------------------------------------
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|NOTE 9 - TAXES ON INCOME:                
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         

XXXI

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9 - 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 8c(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%.                                                                                                                                                                                                                                                                                                                                                                                                               

XXXII

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9 - 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,                  |      
| | -------------------------------------------------------------------------- | -------------------------------- | ----------------------------- | -----
| |                                                                            |                                  |                               |      
| |                                                                            |                                  | 2002                          |      
| |                                                                            |                                  |                               |      
| |                                                                            |                                  | (In thousands ofU.S. dollars) |      
| |                                                                            |                                  |                               |      
| | 1)    Provided
  in respect of the following:                              |                                  |                               |      
| |                                                                            | Provisions for employee
  rights |                               |      
| |                                                                            | Carryforward
  tax losses        |                               |      
| |                                                                            | Doubtful
  accounts              |                               |      
| |                                                                            | Other                            |                               |      
| |                                                                            |                                  |                               |      
| |                                                                            |                                  |                               |      
| |                                                                            | L e s s-
  valuation allowance   |                               |      
| |                                                                            |                                  |                               |      
| |                                                                            |                                  |                               | 1,330
| |                                                                            |                                  |                               |      
| |                                                                            |                                  |                               |      
| | 2)    The
  deferred taxes are presented in the balance sheets as follows:

| |                                                                           |  |                       |       |      |  |  |     |   | 
| | ------------------------------------------------------------------------- |  | --------------------- | ----- | ---- |  |  | --- | - | 
| |                                                                           |  | December 31           |      
| |                                                                           |  |                       |      
| |                                                                           |  | 2002                  |       | 2001 | 
| |                                                                           |  |                       |       |      | 
| |                                                                           |  | U.S. $ in
  thousands |      
| |                                                                           |  |                       |      
| | As a current
  asset                                                      |  |                       | 681   |      |  |  |     |   | 
| | As a
  non-current asset                                                  |  |                       | 649   |      |  |  | 578 |   | 
| | As current
  liability presented in other
  accounts payable and acrruals |  |                       |       |      |  |  | (8  | ) | 
| |                                                                           |  |                       |       |      |  |  |     |   | 
| |                                                                           |  |                       | 1,330 |      |  |  | 570 |   | 
| |                                                                           |  |                       |       |      |  |  |     |   | 

XXXIII

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 9 - TAXES ON INCOME (continued):
|-------------------------------------
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     

| |                                                                     |             |  | 2002                |       |   | 2001  |        |   | 2000   |       
| | ------------------------------------------------------------------- | ----------- |  | ------------------- | ----- | - | ----- | ------ | - | ------ | ------
| |                                                                     |             |  |                     |       |   |       |        |   |        |       
| |                                                                     |             |  | U.S. $ in thousands |      
| |                                                                     |             |  |                     |      
| |                                                                     |             |  |                     |       |   |       |        |   |        |       
| | 1)    Income
  (loss) before taxes on income:                       |             |  |                     |       |   |       |        |   |        |       
| |                                                                     | Israeli     |  |                     | (720  | ) |       | (3,732 | ) |        | (1,737
| |                                                                     | Non-Israeli |  |                     | 7,882 |   |       | 8,278  |   |        | (85   
| |                                                                     |             |  |                     |       |   |       |        |   |        |       
| |                                                                     |             |  | 7,162               |       |   | 4,546 |        |   | (1,822 | )     
| |                                                                     |             |  |                     |       |   |       |        |   |        |       
| | 2)    Income
  taxes included
          in
  the income statements: |             |  |                     |       |   |       |        |   |        |       
| |                                                                     | Current:    |  |                     |       |   |       |        |   |        |       
| |                                                                     | Israeli     |  |                     | 2,328 |   |       | 531    |   |        | 28    
| |                                                                     | Non-Israeli |  |                     | 530   |   |       | 91     |   |        | 78    
| |                                                                     |             |  |                     |       |   |       |        |   |        |       
| |                                                                     |             |  | 2,858               |       |   | 622   |        |   | 106    |       
| |                                                                     |             |  |                     |       |   |       |        |   |        |       
| |                                                                     | Deferred:   |  |                     |       |   |       |        |   |        |       
| |                                                                     | Israeli     |  |                     | (310  | ) |       | 78     |   |        |       
| |                                                                     | Non-Israeli |  |                     | (445  | ) |       | 6      |   |        | 18    
| |                                                                     |             |  |                     |       |   |       |        |   |        |       
| |                                                                     |             |  | (755                | )     |   | 84    |        |   | 18     |       
| |                                                                     |             |  |                     |       |   |       |        |   |        |       
| |                                                                     |             |  | 2,103               |       |   | 706   |        |   | 124    |       
| |                                                                     |             |  |                     |       |   |       |        |   |        |       
| |                                                                     |             |  |                     |       |   |       |        |   |        |       

XXXIV

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 9 - TAXES ON INCOME (continued):
|-------------------------------------
|                                     
|                                     

| |                                                                                                                                                                                                    |  |  | 2002                |  |  | 2001    |  |  | 2000    | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------------------- |  |  | ------- |  |  | ------- | 
| |                                                                                                                                                                                                    |  |  |                     |  |  |         |  |  |         | 
| |                                                                                                                                                                                                    |  |  | U.S. $ in thousands | 
| |                                                                                                                                                                                                    |  |  |                     | 
| | Income
  before taxes on income, as reported
  in the income statements                                                                                                                            |  |  | 7,162               |  |  | 4,546   |  |  | (1,822) | 
| |                                                                                                                                                                                                    |  |  |                     |  |  |         |  |  |         | 
| | Theoretical
  tax expense (income)                                                                                                                                                                 |  |  | 2,578               |  |  | 1,637   |  |  | (656)   | 
| |                                                                                                                                                                                                    |  |  |                     |  |  |         |  |  |         | 
| | L e s s -
  tax benefits arising from
  approved enterprise status                                                                                                                                 |  |  | 911                 |  |  | 23      |  |  |         | 
| |                                                                                                                                                                                                    |  |  |                     |  |  |         |  |  |         | 
| |                                                                                                                                                                                                    |  |  | 1,667               |  |  | 1,614   |  |  | (656)   | 
| | Increase
  (decrease) in taxes resulting from permanent
  differences:                                                                                                                             |  |  |                     |  |  |         |  |  |         | 
| | Disallowable
  deductions                                                                                                                                                                          |  |  | 1,268               |  |  | 996     |  |  | 481     | 
| | Tax exempt
  income                                                                                                                                                                                |  |  | (694)               |  |  | (1,954) |  |  | (265)   | 
| | Increase
  (decrease) in taxes resulting from different tax rates for non - Israeli
  subsidiaries                                                                                                 |  |  | 98                  |  |  | (27)    |  |  | 4       | 
| | Increase in
  taxes in respect of tax losses incurred in thereported year for which deferred
  taxes were
  not created                                                                            |  |  | 264                 |  |  | 285     |  |  | 265     | 
| | Decrease in
  taxes resulting from utilization, in the
  reported years, of carryforward tax losses and expenses
  for which deferred taxes were not created in previous
  years                   |  |  | (911)               |  |  | (994)   |  |  | (564)   | 
| | Increase
  (decrease) in taxes in respect of differences in
  measurement of income from marketable securities                                                                                     |  |  |                     |  |  |         |  |  | 159     | 
| | 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                 |  |  | 786     |  |  | 700     | 
| |                                                                                                                                                                                                    |  |  |                     |  |  |         |  |  |         | 
| | Income taxes
  for the reported years                                                                                                                                                              |  |  | 2,103               |  |  | 706     |  |  | 124     | 
| |                                                                                                                                                                                                    |  |  |                     |  |  |         |  |  |         | 
| |                                                                                                                                                                                                    |  |  |                     |  |  |         |  |  |         | 

| | 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.

XXXV

---

---

RETALIX
LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10 - MONETARY BALANCES IN
NON-DOLLAR CURRENCIES:

| |             | December
  31, 2002           | 
| | ----------- | ----------------------------- | 
| |             |                               | 
| |             | Israeli
  currency            | 
| |             |                               | 
| |             | Linked to
  the Israeli
  CPI | 
| |             |                               | 
| |             | U.S.  $ in thousands          | 
| |             |                               | 
| |             |                               | 
| | Assets      |                               | 
| |             |                               | 
| | Liabilities |                               | 
| |             |                               | 

NOTE 11 - SUPPLEMENTARY BALANCE SHEET INFORMATION:

|   |                      | December 31         |                                                  
|-- | -------------------- | ------------------- | -------------------------------------------------
|   |                      |                     |                                                  
|   |                      | 2002                |                                                  
|   |                      |                     |                                                  
|   |                      | U.S. $ in thousands |                                                  
|   |                      |                     |                                                  
|a. | Accounts receivable: |                     |                                                  
|   | 1)                   | Trade:              |                                                  
|   |                      |                     | Open
  accounts                                  
|   |                      |                     | Less -
  allowance for doubtful
      accounts   
|   |                      |                     |                                                  
|   |                      |                     | 20,635                                           
|   |                      |                     |                                                  
|   |                      |                     |                                                  
|   | 2)                   | Other:              |                                                  
|   |                      |                     | Israeli
  Government departments
    and agencies
|   |                      |                     | Employees                                        
|   |                      |                     | Prepaid
  expenses                               
|   |                      |                     | Sundry                                           
|   |                      |                     |                                                  
|   |                      |                     | 1,364                                            
|   |                      |                     |                                                  
|   |                      |                     |                                                  
|b. | Inventories:         |                     |                                                  
|   |                      |                     | Raw
  materials and supplies                     
|   |                      |                     | Products in
  process                            
|   |                      |                     | Finished
  products                              
|   |                      |                     |                                                  
|   |                      |                     | 1,863                                            
|   |                      |                     |                                                  

XXXVI

---

---

RETALIX
LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 11 - 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 | 
| | ---------------- | ----- |  | ------------------ |  |  | ------------------- |  |  | ---------------------- | 
| |                  |       |  |                    |  |  |                     |  |  |                        | 
| | $ in  thousands  |      
| |                  |      
| |                  |       |  |                    |  |  |                     |  |  |                        | 
| |                  | 5,164 |  |                    |  |  | 78                  |  |  |                        | 
| |                  |       |  |                    |  |  |                     |  |  |                        | 

| | 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             |                 
| |  |  | ----------------------- | ----------------
| |  |  |                         |                 
| |  |  | 2002                    |                 
| |  |  |                         |                 
| |  |  | $ in thousands          |                 
| |  |  |                         |                 
| |  |  | 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.

XXXVII

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 11 - 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 12 - 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 11c.                                                                                                                                                                                                                                                                         
|                                                         |    |                                                                                                                                                                                                                                                                                                                                                                                     

XXXVIII

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12 - 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 13 -
  SEGMENT INFORMATION:
|                                 |    |                                                                                                                                                                                                                                                                                                                                 
|                                 | a. | The Company
  conducts business globally and is managed geographically. The Company and its
  subsidiaries reportable segments are strategic business units which are
  distinguished by the geographical areas in which they generate revenues,
  based on 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 |       
| | ---------------------------------------------------------------------------- | --------------- |  | ---------------------- | ------
| |                                                                              |                 |  |                        |       
| |                                                                              |                 |  | 2002                   |       
| |                                                                              |                 |  |                        |       
| |                                                                              |                 |  | U.S. $ in thousands    |       
| |                                                                              |                 |  |                        |       
| | Revenues:                                                                    |                 |  |                        |       
| |                                                                              | U.S.A.          |  |                        | 48,833
| |                                                                              | Israel          |  |                        | 9,656 
| |                                                                              | International*  |  |                        | 17,964
| |                                                                              |                 |  |                        |       
| |                                                                              | Total
  revenue |  |                        | 76,453
| |                                                                              |                 |  |                        |       
| | * The
  international segment
  includes revenues from
  customers in Europe |                 |  | 15,368                 |       
| |                                                                              |                 |  |                        |       

XXXIX

---

---

RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13 - 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 | 
| |  | ------ | -------------------------------------- | 
| |  |        |                                        | 
| |  |        | 2002                                   | 
| |  |        |                                        | 
| |  |        |                                        | 
| |  | Israel |                                        | 
| |  | U.S.   |                                        | 
| |  | U.K.   |                                        | 
| |  |        |                                        | 
| |  |        |                                        | 
| |  |        |                                        | 

| |    | As for
  goodwill and other assets, see note 4.   
| | -- | --------------------------------------------------
| |    |                                                   
| | c. | Revenues from customers exceeding 10% of revenues:

| |  |            | 2001                |  | 2000  | 
| |  | ---------- | ------------------- |  | ----- | 
| |  |            |                     |  |       | 
| |  |            | U.S. $ in thousands | 
| |  |            |                     | 
| |  | Customer A |                     |  |       | 
| |  |            |                     |  |       | 
| |  | Customer B |                     |  |       | 
| |  |            |                     |  |       | 
| |  | Customer C |                     |  | 7,152 | 
| |  |            |                     |  |       | 

NOTE 14 - SELECTED INCOME STATEMENT
DATA:

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

| |  |                                                                                 |  | Year ended December 31,        |      
| |  | ------------------------------------------------------------------------------- |  | ------------------------------ | -----
| |  |                                                                                 |  |                                |      
| |  |                                                                                 |  | 2002                           |      
| |  |                                                                                 |  |                                |      
| |  |                                                                                 |  | (In thousands of U.S. dollars) |      
| |  |                                                                                 |  |                                |      
| |  |                                                                                 |  |                                |      
| |  | The changes
  in allowance for doubtful
      accounts are composed as follows: |  |                                |      
| |  | Balance
  at beginning of year                                                  |  |                                | 449  
| |  | Increase
  during the year                                                      |  |                                | 1,858
| |  | Bad
  debt written off                                                          |  |                                | (940 
| |  |                                                                                 |  |                                |      
| |  | Balance at
  end of year                                                        |  |                                | 1,367
| |  |                                                                                 |  |                                |      

XL

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---

RETALIX
LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 14 - SELECTED INCOME STATEMENT
DATA (continued):

| |                                                                                                                           |                                                         |  | Year ended December 31, |      
| | ------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- |  | ----------------------- | -----
| |                                                                                                                           |                                                         |  |                         |      
| |                                                                                                                           |                                                         |  | 2002                    |      
| |                                                                                                                           |                                                         |  |                         |      
| |                                                                                                                           |                                                         |  | U.S. $ in thousands     |      
| |                                                                                                                           |                                                         |  |                         |      
| | b.                                                                                                                        | Financial income (expenses) -net:                       |  |                         |      
| |                                                                                                                           | Realized
  gain (loss) on marketable
  securities - net |  |                         | 150  
| |                                                                                                                           | Non-dollar
  currency gains (losses) - net              |  |                         | (264 
| |                                                                                                                           | Interest and
  bank commissions - net                   |  |                         | (385 
| |                                                                                                                           |                                                         |  |                         |      
| |                                                                                                                           |                                                         |  |                         | (499 
| |                                                                                                                           |                                                         |  |                         |      
| |                                                                                                                           |                                                         |  |                         |      
| | c.                                                                                                                        | Other general income -net:                              |  |                         |      
| |                                                                                                                           | Gain (loss)
  on sale of property and equipment         |  |                         | (36  
| |                                                                                                                           | Gain on sale
  of dealership activity                   |  |                         | 1,079
| |                                                                                                                           |                                                         |  |                         |      
| |                                                                                                                           |                                                         |  | 1,043                   |      
| |                                                                                                                           |                                                         |  |                         |      
| |                                                                                                                           |                                                         |  |                         |      
| | 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   | 
| | -------------------------------------------------------------------------------------------------------------- |  |  | ----------------------------- |  |  | ------ |  |  | ------ | 
| |                                                                                                                |  |  |                               |  |  |        |  |  |        | 
| |                                                                                                                |  |  | Number of shares in thousands | 
| |                                                                                                                |  |  |                               | 
| | Weighted
  average number of shares
  issued and outstanding- used in
  computation of basic earning per share |  |  | 11,902                        |  |  | 11,472 |  |  | 10,916 | 
| | Add
  incremental shares from assumed
  exercise of options                                                    |  |  | 493                           |  |  | 681    |  |  |        | 
| |                                                                                                                |  |  |                               |  |  |        |  |  |        | 
| | Weighted
  average number of
  shares used in computation
  of  diluted earnings per share                     |  |  | 12,395                        |  |  | 12,153 |  |  | 10,916 | 
| |                                                                                                                |  |  |                               |  |  |        |  |  |        | 

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

XLI

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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 Novemebr 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.

XLII

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10616 Scripps Summit Court
San Diego, CA  92131

TEL: 858-795-2000
FAX: 858-795-2001
e-mail:  nshd@nshd.com
www.nshd.com

Independent Auditors Report

To the StockholderRetalix Holdings, Inc. and SubsidiariesPlano, 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 years then ended, in conformity with accounting
principles generally accepted in the United States of America.

/s/ Nation Smith Hermes Diamond

February 1, 2003
San Diego, California

OFFICES IN MAJOR CITIES WORLDWIDE

---

---

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 Limited                                   
|------------------- | --------------------------------------------------
|                    |                                                   
|                    |                                                   
|                    | By:                                               
|                    |                                                   
|Date: June 26, 2003 | Barry Shaked, President,
  Chief Executive Officer
|                    | and
  Chairman of the Board of Directors          
|                    |                                                   
|                    | By:                                               
|                    |                                                   
|Date: June 26, 2003 | Danny
  Moshaioff, Chief Financial Officer        



---

---

CERTIFICATION

|I, Barry Shaked, certify that:
|------------------------------
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              



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| | 6. | The registrants other certifying officers
  and I have indicated in this annual report whether or not there were
  significant changes in internal controls or in other factors that could
  significantly affect internal controls subsequent to the date of our most
  recent evaluation, including any corrective actions with regard to
  significant deficiencies and material weaknesses.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                     | /s/Barry Shaked                                    
|-------------------- | ---------------------------------------------------
|                     |                                                    
|Dated: June 26, 2003 | Barry Shaked                                       
|                     | Chief Executive Officer and Chairman of the
  Board



---

---

CERTIFICATION



|I, Danny Moshaioff, certify that:
|---------------------------------
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 



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| | 6. | The registrants other certifying officers
  and I have indicated in this annual report whether or not there were
  significant changes in internal controls or in other factors that could
  significantly affect internal controls subsequent to the date of our most
  recent evaluation, including any corrective actions with regard to
  significant deficiencies and material weaknesses.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                     | /s/ Danny Moshaioff                                
|-------------------- | ---------------------------------------------------
|                     |                                                    
|Dated: June 26, 2003 | Danny Moshaioff                                    
|                     | Chief Executive Officer and Chairman of the
  Board



---

---

EXHIBITS

|*1.1  | Memorandum of Association
  of Registrant, as amended (incorporated herein by reference to the Companys
  annual report on Form 20-F for the fiscal year ended December 31, 2001).                                                                    
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                        
|*1.2  | Articles of Association of
  Registrant, as amended (incorporated herein by reference to the Companys
  annual report on Form 20-F for the fiscal year ended December 31, 2001).                                                                      
|      |                                                                                                                                                                                                                                                        
|**4.1 | Employment Agreement dated
  December 1, 1999, between Point of Sale Limited and Danny Moshaioff
  (incorporated herein by reference to the Companys annual report on Form 20-F
  for the fiscal year ended December 31, 1999).                       
|      |                                                                                                                                                                                                                                                        
|**4.2 | Agreement dated December
  30, 1999, between Point of Sale Limited and the Corex Development Company (C.
  D. C.) Limited (incorporated herein by reference to the Companys annual
  report on Form 20-F for the fiscal year ended December 31, 1999).
|      |                                                                                                                                                                                                                                                        
|8.1   | Significant subsidiaries
  of Retalix Ltd.                                                                                                                                                                                                             
|      |                                                                                                                                                                                                                                                        
|10.1  | Consent of Kesselman &
  Kesselman, a member of PriceWaterhouseCoopers International Limited.                                                                                                                                                          
|      |                                                                                                                                                                                                                                                        
|99.1  | Certification pursuant to
  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                             
|      |                                                                                                                                                                                                                                                        
|99.2  | Certification pursuant to
  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                             



---

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EXHIBIT
8.1

SIGNIFICANT SUBSIDIARIES OF RETALIX LTD.

|Subsidiary                                      |  | Country of
  Residence |  | Business Name            
|----------------------------------------------- |  | ---------------------- |  | -------------------------
|                                                |  |                        |  |                          
|Retalix
  Holdings Inc.                         |  | United States          |  | Retalix
  USA Holdings   
|Retalix
  USA Inc.                              |  | United States          |  | Retalix
  USA            
|Retail Control Systems Inc.                     |  | United States          |  | Retalix
  USA, Pittsburgh
|BASS Inc.                                       |  | United States          |  | Retalix
  USA, Dayton    
|StoreNext Retail Technology
  LLC               |  | United States          |  | StoreNext USA            
|Palm Point Ltd.                                 |  | Israel                 |  | Palm Point               
|Tamar Industries M. R.
  Electronic (1985) Ltd. |  | Israel                 |  | Tamar                    
|StoreAlliance.com, Ltd.                         |  | Israel                 |  | StoreAlliance            
|StoreNext Ltd.                                  |  | Israel                 |  | StoreNext Israel         
|TradaNet Electronic
  Commerce Services Ltd.    |  | Israel                 |  | Tradanet                 
|IREX  Israel Retail
  Exchange Ltd.            |  | Israel                 |  | IREX                     
|Cell-Time Ltd.                                  |  | Israel                 |  | Cell-Time                
|P.O.S. (Restaurant
  Solutions) Ltd.            |  | Israel                 |  | PRS                      
|Kohav Orion Advertising and
  Information Ltd.  |  | Israel                 |  | Orion                    
|Retalix (UK) Limited                            |  | United Kingdom         |  | Retalix (UK)             
|Retalix
  SA PTY Ltd.                           |  | South Africa           |  | Retalix
  SA             
|Retalix
  Australia PTY Ltd.                    |  | Australia              |  | Retalix
  Australia      



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|
|
|
|

Exhibit 10.1



CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

We
hereby consent to the incorporation by reference in the Registration Statement
on Form S-8 (Registration Nos. 333-14238, 333-12146 and 333-09840) of Retalix
Ltd. of our report dated February 13, 2003, relating the consolidated financial
statements, which appears in this Form 20-F.



|Tel Aviv,
  Isreal | /s/ Kesselman & Kesselman         
|------------------ | ----------------------------------
|26,
  2003         | Certified Public Accountant (Isr.)





Kesselman
& Kesselman is a member of PricewaterhouseCoopers International Limited, a
company limited by guarantee registered in England and Wales.

---

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EXHIBIT 99.1

Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

In connection with the Annual Report on Form 20-F of Retalix Ltd. (the
Company) for the period ending December 31, 2002 (the Report), I, Barry
Shaked, Chief Executive Officer and Chairman of the Board of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:

1. the Report fully complies with the requirements of Section 13(a) or
15(d) of the

Securities Exchange Act of 1934; and

2.  the information contained in
the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.

Date: June 26, 2003

| | /s/ Barry
  Shaked                    
| | --------------------------------------
| |                                       
| | Barry Shaked                          
| | Chief
  Executive Officer and Chairman

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



---

---

EXHIBIT 99.2

Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

In connection with the Annual Report on Form 20-F of Retalix Ltd. (the
Company) for the period ending December 31, 2002 (the Report), I, Danny
Moshaioff, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:

1. the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

2.  the information contained in
the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.

Date: June 26, 2003

| | /s/ Danny
  Moshaioff    
| | -------------------------
| |                          
| | Danny
  Moshaioff        
| | Chief
  Financial Officer

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



---

---